Have a structured plan

When investment markets are turbulent, a structured plan is your lifeboat. Firstly, if you’re looking at winding down your career, you need to determine if and when you can retire and ensure that you can afford a comfortable retirement lifestyle. Secondly, as you approach retirement, it’s important to keep in mind that your investments typically have less time to recover from market downturns.

Volatile market conditions can put a dent in your retirement savings, potentially reducing the funds you’ll have available. But that doesn’t mean you have to run for cover. In fact, with high inflation, you need a nuanced strategy that accounts for both short and long-term financial needs. In other words…

Consider a mixed investment horizon

If you reduce your investment risk too early, you may miss out on investment growth opportunities – and inflation might erode the value of your investment faster. If you don’t reduce your risk, though, market volatility may expose your investments to significant short-term losses just as you’re about to retire (sequencing risk).

So, striking the right balance between risk and growth potential is critical. And one way to do that is through a ‘bucket’ (or cascading) approach.

In short, you can split your retirement funds into three or more imaginary ‘buckets’ – short term, medium term and long term. Then, you’ll invest each bucket according to its own investment horizon.

For example, the money you need within the first three years might be held in cash or term deposits. The funds that you plan to use in the following three or four years could go into a low-risk or balanced fund. Lastly, anything beyond the seven-year timeframe you might put in a growth fund. This strategy allows you to manage and take advantage of market volatility, with three (or more) investment strategies ticking along at the same time.

Take stock of your retirement income sources

In the lead-up to retirement, you need a clear overview of where your future income will come from.

The more income sources you have, the more flexibility you can enjoy. For example, if you own your home, you may have the option to downsize it and use the equity released to complement your income. You may also consider other income sources such as rental income from an investment property or semi-retirement whereby you scale back your working week. Alternatively, you may have a business that can support your income needs even after you retire.

Diversification of income sources in retirement can be a good strategy to help you manage market volatility in your investments.