BY JOHN ELLIS, FINANCIAL ADVISOR
In the last two weeks we looked at whether people feel financially and socially ready for retirement. This week the focus is on a particular group: those who are perhaps five to 10 years away from finishing work and what they should be checking after the recent fall in technology and AI-related shares.
October was a difficult month for many of those stocks. The Nasdaq fell about 5%, with several large companies losing considerable value in a relatively brief period. Some well-known investors and the Central Bank Governor have warned that valuations in parts of the AI sector look overpriced.
Another correction is certainly possible. We have seen similar concerns during previous periods of heavy investment in innovative technology and infrastructure. But nobody can say with certainty what happens next.
One thing is clear: a small number of companies now have a much greater influence on stock markets than they did in the past. A decade ago, the 10 largest companies in the S&P 500 accounted for about 18% of the index. Today that figure is closer to 40%, with most of those companies involved in technology or AI. This matters because a typical global equity fund now has a greater dependence on a relatively small number of companies.
Irish pension holders are not immune because most workplace and personal pensions have some exposure to global equities, so a further fall in these companies would affect many pension funds, although not all to the same extent.
For someone with 20 or 30 years until retirement, a market fall can often be absorbed over time, particularly if regular contributions continue. The situation is different for someone approaching retirement.
If the intention is to buy an annuity, the value of the pension fund in those final few years will have a direct bearing on the income that can be secured. A significant fall just before retirement could leave little time for the fund to recover before it is used to purchase that guaranteed income.
Those planning to move into an Approved Retirement Fund (ARF) face a different challenge. Their money remains invested, but a sharp fall in the early years of retirement can have a lasting effect on how long the fund will last. This is known as sequence of returns risk. Put simply, the order in which investment gains and losses occur can make a considerable difference when someone is beginning to draw money from their pension. I have seen cases where two people with similar funds ended up with quite different outcomes simply because one took the hit in the first year or two of drawdown and the other did not.
Many employees who have never selected their own investments will be in a default strategy, commonly known as ‘lifestyling’. These arrangements generally invest more heavily in equities when members are younger and gradually reduce risk as retirement approaches. The timing and pace of that change varies between pension schemes. Those who have actively selected a higher-growth fund may be carrying considerably more equity risk than someone following the default approach. Quite a few people only discover this when they ask for the figures.
So, what should you do? First, find out where your pension is invested and how much exposure it has to shares. Check whether the fund is scheduled to change automatically as retirement gets closer.
Most pension providers make this information available through their online portals or annual statements. If the figures are difficult to understand, the scheme administrator or your financial adviser should be able to explain the current investment mix and what changes, if any, are planned over the coming years.
For some people, their existing lifestyling strategy may already be doing exactly what it is supposed to do. Others may discover that their pension remains heavily invested in equities at a time when they would prefer to take less risk. That does not automatically mean they should switch funds, but it is better to understand the position now than discover a problem when retirement is only months away.
Nobody has a crystal ball when it comes to markets. What you can do, however, is make sure you understand where your money is invested and whether the level of risk still makes sense for the retirement you have planned.
Five to 10 years might sound like a long time, but when it comes to retirement planning it can pass surprisingly quickly. A pension review now could leave you with more choices when the time comes to stop working.
086 8362633
