Vanguard Target Retirement

BLB53

Nor is 80% equity allocation at age 65 unreasonable.

What is reasonable is your risk profile and capacity for loss and whilst it is normal for people to drop a little down the risk profile in retirement, it tends to be a slower move and not as extreme

Sorry but I don't follow the point you make. For the person building a pension over many years the fund starts with 80% equities and reduces to 50% at 65 and then 30% at 75 yrs and you said this was not a good idea [to use Target Retirement funds] if you are planning to be in drawdown in retirement...so why is it not a good idea?

Pincher

Zola. wrote: »

Can you get these through regular sites like H&L etc, or do you have to go through Vanguard directly?

Funny you should ask. Previously you need to have £100k to go direct, but I just spoke to Vanguard UK, and they are going retail end of May 2017!

S&S ISA is on the cards, so this year's £20k is spoken for.

If they do pension pots, might move some small pots in there.

All depends on the charges, naturally.

Will they force a seismic drop in platform charges?
Will we see homeless fund managers begging on the streets?
Such exciting times we live in.

ColdIron

Pincher wrote: »

Funny you should ask. Previously you need to have £100k to go direct, but I just spoke to Vanguard UK, and they are going retail end of May 2017!

S&S ISA is on the cards, so this year's £20k is spoken for.

A Vanguard ISA might be a problem of you wanted non Vanguard funds. We will have to wait and see

dunstonh

BLB53 wrote: »

Sorry but I don't follow the point you make. For the person building a pension over many years the fund starts with 80% equities and reduces to 50% at 65 and then 30% at 75 yrs and you said this was not a good idea [to use Target Retirement funds] if you are planning to be in drawdown in retirement...so why is it not a good idea?

It may be the right thing for a certain individual. However, it is probably not the right thing for most people. If you invest in this fund, you are not getting the choice. You are being moved at given points to a different risk profile whether you like it or not.

Plenty of retired investors have equity allocations (excluding savings) above the 50% mark at 65 and above the 30% mark at 75.

If you, as an individual, have the risk profile to have x% equities then your age may not be a reason to reduce so drastically. Capacity for loss tends to be the major driver for those in retirement. Not behaviour/attitude to loss (for someone who is an experienced investor)

If you have invested for the best part of your life at say risk 7, you would likely have gone through 5-6 financial crisis and very very many market crashes. So, why would you suddenly fear these events just because you are 65? You wouldn't unless there was a capacity for loss issue.

Going back onto drawdown, if you have spent 20-30-40 years building up your pension in the accumulation stage, you are likely to have another 20-30 years in the decumulation stage. So, time is not the issue with drawdown in the same way it was with annuity.
What if spouse is 10 years younger and female? That could be another 15 years invested after you have died?

Risk reducing funds are not measured to the individual. They have no consideration over capacity for loss, knowledge or behaviour or the time it will still be invested. The fund is making the decision rather than the individual. Surely it is better to have an allocation the is right for you and not what a computer says without knowing any facts?

Statistically, lifestyling funds provide lower returns in most periods compared to remaining invested to the specific date.

seacaitch

I think there's an argument to be made regarding the use of a ladder of target retirement date funds, allowing a portfolio to automatically derisk itself a tranche at a time, every 5 years, or whatever the target date intervals are.

Think of this as combining traditional lifestyling (where the intention was to derisk in anticipation of annuity purchase on retirement) with a drawdown approach (where the intention is to remain fully invested with a consistent asset allocation).

With a ladder of these funds, the derisked tranche wouldn't be encashed to purchase an annuity but would instead be drawn down (and drawn down fully) over the succeeding 5 years in order to meet anticipated spending requirements. When that 5 years are up, the next tranche will already have automatically derisked itself, ready for drawdown, and so on.

You might view this approach as providing, amongst other things, some automatic mitigation against sequence of returns risks (commencing drawdown during the beginning of a lengthy period of lowly priced risk assets). Obviously, other approaches are also available...

The big practical issue with these types of funds is probably that of not knowing when you will retire and therefore what fund or funds to choose, ladder or no ladder.

LHW99

My main objection to any form of lifestyling is that the change happens on a pre-ordained day, even if there has been a 50% drop in the markets the day before.
If the change is under your control, then you can say, OK I'll hang on a year or so, let the dividends roll in and keep an eye on what I drawdown.

seacaitch

LHW99 wrote: »

My main objection to any form of lifestyling is that the change happens on a pre-ordained day, even if there has been a 50% drop in the markets the day before.

These TRF funds use a glide path that steadily reduces equities from 80->30% weightings over a 32 year period:
80->60% over 20 years;
60->50% over 5 years;
50->30% over 7 years.

So there are no dramatic asset allocation shifts on any given day; the allocation shifts on a single day would barely be measurable, never mind material. The allocation changes over a full year are also modest, with the largest being the ~3 percentage point reductions in the final 7 year phase of the glide path once retirement has commenced.

https://www.vanguard.co.uk/documents/adv/literature/trf-research-paper.pdf

The preordained day issue is an issue but not really for the reason you state but more because life's journey is unlikely to lead you to a fixed retirement date that you've identified 40 odd years in advance!

Malthusian

seacaitch wrote: »

So there are no dramatic asset allocation shifts on any given day; the allocation shifts on a single day would barely be measurable, never mind material.

But the markets don't fall 50% on any given day either so either LHW99 is illustrating the problem through hyperbole or he doesn't know a lot about the stockmarket. I'm assuming the former.

The allocation shifts may not be as dramatic as selling half or all of your equities the day after they fall by 50%, but having a glide path that sells equities and buys bonds (or cash) which coincides with a November 2007 -> March 2009 style fall in the equity markets is still going to leave you materially worse off.

It may be that you were absolutely determined to retire and buy an annuity in March 2009 and in that case you were just going to have to suck it up and be glad that the lifestyling did protect you from some of the fall in value. However, a lot of people in this situation might prefer to stay invested and delay retirement for a year or two if necessary. Or they might have retired early in 2007 because being fully invested while the markets were at their peak allowed them to reach their retirement goal earlier.

Malthusian

Incidentally, one potential problem with the Vanguard Retirement Funds is that they start out at Vanguard 80/20 and reduce the equity content over time. However, the OP has already self-risk-profiled and decided that he is comfortable with the level of risk of Vanguard 60/40. So a Vanguard Retirement Fund is going to be too hot for him. Unless he chooses one that is already in its glide path and has reached somewhere around the 60/40 mark, but surely the choice of fund is supposed to depend on his retirement date and not his risk profile.

seacaitch

Whatever approach people take has pitfalls. A problem with any 'all in one' fund that attempts to provide a whole portfolio in a single fund, such as these TRF funds or the LifeStrategy funds, is that you lose granular control, which may have specific relevance during drawdown.

During a protracted equity market bear market, such as in your historic example, you might wish to avoid selling equities low and instead sell other portfolio components that have either not fallen as much or have risen. You can't do that with these all in one funds, without entering into more complex workarounds.

All in one funds are all about providing a simple (but reasonably effective) product, not addressing every possible need. You are trading sophistication for convenience. The important thing is for people to understand exactly what it is they're purchasing, compromises and all, and then carefully deciding whether that product sufficiently meets their needs to warrant purchasing and staying with over the (very) long term.

Incidentally, there are a number of references in the thread regarding the TRF fund range being aimed at future annuity purchase. It's not - please read the Vanguard doc I linked to. Vanguard have attempted to adapt the lifestyling approach to a drawdown strategy, hence the relatively high equity weighting at retirement, the continued glide path, and the 30% retained equity weighting. The specific choices that Vanguard has made may not be to someone's liking, but the approach nevertheless appears a reasonably sound one that would suit some people's needs.