COVID-19 has been with us for less than a year but has so swiftly upended everyday life. People are still wrestling with the impact of the pandemic and its related market volatility on their savings and retirement plans.

Those of us approaching retirement are justifiably concerned – from an investing perspective, we have seen this before during the global financial crisis. But unlike previous crises, COVID-19 may perceptibly change people's approach to retirement.

At the most fundamental level, people who have lost their jobs or been forced into wage reductions have a reduced capacity to contribute to their retirement savings, likely throwing retirement plans off course. This is compounded by more volatile and lower forecasts for investment returns.

The Reserve Bank of Australia moved quickly in the early part of the pandemic to slash interest rates to record lows to bolster the economy, but the rate reduction also had the effect of shrinking the interest being paid on savings vehicles like bank term deposits, a staple in most retiree portfolios.

Meanwhile, companies have pulled back on dividend payouts, further constraining any investment earnings.

And while these macro-economic effects combine to hurt our retirement plans, human nature may also get in the way.

The Australian government's scheme allowing early access to retirement savings proved popular with $34.4 billion withdrawn from our super funds1. But while withdrawing super early can help tide us over during a crisis, it comes at a future cost. For those close to retirement, the money withdrawn is unlikely to be recontributed and will disproportionally reduce our retirement savings as compounding takes hold. Younger investors at least have time on their side to catch up on the contribution front although the impact will remain real.

So how are people rethinking retirement during a global pandemic?

One option is to delay retirement and work longer. This comes with two key benefits.

People who stay in the workforce continue to contribute to their super. Second you do not have to drawdown on your retirement savings to fund your lifestyle, leaving the assets to grow and compound.

Of course, working longer is not an option available to everyone. As businesses scale back their workforces, many people are simply being forced out.

These earlier-than-planned retirees are faced with the prospect of accessing their retirement savings earlier, increasing the retirement challenge of making the money last longer.

People at or near the point of retirement face sequencing risk which refers to the idea that a wide variety of returns can be expected over an investor's life: there will be periods of strong returns but also that of declining markets.

Over a lifetime, these tend to even out – but the sequence in which they occur is important. Declines early in an investing lifetime can be recovered but the same magnitude declines at retirement can be devastating.

The OECD says downturns that affect the value of retirement savings have taken about two years to recover in past crises, meaning so long as people do not sell, their portfolios eventually recover and return to growth2.

Bunkering down for the years until normal growth trends resume requires a range of strategies but it all probably starts with going back to basics and harnessing the value of household budgeting.

Extraordinary levels of government assistance have been put in place in the form of extra income and household support payments available for people economically impacted by COVID-19.

Banks, building societies and credit unions are obligated to consider applications for relief based on financial hardship and relief could include repayment deferrals or interest holidays which can provide a window of relief for people that have lost their jobs or are facing reduced hours.

It is important to know however that the help offered is almost always temporary and will have to be paid back – with interest – at some stage in the future.

Reduced circumstances may require some cutbacks in lifestyle terms but people heading into retirement can take comfort that living expenses are typically lower in retirement – some actuarial studies have put it as low as 35 per cent of your salary.

Do not forget about the age pension. As superannuation balances reduce, the chances for eligibility to at least a part pension rises.

Finally, retirees with enough to live on but concerned about planning for the future can take advantage of the reduction in minimum withdrawal rates from super which have been halved to help ensure retirees are not forced to sell assets at depressed prices.

What else?

Investors should review fees being paid on investments. Low fees are one of the best predictors of investment outperformance for the simple reason that the more you pay away in fees, the less you get to keep. While no-one can control market performance you do have control on the fees you pay and in a low return environment the fees paid away are a big drag on your net return.

Another step is to re-align your asset allocation to ensure it remains in line with your plans. If the pandemic has made you think about delaying retirement, it might also give you a chance to seek more growth from your asset allocation as you have more time left in the working phase.

And of course, it's not only about the money.

The social isolation and resulting loneliness from the pandemic pose risks to mental and physical health that are disproportionately felt by those of us in or near retirement age.

So it is worth us all keeping an eye out for those near or in retirement to make sure they are coping with all the pressures that COVID-19 poses to finances and mental and physical health.

By Robin Bowerman, Head of Corporate Affairs, Vanguard Australia.

An iteration of this article was first published in the Australian Financial Review on 12 Nov 2020.