Vanguard Target Retirement

gaz77

I don't have a personal pension just now, so I've been researching things over the last few months.

My current thinking is to start a SIPP and passive invest by buying into low fee tracker funds in different markets. Towards retirement age, I would increase the proportion of bond funds to equity funds.

I came across the Vanguard TRFs, and it would seem to make this easier. I just buy into the one fund over the next 20-30 years, and it de-risks itself over time. I also get far better diversification of funds than creating a portfolio myself.

This thread has made me doubt things a bit though - are there downsides to this strategy?

I understand that drip feeding in funds over 20-30 years evens out the market highs and lows, so I get the idea that drip feeding out over 20+ years during drawdown evens things out too.
However, once I'm retired, I won't be working, so wouldn't having a less risky portfolio be a good idea? 5 years into retirement, it's unlikely I could go back to work if things were looking bad.

I presume I could buy into a higher risk LS fund while earning then swap it for a lower risk LS fund when I retire, but how would I know when's a good day to do this? Wouldn't I be safer with the TRF glide path?

One other comment I've seen is that with the TRFs, you're planning a specific retirement date decades in advance which may be unrealistic. But why would I be tied in to the specific TRF? If in 10 years time I realise I may be be able to retire far earlier, or will have to work longer, what will stop me selling the fund and buying something more appropriate?

At the moment, I've been holding off to see if Vanguard launch a SIPP product. If it's as cheap as their S&S ISAs, then it's may be the cheapest option. After that, it looks like Best Invest have lowest fees. Should I be considering anywhere else?

I have my own company and pay myself a combination of salary and dividends. Will I be able to put money into the SIPP directly from my company or are there any restrictions? It would seem to be the most efficient way of funding a pension.

Thanks in advance for advice! I'm new to investing, but trying hard to learn

greenglide

If you have your own company then the normal thing to do is to have the company to pay directly to the pension as employer contributions avoiding corporation tax, dividend tax, national insurance or income tax. Any normal SIPP should do this.

I would start now, don't wait for Vanguard to introduce a SIPP, they may never do or it could be several years.

bostonerimus

Ahh, the good old days when a retirement could be entirely funded with bonds. There's nothing wrong in holding Target funds as long as you understand how they fit into your overall asset allocation, but with bond rates so low and if you are planning for a 30 year retirement then most people will need some portfolio growth to keep up with inflation and that means holding equities.

seacaitch

bostonerimus wrote: »

Ahh, the good old days when a retirement could be entirely funded with bonds.

Remember, the thread is about Vanguard's Target Retirement Funds (TRF), which are aimed at people intending to use drawdown strategies during retirement. As such, they maintain a significant (50%->30%) equity exposure* during the retirement phase. See an earlier post of mine describing the glidepath.

These are not traditional 'lifestyling' funds aimed at annuity purchase upon retirement, which have you switching entirely into gilts. I'm assuming that's the type of fund you're referring to...

Best to read the Vanguard docs if in doubt.

I don't think anyone's suggesting this TRF range is a perfect solution but they do at least look like a reasonable solution for some people. Many people could - and probably will - do a lot worse than using a fund like these. Specifically, investors often overestimate their psychological ability to ride-out deep equity market drawdowns without panic selling. Added pressure is brought to bear during such drawdowns if relying upon the portfolio for most/all of your living expenses, when an investor may feel very financially vulnerable and thus the pressure to 'protect capital' (ie. sell out) may be intense. This contrasts with the accumulation phase when an investor is paying new money into the portfolio and can comfort themselves with the dollar cost averaging they're enjoying during dep equity market falls.

*NB The TRF's 50%-declining-to-30% equity weighting during the drawdown retirement phase seems like a reasonable compromise between capturing equity upside and retaining purchasing power during retirement, without exposing retirees to intolerable drawdowns that could have them panic selling, particularly if on retirement they immediately experience a really unlucky sequence of returns.

bostonerimus

Holding a high percentage of bonds exposes you to interest rate risk and anyone starting drawdown now with a high bond percentage is likely to have a poor starting sequence of returns. The portfolio won't be as volatile as if it held more equites though.

If you can afford to hold 50% to 30% equites then that's great, but historically less than 50% equites does not produce the most efficient balance of risk/return and drawdown success. 60/40 is a common starting point and a rising equity glide path has been shown to improve the probability of success.

I have pension income and I felt secure retiring at 60% equites and 40% bonds and now I'm at 70% equites. This might not be appropriate or comfortable for others.

webnibbler

The attraction for me of Vanguard's Target Retirement Funds is that you can simply choose the derisking profile that fits your plan. I decided that I would like a 60 / 40 split at age 65 and the TRF that met this for me was TRF 2040. I won't actually be 65 in 2040 but my portfolio should match my desired allocation at that age.

dunstonh

webnibbler wrote: »

The attraction for me of Vanguard's Target Retirement Funds is that you can simply choose the derisking profile that fits your plan. I decided that I would like a 60 / 40 split at age 65 and the TRF that met this for me was TRF 2040. I won't actually be 65 in 2040 but my portfolio should match my desired allocation at that age.

How do you know what your plan is?

The big negative of the TRF is that you are fitting Vanguards plan. Not your own. Your plan is unlikely to remain consistent with that. One thing I have learnt with over 20 years of advice is that plans never turn out as expected. You should always retain flexibility and control and not use pre-determined products or investments.

Change things when they suit you. Not when it suits a provider.

bostonerimus

webnibbler wrote: »

The attraction for me of Vanguard's Target Retirement Funds is that you can simply choose the derisking profile that fits your plan. I decided that I would like a 60 / 40 split at age 65 and the TRF that met this for me was TRF 2040. I won't actually be 65 in 2040 but my portfolio should match my desired allocation at that age.

I agree, you don't need to match the TRF date with your actual retirement date.but be aware of your changing asset allocation as you do drawdown. You can customize your portfolio and get a large amount of diversity by using a few multi-asset funds or just straight indexes. There's no need to get overly complicated.

gaz77

dunstonh wrote: »

How do you know what your plan is?

The big negative of the TRF is that you are fitting Vanguards plan. Not your own. Your plan is unlikely to remain consistent with that. One thing I have learnt with over 20 years of advice is that plans never turn out as expected. You should always retain flexibility and control and not use pre-determined products or investments.

Change things when they suit you. Not when it suits a provider.

I touched on this in my last post, as I don't fully understand this argument.

For example, I might start putting money into a TR 2045 Fund just now, as at this time it best fits my risk profile and estimated retirement date.

Fast forward ten years, and I haven't been able to put as much money in as I hoped, or for some other reason it looks like I'll need to work an extra 5 years. Can't I just sell the TR2045 Fund and buy a TR 2050 or something similar?

Conversely, in ten years time I might be doing better than I planned. Could I not sell the TR 2045 and buy TR 2040? Or maybe my attitude to risk has changed, and I buy a LS 80% Equity instead?

At what point have I lost control or flexibility? I'm not trying to be difficult, I'm just worried there's something important I'm not grasping.

bowlhead99

I suppose the thing is when you buy a "lifestyling" target retirement date fund, its game plan is to move you along the risk scale at a particular pace. However, as an out-of-the-box solution it is aimed at a particular bell curve of individual attitudes which you might not fit at all - indeed, the average target customer, whoever that is, might fit it, but all the rest of us would prefer to be moving at a different pace, or not moving at all.

When you "fast forward" five years or ten years into the future, your attitude to risk may not have changed (in terms of your tolerance for up swings or down swings) and your need for performance (potential growth over preservation of capital) may not have changed. Perhaps having spent five or ten years building your assets and broadening your horizons and developing your life and your wealth, you would now have a greater capacity to absorb losses and shrug them off, rather than a lower appetite for risk.

But the fund is going to be pushing you out of equities and into bonds as you go along - not entirely into bonds of course, but far enough that there's several available notches it might move you along to, and they see fit to launch quite a lot of different target dates with differing profiles that move over time.

So, it could be fair to say that a lifestyling find that presumes to know where you'll be with your life in five years from now or ten years or fifteen or twenty, is a bit of a gimmick, because it's not going to get it exactly right, so you'll quite likely want to change it when it's no longer right for you - in which case why not just buy what is right for you now and *isn't* going to automatically start changing on you ;, and then when that thing that works for you now ceases to work for you, move on.

Many people who are happy with the volatility of a particular mix of assets now (whether that's 80:20 something to something else, or 70:30 or 75:25:5) might legitimately be happy with that same mix in five years or twenty years time. So on balance, it seems a leap of faith to let Vanguard presume to know your needs and change your mix over time without any ongoing input from you, especially as they don't know you at all, while even you yourself don't know exactly what you'll want in the future when the future happens.

Sure, they might not do a bad job, and it's easy, but to me it just encourages laziness and not taking an interest in what your investments are doing. You are likely to get a better result if you do take an interest.

Obviously, some people really don't want to take an interest and those are the sort of people the product was designed for. There is no shame in admitting you are happy to just line up like a sheep or cow and follow the flock or herd without wanting to waste your time thinking about stuff. Perhaps it's just snob value that makes some of us think we are too good for what the masses are being served. The fact you are at least thinking about what you are being served marks you out as someone who is more likely to get a satisfactory result whether you end up with a Vanguard product or something else.