A brief summary of how ‘Income Requirers’ might be impacted by the COVID-19 outbreak.
Last Updated: 26th April
The last few weeks have been a challenge for all of our clients and community. The challenge is not insurmountable, but it has raised particular challenges and opportunities which will vary depending on your stage of life. This Insight shares our ‘COVID Thinking’ for ‘Income Requirers’.
Who counts as an ‘Income Requirer’?
Just like the ‘Retirement Approacher‘, this is another phrase we have invented. Quite simply, we couldn’t think of a better phrase to describe clients who need to access their investments. This definition is broader than just those who have retired, as it also includes those who are funding life with investment withdrawals between jobs as well as clients who need to withdraw capital lump sums.
The impact of COVID is distinctly different for those individuals accessing their investments, compared to those who are still accumulating or just approaching retirement.
If you are dependent on regular withdrawals from your investments, a market fall like we have seen in March will be particularly un-nerving, especially after you have diligently built your savings. This feeling is magnified if you have fully retired and are unable to return to work to replenish your savings. Hopefully our recent Insights helped you to keep the recent falls in context and remain calm.
If you continue to receive regular investment withdrawals after markets have fallen, you will need to sell more investment units, to release the same amount of cash each month. This crystallises the fall in investment values and can compound losses if no corrective steps are taken.
This unexpected event is the perfect trigger to revisit your financial plan, and it may help you to review your current lifestyle with a fresh perspective.
Clients that benefit from our ‘the full boosst’ service and detailed cashflow planning will have been shown the impact of a surprise market fall on their overall retirement plans. We do this by simulating a market fall in our financial projections… although we fully appreciate that seeing a market fall on screen is somewhat easier to stomach than a real-life fall.
How Can We Minimise The Impact?
You will be pleased to hear that boosst portfolios are constructed using extremely cautious bond funds. Bond funds are the ‘boring’ component of portfolios, which behave like an insurance policy. Specifically, we use short-duration, high-quality bonds, which deliver underwhelming returns in a rising market but when markets fall, as they have, they are far less impacted than equities. At the date of publishing (26-04-2020), the two bond funds predominantly used within boosst portfolios sit at more or less the same value as they did on 1st January. They have done their job.
For clients classified as a ‘Retirement Approacher’, we will have guided you through our investment process and ensured that your retirement funds are invested using a suitable portfolio. For most, this will mean a portfolio which is heavy on ‘boring’ bonds, which will have dampened the impact of equity markets slumping. We have done our job.
Now it is your opportunity to make a difference. If you are in a position to reduce your monthly investment withdrawals, this simple step will help to preserve the longevity of your savings. Unfortunately, we are all having to live a different lifestyle to the one that we would usually choose – due to social distancing measures and lockdown. You can however use this in your favour, as those very same social restrictions have made it harder to spend your income on travel, socialising and most hobbies. As life is tending to cost less, reducing investment withdrawals has become a viable temporary measure for the short-term.
If your monthly withdrawals simply cannot be reduced, or if you have committed to a capital withdrawal for a one-off purchase, there are a few key considerations. Every scenario here will be different, so it is certainly worth reaching out to us, so that we can guide you to the best outcome. One option that we can consider is to fund a withdrawal from your defensive assets (cash and bonds), which have not been subject to the same falls in value as equities.
Click here to return to our main ‘COVID-19 Thread’ and continue reading our latest thinking.
We thank you for the trust you have placed in us, and we hope you and your family remain healthy and safe.
Please be aware that the information we have shared in this Insight is for information purposes and is not individual advice. We make a conscious effort to check that all links to third party websites remain active and correct however we cannot take responsibility for their content or their availability.