According to a survey of 10,000 people aged 50 or over by the Institute for Fiscal Studies, one in eight older workers has changed their retirement plans as a result of Covid-19.
One in three reported a worse financial situation and 13% have changed their planned age for retirement – most of whom are planning to retire later than they had intended, at least in part because of a drop in the value of their pension fund.
The pandemic brought home the unexpected nature of investment returns and the impact those can have on retirement planning. Indeed, retirement planning often focuses on investment illustrations that observe a 4 or 5 per cent rise each year. That looks great on paper, but in reality, it’s not what happens. Covid-19 was a good example of market unknowns impacting the world around us and retirement planning changing as a result.
Look ahead, act now
The pandemic has refocused the need for clients to think long term and assess their choices and plans for retirement much earlier. Covid-19 has seen all sorts of interconnected issues impact individuals of all ages.
Children, young and older have moved back into family homes; parents are once again helping them get on the property ladder. Others will have dealt with redundancy, or the death of a spouse or loved one. They may not have planned for these scenarios, yet they could have a profound impact on retirement savings - for better or worse.
On the flip side, remote working and redundancy / furlough released some older workers from their routine and pushed them towards an earlier retirement. For these individuals the ability to ensure their pension pot has enough money to see them through their later years is the priority.
Market conditions have also been difficult for those approaching retirement
From record lows to record highs, questions about over-valued stock markets and whether we will experience a recession in 2021 continue to dominate headlines. As a non-advised client last March, it would have been very easy to say: “What's going on? The market is too volatile; I’m going to sell out immediately.” Yet most advisers were telling clients to remain calm, ride out the storm and focus on the long term.
That view was proved right over the past year. While markets don’t always rebound, the general principle of focusing on the long term has held true. As individuals we are not necessarily trained to abide by that though.
This new environment arguably requires more planning discussions and investment and portfolio reviews. There is a need for advisers to help investors ‘look ahead’ and ‘act now’ if they are to assist in securing a comfortable retirement. This includes making clients aware of the danger of sequence risk – the negative timing of withdrawals from retirement assets that would damage overall returns. When you're taking an income in retirement, you never want to be drawing out of an investment that's falling dramatically because that is going to result in a bad outcome.
At the same time, ongoing low returns and low interest rates will start to have a significant impact on pension portfolios, making the client’s investment strategy even more important.
Placing too much money in cash or low-risk assets could result in them losing money from that part of their portfolio, and other investments will have to work harder to make up for those losses.