Don’t fall into a pensions black hole! Get your retirement plans back on track after Covid-19
Have you ever wondered what it would be like to fall into a black hole? Say, if you wandered too close, and tripped.
Obviously, it wouldn't be good. Your journey through a rupture in the space-time continuum would be fascinating to the outside observer, but fatal for you.
Imagine yourself being pulled along against your will, unable to head back the other way, as you get sucked towards the event horizon.
Investors now face a similarly unpleasant sensation right here on earth, as the Covid-19 pandemic ravages their retirement savings, according to new research from fund manager Fidelity International.
It says almost half have fallen into a “pensions black hole”, as their savings will no longer give them the income they need in retirement.
Even though global stock markets have bounced back after folding in on themselves during March, many investors have still suffered long-term damage.
Don’t despair. While nobody can escape a cosmic black hole, you can get out of a pensions black hole, if you work at it.
Don’t panic, it’s not the end of the world
Of all the dangers facing investors, I believe a stock market crash is the least of them. Why? Because they are natural events that happen all the time.
We all remember the big ones – Black Monday 1987, the tech crash in 2000, the financial crisis and now the coronavirus crash, but there have been countless smaller ones along the way.
The moment you jet off on your investment journey, you have to accept you are going to get sucked into one and you know what? The long-term damage is minimal.
Nothing escapes a black hole, not even light. Hence the name. But your retirement portfolio can emerge from a crash in surprisingly good shape.
The Covid-19 crash may have felt like being sucked into a black hole, as economies locked down and liquidity dried up. Yet by April and May, markets had clawed back a huge chunk of their losses.
That happens after every crash. The rebound comes sooner than expected, and share prices rise faster than you can imagine.
In fact, you can turn all the volatility to your advantage, by purchasing funds and shares at reduced prices, and waiting for them to recover.
Don’t get lost in space
So do not panic about the crash and its impact on your retirement. The fabric of reality has not been broken.
Instead, spend a little time piecing together all your various pensions and investment portfolios, to see where you stand today. After the recent recovery, the damage may be less than you think.
Next, review your portfolio to see whether it is fit for the post-pandemic economy. Here you may have some tough calls to make. Do you play safe by investing in sectors that have shown resilience during the crisis, such as technology stocks, healthcare and utilities?
Or do you go bargain hunting in bombed-out sectors such as travel and hotels, oil and energy, banks, bricks and mortar retailers, auto manufacturers and smaller companies, in the hope of generating a rapid return?
These are calls only you can make.
Get ready for lift off
What you mustn’t do is sell up and hide your money in cash. In the longer run, stocks and shares are the best way to generate long-term retirement wealth.
The global economy is set to remain sticky, amid fears of a second wave, the ongoing trade war with China, and US Presidential election in November.
While further volatility is likely, asset prices could be driven higher by trillions of dollars in fiscal and monetary stimulus unleashed to combat the crisis.
The US Federal Reserve and other central bankers have given markets the rocket fuel they need to avoid total meltdown. It should also support a continuing recovery, as the world moves out of lockdown.
Share prices could still go to the stars, in the longer run.
Make up for lost time
Investing more in today's market won't be easy if you have been furloughed or lost your job or business during the pandemic. In that case, covering your everyday spending is the priority.
Ideally, you will have built up a pot of emergency cash, equal to six months' earnings, to tide you through tough times like these.
If you have done that, you can leave your long-term retirement wealth untouched. When your career is back on track, make it a priority to kickstart your retirement savings again. Even a couple of years out of the market can cost you dear.
Say you invest $1,000 a month in your online portfolio, and have 30 years to go until retirement. If markets rise at an average rate of 6 per cent, your contributions should have grown to $1,005,620 by the time you retire.
However, if you stop paying in for just two years, you will end up with $871,678. That is an incredible $133,942 less, despite the same growth rate.
So if you fall behind, make every possible effort to make up the shortfall.
The alternative is to delay your retirement and work longer – which is fine if you love your job, terrible if you don’t.
This investment law still stands
It may feel like your retirement plans have collapsed into a black hole, but you can still accelerate out of it.
In a black hole, the laws of physics as we know them cease to apply. In a stock market crash, they survive intact. One of the most famous states that: “For every action in nature there is an equal and opposite reaction”.
So it is with stock markets. As history shows, for every crash, there is a recovery. Now is a good time to invest in it, and get your retirement back on track.
Harvey Jones has been a UK financial journalist for more than 30 years, writing regularly for a host of UK titles including The Times, Sunday Times, The Independent and Financial Times. He is currently the personal finance editor of the Daily Express and Sunday Express, and writes regularly for The Observer and Guardian Unlimited, Motley Fool and Reader’s Digest.
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Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.