Q: I’m 55 and I’ve had a significant portion of my pension savings invested in an equity portfolio for the last 15 years. This year, with volatility across the markets, my annual return has been negative. I had hoped to retire in ten years, so I am worried I will lose more of the savings I had set aside for retirement. Should I cash out now? Billy, Cork City
A: Historically, investing in a diversified equity portfolio has provided the best return on investment over a long period. Since 1928, the US stock market has experienced short-term declines averaging 15pc every single year. Yet, over the same period, annualised returns averaged 11pc. In short, volatility is normal. And it is the cost of investment growth.
The greater risk to investment return on equities was not being in the market during these negative periods but being out of the market during the far more frequent positive periods. Time in the markets, not timing the markets, is the message here.
Since the global financial crisis, investors have become much better at understanding both risk and the volatility of investment returns, particularly equity investments. Advisers have also seen the benefit of educating their clients in this space as it provides a better outcome for everyone. Your question is a great indicator of the benefit of having a good adviser to remind you of the long-term goal of your investment.
To focus on your own circumstances, you have identified that you wish to retire in ten years. Wholesale cashing out of your equity position now while trying to time a re-entry would not be a recommended course of action. It would be much more beneficial to identify the income that you think you will need in retirement. Will you be carrying debt? Will you have dependents? What income will you need to fund the retirement that you are planning?
Really focus on your own planning and maximise tax efficiencies and contributions within your budget. As you get closer to your intended retirement age, you can taper your equity portfolio to less volatile assets in a systematic way.
How can I protect my income if I develop long Covid and cannot work?
Q: I’m a 45-year-old self-employed consultant and I was out of work for two weeks earlier this year after getting ill with Covid-19. Ever since, I have been worried if I ever developed long Covid I would not be well enough to continue working. What financial protection can I put in place to ensure I can maintain my lifestyle if I get sick? I have 10 years left on my mortgage. Eileen, Co Galway
A: Unfortunately, this has become a real issue for many people in recent times.
Often – though not always – employees on the frontline of the pandemic, such as hospital staff, had enough benefits through their employment to ensure that some of their income was paid when they were unable to work due to Covid-19. This type of security is less prevalent in the private sector, and for self-employed people like yourself, the onus is on you to source this benefit.
People have come to realise how precarious their situation can be if they are unable to work. The ‘it will never happen to me’ way of thinking has been replaced by ‘it could well happen at some stage’. Small business owners and sole traders just cannot take these chances. Businesses can be really impacted by key employees – or indeed sole employees – not being present. Contracts can be lost and businesses can fold.
Often the much wider and longer-lasting impact, though, can be on the loss of lifestyle and its knock-on effect on dependents. In short, you need to protect your income. Tax relief is applicable on premiums at your marginal rate and there are excellent products available across the market, especially for your profession.
It is worth noting that income payments typically start after an initial waiting period, so I would recommend building up an emergency fund to cover this period. The benefits are only allowed to cover a certain proportion of your income, so you would need further savings to supplement your income should the worst scenario come to pass.
Putting these steps in place would be good financial planning and would ensure that you could maintain your lifestyle if you couldn’t work.