When planning for retirement, particularly in a volatile market environment, investors need to be aware of sequence risk and how to mitigate against it.
Many assumptions are made during this planning process, including estimates of future investment returns and inflation. During this process it is also important that retirees are made aware of the dangers of sequence risk and how short-term market volatility may permanently impact the level of their future income.We know the market has its ups and downs. When we are young and in the early stages of our saving careers we are net investors.
To mitigate sequence risk investment linked annuitants and their advisers focus on more conservative investment strategies that aim to provide some level of capital preservation while still providing inflation-beating returns over the shorter to medium term.Amid the unprecedented economic contraction due to Covid-19 central banks are encouraging growth by keeping monetary policy rates and funding costs low.
But now, post Covid, things have changed dramatically. Globally, central banks have maintained policy rates at low levels to help boost global economic growth. In SA the repo rate of 3.5% is now more than a percentage point less than expected inflation of about 5%. We have moved to a zero real policy rate environment, and today most money market investments are yielding the same as or below expected inflation. Gone are the low-risk CPI plus 3% days.
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