A market correction can have a devastating effect on your retirement plans. If you have enough to survive there is every chance your balance will recover and even increase. The crucial factors will be;
- How much super you have.
- How severe the turn-down.
- How long it lasts.
- How much you draw down.
- How robust the recovery.
When returns can’t cover draw downs
The larger your balance the more likely you will survive the crash. Assuming you had a balance of $1,000,000 in a fund earning a net 5% pa from which you drew down $50,000 pa. This will leave the balance almost static – you withdraw as much as is earned.
During a market crash your balance is eroded by negative perfomance as well as the $50,000 pa you need. When the market bottoms out you will need much better perfomance than 5% to cover your $50,000 withdrawal and the liklihood is you will need to draw down capital.
As you draw down capital the depleted balance reduces further and the situation deteriorates. Only stellar returns will restore the situation to where it was before the crash.
The 1987 crash was followed by stellar returns and 10 years after the crash the retiree in the example above would be almost back to the original balance of $1,000,000 having withdrawn $50,000 pa throughout.
The GFC has seen a much more “insipid” recovery and 7 years after the crash (May 2015) the balance would only be around $680,000.