COVID-19’s ‘retirement trap’

By Cameron Micallef

May 07 2020
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The fallout from COVID-19 is likely to hit retirees the hardest with health, lifestyle and financial implications for older Australians, an industry expert has said.

BetaShares senior investment specialist Dr Roger Cohen believes older investors are most at risk as they try to navigate distorting perceptions, changing consumer behaviour and testing the mental fortitude of investors through volatile markets.

The investment specialist believes that in order to understand the impact of COVID-19 on retirees, it is critical to review how human behaviour is being influenced by the pandemic, and how it will be influenced after the event has passed.

“If we assume that COVID-19 will at some time be eradicated entirely, or completely controlled (including effective testing and a vaccine), we will not revert to the same state as we were in pre-COVID-19. We’ll be changed as a society in many respects,” he said.

“Some of these changes – both positive and negative – will be logical and rational, while others will be exactly the opposite.”

To highlight this, Dr Cohen explained the potential impact on the cruise ship industry, which is likely to be heavily impacted when life gets back to normal.

“Once the pandemic has passed (and future occurrences can be controlled), the risk of taking a cruise is no higher than it was before COVID-19. However, people will be much more reluctant to be on a cruise ship as their perception and awareness of risk is now raised,” Dr Cohen said.

“This means that cruises for many retirees (and others) will be replaced by local travel, travel to specific destinations, or no travel at all.”

Dr Cohen explained that this line of thinking applies to many other issues and actions, where the risk is perceived to have increased, regardless of whether it has or not.

Dr Cohen argued that pre-retirees and those in the retirement phase should stay invested despite the wild volatility triggered by the COVID-19 pandemic. However, he noted that riding out the market swings will test the mettle of even the most seasoned investors.

“This is where rational and irrational behaviours can have a significant impact on the financial wellbeing of retirees,” he said. “The decisions they make during this unprecedented event could make or break their retirement plans. It may leave some effectively ‘retirement trapped’ by their irrational decision making.”

The fund manager noted that many retirees and pre-retirees set up SMSFs as a reaction to the global financial crisis.

“Many SMSFs were not well governed or advised. Coming out of the GFC, they had large allocations to cash and therefore missed out on the recovery in equities,” he noted.

The COVID-19 pandemic has already impacted the superannuation assets of most Australians. The impact of this is exacerbated if they are in retirement and drawing down on these assets.

Dr Cohen believes many retirees, particularly those who sell out of the market irrationally, will not fully benefit from the recovery that will eventually take place, and that any changes to the construction of their portfolios as a reaction to the current situation will also have lasting consequences. These may be positive or negative.

About the author

Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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Retirement