Should I retire during market uncertainty?

By Lorna Tan
Head, Financial Planning Literacy

If you’ve only got a minute:

• The few years before and after the start of retirement is a crucial period so be proactive about reducing your risks before you leave the workforce.
• To mitigate the sequence of returns risk as you approach retirement, you can delay retirement, cease or reduce investment withdrawals during the downturn, boost cash reserves, and set up multiple passive income flows.
• To mitigate market uncertainty, avoid knee jerk reactions and stay diversified. Focus on quality securities with strong fundamentals and management, and investment grade bonds.

This article was first published in The Business Times.

Financial experts often extol the virtues of staying invested and ignoring the noise during heightened market volatility. Much research has been done to indicate while it is tempting to bail out, it is usually difficult to jump back on the bandwagon without missing the best trading days, resulting in a dent in portfolio value.

So, it is advisable to seek a diversified asset allocation that is aligned to your risk appetite, goals, financial situation, time horizon, and one that can ride out market volatility. Steadfast investors with time on their side would be rewarded when the market bounces back after a downturn. 

However, while this can work for individuals who have more than 10 years before retiring, what can a pre-retiree or a recent retiree do? Those who are older would have less time than younger investors to allow their investments to bounce back and make up the losses.

This is why the few years before and after the start of retirement is a crucial period and why I’m proactive about reducing my risks before I leave the workforce. In the last few years, I have gradually moved my investments to safer asset classes like annuities and fixed income, while leaving some exposure to equities for long-term growth. I have also reviewed my healthcare and estate planning needs.

Mitigating sequence of returns risk

Sequence of returns (SOR) risk is the threat that withdrawing from an investment portfolio during a bear market – particularly if it occurs at the start of retirement - will negatively impact your overall returns. If the negative returns occur first, you end up selling some holdings, and so reduce the securities you own that are available to participate in the later-occurring positive returns.

If a high proportion of negative returns occurs in the beginning years of your retirement, it will have a lasting negative effect and reduce the amount of income you can withdraw over your lifetime. As such, you risk depleting your nest egg faster.

To mitigate SOR as you approach retirement, you can delay retirement, cease or reduce investment withdrawals during the downturn, boost cash reserves, and set up multiple passive income flows.

Here are some considerations for pre-retirees and recent retirees.

1. Set up a cash bucket

Your retirement need not be contingent on how well the market performs. The litmus test of a sound retirement plan is one that would not be derailed by external shocks like poor market performance. Part of the solution lies in setting up a cash bucket that allows you to enjoy liquidity whenever you need to draw down your financial resources during retirement, regardless of market ups and downs. 

You have options to hold your cash or near-liquid assets in your cash bucket via a range of tools such as high interest yielding accounts, money market funds, short-term Treasury bills, Singapore Savings Bonds, time deposits, and short-term endowment insurance plans.

The conventional advice is that the cash bucket should be able to cover expenses in 3 to 5 years in retirement. If you are conservative, you can aim for the cash bucket to cover more years of expenses in retirement. This enhances the peace of mind to retire confidently knowing that the money you need is protected from market volatility.

You can start to gradually shift part of your investments into the cash bucket a few years before your retirement.

2. Build multiple income sources

Meanwhile, identify other sources of income that you could tap. This includes payouts from annuities/retirement income insurance, endowment plans, fixed income such as bonds, and rental income. The more guaranteed income flows can fund your needs while the more variable flows can fund wants. If you are risk averse, build more predictable income flows to cover needs and some of your wants.

Consider optimising government schemes such as the Central Provident Fund (CPF) and Supplementary Retirement Scheme (SRS).

For instance, if you have already retired and have sufficient liquidity, consider deferring your CPF LIFE payouts. You can do so up to age 70. Each year that you defer, your payouts will increase by up to 7 per cent.

If you have low CPF balances, you may be eligible for the Matched Retirement Savings Scheme. For every dollar that is topped up to your Retirement Account (RA), the government will give a matching grant of up to $2,000 each year, with a lifetime limit of $20,000.

You can withdraw your SRS savings over 10 years penalty-free once you reach the statutory retirement age prevailing at the time of your first SRS contribution. A few years before this, decide if you wish to liquidate your SRS investments and withdraw them as cash or have them transferred to your CDP account without liquidating.

If you are asset rich but cash poor, consider rightsizing especially if the kids have already flown the coop, or monetising your home equity via the lease buyback scheme (for public flats) and DBS Home Equity Income Loan (for private property). For both schemes, the proceeds will be used to top up your CPF RA for higher monthly payouts. By doing so, you may qualify for government bonuses.

3. Have some exposure to equities

In light of a longer lifespan, retirees, at least in the early part of retirement, can still be invested in equities to potentially achieve some upside to counter inflation and fund their wants in the decades ahead.

To navigate the market volatility, remind yourself that this exposure is for the long term. The key is to avoid knee jerk reactions and stay diversified. Focus on quality securities with strong fundamentals and management, and investment grade bonds.

After all, history tells us that market downturns happen frequently but don’t last forever.  And upturns occur more often than downturns.

4. Reduce spend and investment withdrawals

If you have already retired and your income flows are impacted negatively by the market declines, it is prudent to tighten your belt by cutting back on spending, avoiding bad debt, and reducing withdrawals.

Use a digital financial app to set up a budget and categorise your spend. This offers clarity and it is easier to see where you can cut back on unnecessary expenses. Doing so, even temporarily, will help your money last longer.

There is a view that retirement expenditure may resemble the shape of a smile. This is because of high expenditure during the early years when people are healthy, travel more and are keen to embrace their freedom, followed by a slowing down as health issues emerge leading to a fall in income needs, then an increase in spend due to long-term care costs later in life.  

Low hanging fruits to reduce spend can include cheaper travel destinations, making bulk buys, cutting down on subscriptions, and adopting affordable hobbies.

And if you are applying the 4% withdrawal guideline on your portfolio, with subsequent annual adjustments for inflation, adopt a more conservative figure, say 3% and forgo the inflation raise during bad years, before resuming when the market bounces back.

5. Work a little longer if needed

If you still find purpose in your work and are in good health, consider retiring later to boost your nest egg and get your retirement plan back on track. Doing so may also reduce the retirement period that your savings need to last.

Whether you have retired or not, one option is to look for side hustles or part-time work to supplement your passive income sources. The government is keen to help Singaporeans to re-tool and learn new skill sets.  Take advantage of the SkillsFuture Credit to deepen your existing skills or reskill into new areas outside of your current field.

6. Manage your expectations

When I started retirement planning more than 2 decades ago, I went through the exercise of visualising my needs and wants of 3 retirement lifestyles - basic, moderate and luxurious - and quantifying my expenses for each lifestyle.

During my wealth accumulation phase, I continuously seek opportunities to make my money work harder and allocated my savings into suitable vehicles to close the money gaps. Doing so gives clarity on which lifestyle I can realistically achieve and when I can retire with a greater peace of mind.

If you have not done so, it is timely to take control of your retirement by setting up a plan and act. Life is a bag of trade-offs. Having financial knowhow leads to informed decision making and enables one to better adapt to unforeseen circumstances. This helps to boost mental resilience and cope with anxiety during times of uncertainty.

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Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.