Preparing for retirement? Here’s how to invest in a volatile market

[SINGAPORE] For Singaporeans approaching retirement, the transition out of the workforce brings a daunting new set of investment decisions.

With sticky inflation, shifting interest rates and geopolitical risk, individuals two to five years away from retiring face a unique set of challenges.

“Markets fluctuate, headlines amplify uncertainty, and the instinctive reaction is often to ask ‘Should I cash out now?’” said Brandon Ho, a chartered financial analyst and head of investment advisory in Singapore at Arta Finance.

The Business Times asked three wealth experts how pre-retirees should navigate current market volatilities and structure their portfolios.

What is the biggest risk for someone retiring in two to five years?

Markets have become increasingly volatile, with swings driven by inflation uncertainty, geopolitical risks, concentrated equity leadership and “higher-for-longer” interest rate regimes, noted Afdhal Rahman, executive director of wealth advisory at OCBC.

While market dips are a normal part of investing, retiring into a period of market volatility over the next two to five years could expose individuals to what is known as “sequence of returns” risk.

“This is the risk that a sharp market drawdown at the start of retirement derails an individual’s retirement plan and increases the likelihood of running out of money,” said Ho.

When one is still working, market dips are an opportunity to buy cheaper assets. But for retirees who depend on their portfolios to fund spending, the math changes.

“Withdrawals in bear markets are more costly than withdrawals in bull markets,” said Afdhal. By having a cash buffer built into portfolios, retirees can avoid selling investments during market downturns, he said.

Should I just sell everything and hold cash or fixed deposits?

Seeking safety in cash is a common reflex, but experts warn that it can be a costly mistake.

“De‑risking into cash or fixed deposits might seem appealing in today’s uncertain market environment,” noted Afdhal.

However, an individual’s purchasing power could weaken if they moved their holdings to cash too aggressively, especially with higher inflation, he added.

Afdhal stressed that cash should be seen as a strategic buffer, not the dominant allocation.

Ho echoed this sentiment: While cash reduces short-term price volatility and is often perceived as the least risky asset, it carries a different type of risk – inflation.

Assuming a 3 per cent inflation rate, the cost of living would double roughly every 24 years.

“A portfolio concentrated entirely in cash may appear stable in nominal terms, but in real terms, it can steadily lose ground,” Ho said.

How should I adjust my portfolio’s ‘glide path’ right now?

Pre-retirees should shift from aggressively chasing growth to securing reliable income, but the transition should be measured, experts said.

Hamza Ayub, chief strategist and portfolio manager at Farro Capital, advised that asset allocation should move from one that is growth focused to a more balanced one, with a range of 40 to 50 per cent in equities and 50 to 60 per cent in bonds.

He suggested increasing the weight of bonds by 5 per cent each year to move towards a more income-oriented portfolio as retirement approaches.

Afdhal, who also suggested reducing exposure to higher-volatility growth assets and increasing allocations to defensive and income-oriented instruments, noted that this means trimming exposure to asset classes like equities and high-yield credit.

The glide path would involve rotating towards higher-quality fixed-income assets that can pay a reliable and predictable income. He also suggested moving to lower-volatility dividend equities and real estate investment trusts (Reits).

Rather than looking at the portfolio as a single pool, Arta’s Ho also recommended structuring capital into three distinct buckets of relative sizing, which evolve over time:

• Liquidity bucket: Capital intended to fund the next one to three years of withdrawals and unforeseen expenses.
• Retirement bucket: Assets designed to support spending needs throughout retirement.
• Generational bucket: Capital not required for retirement spending and intended for future generations or philanthropy.

For a pre-retiree, the retirement bucket should ideally be fully funded, while capital intended for near-term spending gradually moves into the liquidity bucket, Ho said.

“This transition naturally de-risks the overall portfolio by ensuring that early retirement withdrawals can be funded without selling growth assets in case of market downturns,” he added.

What does an ideal asset allocation look like?

While individual needs vary depending on lifestyle and healthcare costs, the experts suggested specific frameworks tailored for pre-retirees.

Ayub suggested the following portfolio allocation for a Singapore investor:

Meanwhile, for a reasonable starting allocation, Ho alternatively suggested:

Does CPF change the equation for Singaporeans?

The Central Provident Fund (CPF) plays a large role in mitigating risk for local investors.

“CPF provides a stable, risk-free income floor to help retirees afford a basic lifestyle in retirement,” said Afdhal. “During market stress, a retiree who can depend on CPF Life for basic income is less likely to sell investments at depressed prices to meet living expenses.”

Ho similarly pointed out that CPF provides predictable lifelong payouts, creating a baseline level of financial security. This income floor reduces the pressure on personal investment portfolios to fund every dollar of essential spending.

However, Afdhal cautioned that this safety net should not be seen as a licence for indiscriminate risk‑taking, as it does not eliminate the threats of inflation or rising healthcare costs.

How do I tune out the daily market noise?

When headlines blare about impending recessions or geopolitical shocks, the experts advised falling back on discipline.

“Investing is a game of asset allocation, diversification and discipline, and if retirees can follow these three rules, there isn’t a need to fight markets and get influenced by its noise,” said Ayub.

Afdhal suggested using time as a filter: “If a market event does not materially impact their income needs for the next few years, even decades, it is typically noise.”

Ho recommended that pre-retirees revisit their plan only when there is a “structural shift”, such as a permanent change in retirement income expectations, major healthcare expenses, or inflation materially altering spending needs.

Ultimately, the goal is not to eliminate volatility, but to prevent it from derailing retirement outcomes, Ho said.