How Do I Protect My Approved Retirement Fund (ARF) During Periods of Stock Market Volatility?

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How Do I Protect My Approved Retirement Fund (ARF) During Periods of Stock Market Volatility?

When you accessed your Pension, and after you got your tax-free lump sum, you will in most cases have set up an Approved Retirement Fund (ARF). This ARF is the fund that you will draw your yearly income from in retirement.  ARF funds are essentially investment funds with some exposure to stock markets, and by extension financial market volatility. This leaves many ARF holders worried about the impact of financial market volatility on their investment and their retirement income during this difficult time.

Having an investment strategy for your ARF is crucial for 3 reasons:

  1. It insures you have a sustainable level of income in retirement without having to reduce that income during periods of stock market turmoil.
  2. It allows you to deal with periods of market turbulence without having sleepless nights.
  3. It will help you to understand what type of ARF Funds are suitable for you in terms of the risk profile of those ARF Funds.

So, what does successful ARF investment strategy look like?

  1. Understand your ARF Fund – there are thousands of ARF investment funds to choose from. Each of these carries a risk rating which indicates the risk profile of your ARF Fund. This rating works on a 1 to 7 scale standardized scale, with Risk Rating 1 the lowest and Risk Rating 7 the highest. You need to know the risk rating of your fund and understand exactly what exposure you have to financial market volatility. 
  2. Timing the Market – it’s only natural during times of stock market volatility to want to do something. Many ARF investors are tempted to transfer their ARF funds completely to Cash Funds when financial markets crash. The one certainty when it comes to financial markets is that trying to pick the right time to move into cash and the right time to move out of cash is impossible to get consistently right over the long term. The most successful long-term investors are those who don’t panic in times of market turmoil by moving all of their ARF to cash after a big fall, as this can compound the loss. However, that’s not to say you should do absolutely nothing and leave yourself completely at the mercy of stock markets. A successful ARF strategy should be structured so that you always have 2-3 years of future income need invested in a very low risk fund. This is commonly known as a ‘Bucketing Strategy’ and we will be discussing this in our next article. 
  3. How much Income do I need? – the starting point with any retirement plan is to identify what level of income you need to take from your ARF each year. Understanding your income requirements will dictate the long-term investment growth that needs to be achieved by the ARF fund to provide you with this income. For example:
  • John is 65 years of age. He has an ARF Fund valued at €250,000 and needs to take income each year from the ARF of €15,000 (with an assumption of increasing this €15,000 per annum by 2% each year to keep pace with inflation). If we assume life expectancy for John of age 95, then what level of investment growth is needed each year on average to allow him to achieve his goal? The answer is about 6.25% net investment growth each year.
  • However, If John needed to take only €10,000 per annum instead of €15,000 then the investment growth needed per annum on average to achieve this would be about 3.10%.

Understanding your income needs over the lifetime of your ARF will help to guide your decision making when it comes to ARF Fund selection. There is sometimes no need to invest in higher risk ARF funds if you only need to make modest investment gains to fund your retirement goals. Likewise, there is also a need to understand that investing in very low risk or cash funds may not provide the retirement income that you need in the long term.

4. Advice & Planning – you need to meet with your Pension Advisor every year to make small changes as your personal and financial circumstances change. Nothing radical, just some basic housekeeping and perhaps looking at capturing occasional investment opportunities as they pop up.

If you would like to learn more or discuss how we might be able to help, please reach out to us, we are open for business.

Thank you for reading and take care.

Michael Coburn and Jim Doyle

Guardian Wealth

Serving the South East, Midlands, East Coast & Dublin


Phone Joanne on 01 5260770

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