With loud and scary headlines dominating Australian media (“Carnage!”, “Market meltdown!”, “Billions wiped overnight!”), your feelings of fear and anxiety are completely understandable. You’ve worked hard to build your super, and seeing it fluctuate can be unnerving, especially when retirement feels so close.
But while the situation may seem daunting, these fear-driven headlines don’t always give you the full picture. Truth is, financial markets have always gone through ups and downs!
With the right information and a level head, you can make strategic decisions to keep your future on track.
So how do you survice a market crash before retirement?
3 things to remember when markets take a nose-dive
As alarming as the market crash might feel, keep these points in mind:
1. Markets fall… and then rise again
Downturns are part of the market’s natural rhythm and, while the cycle may unfold a little differently each time, recovery always tends to follow.
2. Most Australian super funds are structured to cushion these blows
Your super fund is likely already designed to navigate market shocks with diversified investments.
3. Timing the market is a gamble that rarely pays off
Trying to exit and re-enter the market at the “perfect time” often leads to worse outcomes than staying invested.
What can you do?
Focus on what you can control, like having a clear plan to help you move forward with confidence. Here’s how you can protect your super from the market crash.
First and foremost, don’t panic
As humans, we’re wired to have certain psychological biases that impact our decision-making. That’s why financial downturns often see investors making rash decisions – ones that feel safe in the moment – only to regret them later when the market recovers.
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Below, we address two common (and, often, panic-driven) questions we hear when markets dip:
“Should I sell my super and move to cash?”
While this might seem like a safe bet, selling your holdings during a downturn only makes one thing certain: your losses become crystallised when they might have just been temporary.
Plus, most people don’t think about when they will reinvest after selling their investments – often leading to a prolonged period on the sidelines and not earning returns.
Not only that, but investors who pull out hastily miss out on the market’s best-performing days (which, historically, tend to follow the worst-performing ones).
Missing these key rebound days can have a lasting impact on your portfolio’s long-term performance
So, unless you have an urgent cash flow need, it’s usually wiser to stay invested and ride out the recovery.
“Should I switch to a more conservative portfolio?”
Your super fund will usually offer more conservative or moderate investment options, or if you have a SMSF, you might be looking at more defensive ETFs for example. These investment options can seem safer when share markets are falling because they’re generally lower in risk and volatility.
But here’s the catch: making the switch during a downturn can lock in your losses, twice. First, by selling growth assets at a market low, and second, by moving into investments that historically provide lower long-term returns, meaning you might not fully benefit from the eventual rebound.
A better approach is to review your current exposure to risk and ensure your investment mix is tailored to your personal goals and time horizon.
Ultimately, and as I always say, you should never take on more risk than is required to achieve your retirement objectives.
So, how do you accomplish that in practice?
First, you need to determine if your goals are still achievable
Determine if your goals are still achievable
Much of the stress and anxiety around market volatility stems from not knowing where you stand. Let’s replace your fears with facts by checking in with your goals.
Let’s say you need $70,000 a year in retirement to cover your expenses. To check whether you’re on track to meet that goal, you can use The Australian Government’s Money Smart Calculator. Here’s a simple step-by-step:
1. Start with the ‘About you’ section and enter your:
- Current age
- Current annual income (before tax and super)
- Desired retirement age
- Relationship status (single or couple)
- Current super balance
- Whether you’re a homeowner
- The total value of your investment assets
- The value of any one-off capital expenses you might incur, at or during retirement
For a more detailed guide on building a retirement plan and assessing your current position, see our article: Retirement Planning for Beginners.
After you’ve run the numbers:
If you’re on track, meaning you’ll have enough income to cover expenses, that’s great news! Stay the course, or, better yet, consider maximising your savings with one of the strategies we discuss below.
If things aren’t looking as expected, don’t despair. The good news is you’ve identified it now, and it’s simply time to reassess and readjust!
Adjust your retirement plan as needed
As you’d know from experience, adaptability is key when life throws a spanner in the works – and your retirement plan is no different.
So, if things have veered a little off track, here are some adjustments you could make so that you can continue striding forward towards your goals:
Increase your savings in the lead-up to retirement
Consider reviewing your spending to identify areas where you can trim non-essential costs and redirect those savings into your super. Even small, regular contributions (e.g. through salary sacrificing) can add up over time. Your future self will thank you!
Retire a little later
Delaying retirement, even by a year or two, can make a significant difference. It means contributions are going into your super for longer and withdrawals from it are being delayed.
Re-evaluate your spendings in retirement
Reducing your retirement expenses simply means re-evaluating what matters most to you. So, if you need regular travel to satisfy your adventurous spirit, it might make perfect sense to allow for it as a non-negotiable in your budget!
To compensate for this, you may decide that you are willing to limit how much you dine out and to cook at home instead, or delay the purchase of a new car. By focusing your spending on what truly matters, you can lower the income you need in retirement—making it easier to afford the lifestyle you want.
Review your investment strategy
Depending on your risk tolerance and retirement timeline, carefully increasing your exposure to higher return (and higher risk) investment options could help improve long-term outcomes. However, seek independent financial advice to ensure this type of strategy is right for you and your current position.
Use strategies to rebuild & optimise your retirement savings
Now’s a good time to explore two essential strategies that can help stretch your retirement savings further:
1. Increasing your super contributions
Like maintaining a garden, your super account needs ongoing care and attention to thrive. If your budget allows, making extra contributions (via salary sacrificing or making personal after-tax contributions) during a downturn can give your retirement savings more time and opportunity to grow.
2. Starting a Transition to Retirement (TTR) pension
If you’re over 60 years of age and still working, a TTR pension offers a flexible way for you to ease into retirement.When used alongside salary-sacrificing, a TTR strategy allows you to:
- cut back on work without reducing your income
- boost your super balance AND
- pay less tax
Several strategies can help optimise the super you’ve built. Read: 10 Retirement Planning Strategies: Boost your Super & Minimise tax to better understand your options.
How to protect your super from the next market crash
You may not be able to predict the next crash, but you can plan for it. Here are a few smart steps you can take now to protect your super and minimise future impacts.
Maintain a cash buffer
By keeping one to two years’ worth of living expenses in cash or low-risk assets (like term deposits and government bonds), you’ll have something to fall back on without feeling pressured to sell investments when markets have plummeted.
Diversify your portfolio
Like “putting all your eggs in one basket”, keeping all your money (eggs) in one asset class (basket) is risky! By diversifying your portfolio, you spread your investments across a range of asset classes, and sectors which helps offset the impact of any one area suffering and can provide you with a variety of returns.
Note: While many Australian super funds are well-diversified, it pays to review how your money is being invested and compare it with other providers.
Choose the right investment mix for you
With investment portfolios, there is no ‘one-size-fits-all’. Depending on your retirement timeline and risk appetite, you should align your investment portfolio with what you need and are comfortable with. For example, as you enter retirement, shifting to a more conservative and stable mix of investments may be more sensible.
Key takeaways
Retirement planning isn’t just about numbers. It’s about building the confidence to navigate the unknown with enough flexibility to adjust along the way.
Yes, this market crash is uncomfortable (to say the least), and the screaming headlines don’t help. But your strongest defence is to keep calm, reassess your position and make thoughtful adjustments to your retirement plan.
Remember: market downfalls are temporary, and support is available when you need it. Our team is ready to help.
At Toro Wealth, we help Australians aged 55 and over optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.
