Don’t rush investment decisions in times of uncertainty
Article by Bjorn Ladewig, Longevity Actuary at Just SA
It’s natural to feel a certain amount of panic during any crisis, let alone a global pandemic. But rushing into investment decisions through panic is always a bad idea, even if your nervous system is screaming at you to act.
When someone panics, they go into ‘flight or fight’ mode. This survival mechanism is deeply embedded into the so-called ‘old-brain’ and happens instinctively. While it may result in immediate survival, the ‘flight or fight’ state can cause investors to make expedient, short-term decisions that may end up being poor decisions in the long-term.
History is full of examples of events that caused investors to act out of fear and make poor decisions, from the stock market crash of 1918, through to the Global Financial Crisis of 2008, and many in between. And now there is COVID-19, which gave many investors a huge shock when the market crashed in late March.
The tried and tested investment advice is stay invested for the long term, and certainly your approach to retirement should be the same regardless of market conditions.
But if you’re about to retire, it might be wise to consider additional options to secure a sustainable long-term solution to protect yourself (even partially) from the next market crash.
One of the biggest decision investors will make is the choice of an annuity product when they are ready to retire. And it’s not always a simple decision, particularly in the middle of a pandemic.
Traditionally there have been two main types of annuities to choose from to provide a monthly income in retirement: a life annuity or a living annuity.
In simple terms, a life annuity provides a guaranteed income for life regardless of market conditions or how long you live. A living annuity also provides a monthly income, but it is not guaranteed for life as it is largely dependent on an investment strategy to balance market performance with the amount of income you draw each year.
There is also a third type of annuity, one that blends the advantages of living and life annuities. A blended annuity is a relatively new option and caters for retirees who want a combination of the flexibility that living annuities offer, and the peace of mind and security that life annuities offer.
If you choose a living annuity, there are secondary decisions that also need to be made. These include what drawdown rate to select, what investment manager/s to use, and how the underlying investment portfolio should be structured.
Standard life annuities are more straightforward from an investment point of view. You buy one at a set purchase amount, and in exchange you receive a monthly income for life with fixed or variable increases (depending on the choice of life annuity and the options you select). You have no further investment decisions to make, and there are benefit options if you want to leave an income legacy. For example, you can add a 10-year minimum payment period, which means income will be paid for at least 10 years even if you die.
As a combination of the two main types, blended annuities have the advantage of allowing you to consume more during retirement as you know your basic needs are covered, because part of your capital is dedicated to produce a guaranteed income. The balance of your assets stays invested in the market to cover discretionary spending and allow for any legacy wishes.
We don’t know when the pandemic will end, we don’t know how it will ultimately affect us or our loved ones, and we don’t know what the lasting impact will be on the economy, our finances, our investments and our retirement. Isn’t it then a good time to consider guarantees when there is so much uncertainty in the world?
Lucie Osman - cdcom
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