Defined Contribution Pension - Target Date Fund Investments

Jimbo911

bostonerimus wrote: »

Generally I'd say 60% bonds is pretty conservative at age 51 and that in drawdown fees and expenses will directly affect your level of income so make sure you minimize those!

Are you suggesting my current investment bonds should more or less then 60% at age 51? Thank you.

AnotherJoe

Jimbo911 wrote: »

Are you suggesting my current investment bonds should more or less then 60% at age 51? Thank you.

I think everyone is suggesting that (a) you probably shouldn't be in a target date system, because it probably doesn't fit your plans, and that 60% is very conservative for someone with 30+ investing years ahead of them, but not knowing your overall financial situation* and your approach to risk, no can can conclusively state that 60% is too high.

It certainly would be too high for most, but then again there was a poster here recently who had a hugely conservative approach and who was essentially 100% in bonds, so there is no right answer.

You have plenty of time to get educated, or you could take financial advice now.

*so, you plan to start draw down at age 55 in 4 years time but that doesnt really mean anything by itself. Will you draw down 3% a year indefintely or 20% for 4-5 years as you bridge to other pensions? Do you need all that money to live on or is it a top up or or or ???

coyrls

Jimbo911 wrote: »

I intend moving my pot to a drawdown scheme in 4 years time. Are you able to advise on what my mix of Investments should be for me to take drawdown?


Thank you.

I think in principle you should decide what asset mix you want to have to support drawdown and attempt to get your allocation as close to that mix as possible with your current provider prior to moving to drawdown. The only complication is that it is likely that you will need to transfer to your new provider in cash and so you may want to gradually move to a cash equivalent fund in the last year or so to avoid a situation where your funds are sold during a sudden crash that recovers before you’re able to reinvest with your new provider.

Linton

Jimbo911 wrote: »

Are you suggesting my current investment bonds should more or less then 60% at age 51? Thank you.

Less than 60% bonds if you plan to drawdown. Bonds generally are less volatile and provide lower returns than equity. They are suitable if you need the money in the relatively short term but in your case you could still be drawing down in 40 years time. No-one knows what could happen to inflation between now and then so you need to ensure a good return on your investments until nearer the time.

For the past few years conditions have been unusual for bonds. Interest rates have fallen which has the effect that very safe bonds like gilts are not great investments as their price has risen close to the maximum.

What you should do depends on your circumstances and attitude to risk. Your pension pot or other investments may be so large that you can afford to meet all your conceivable expenses for the rest of your life without any worry about inflation. If you invest more in equities you will need to accept that in some years there will be crashes during which you pension pot drops in value. You may find this difficult.

So we cant tell you what is right for you. To get that advice you would need to consult a professional.

Jimbo911

All I'm trying to do is use my existing pension fund (which is fairly cautious as far as risk is
concerned - Investments detailed at the end) as a vehicle to build as big of a pot as possible
by the time I'm 55.


As my pension provider does not offer drawdown, the investment mix in my current DC will have nothing to do with my drawdown (except hopefully build a decent sized pot). At 55 I want to do is transfer the money out of my DC pot and put it into a drawdown that is provided by someone else.


Perhaps I should pose the question as "Is my current Investment mix good for building a large
pot in 4 years-time, which is ready to transfer away from my current pension provider to a
drawdown provider?"


UK Equities, 4.4%
Global Developed Market Equities, 17.5%
Global Multi-Factor Equities, 3.9%
Global Small-Cap Equities, 2.3%
Emerging Market Equities, 3.7%
Global Property, 3.4%
Commodities, 1.4%
Global Corporate Bonds, 7.1%
UK Corporate Bonds, 8.4%
Gilts, 12.2%
Index-Linked Gilts, 35.6%
Cash, 0.0%

bostonerimus

Jimbo911 wrote: »

I intend moving my pot to a drawdown scheme in 4 years time. Are you able to advise on what my mix of Investments should be for me to take drawdown?


Thank you.

For drawdown you should probably start with 60% equities as for historical stock and bond markets that's been a good compromise between risk and return. That asset mix has given a 95% change of being able to withdraw a 3.5% inflation adjusted income for 30 years. Of course the asset mix also depends on your other investments and pensions. For example if you had a final salary pension that covered your basic expenses you might want to go 100% equities because you could "afford" to take the extra risk.

Bear in mind that any investing fees will directly reduce the income you can take......so 1% fees and your income does down to 2.5%. For that reason you might want to look at the various low cost multi-asset funds with a n equity mix that you like as a starting point for your drawdown fund allocation.

dunstonh

Bear in mind that any investing fees will directly reduce the income you can take......so 1% fees and your income does down to 2.5%.

That is not correct.

Fees will certainly reduce the net return of the fund. However, not to a scale that will require you to reduce the income draw.

bostonerimus

Jimbo911 wrote: »

All I'm trying to do is use my existing pension fund as a vehicle to build as big of a pot as possible by the time I'm 55.

I'd stop thinking like that. You want to balance risk with potential return......the biggest pot possible would require you to go 100% equities, but you'd also have a high chance of losing money. So you should be looking to grow your pension fund consistently, balancing risk and return to maximize the probability that you'll have enough to fund your retirement. You need to do a budget, work out how big a pension pot you need and design an asset mix that gives you the highest probability of getting there.

bostonerimus

dunstonh wrote: »

That is not correct.

Fees will certainly reduce the net return of the fund. However, not to a scale that will require you to reduce the income draw.

The safe withdrawal rate models do not include fees. It's true that they will reduce when the value of a portfolio goes down so that it might not be 1:1......but minimizing them is still good practice. If the actual reduction for 1% fees is something like 0.5% that's still 15% of your income lost. However, to be careful, many people in the US adjust their safe withdrawal rate by the amount of fees they pay....of course that could be as low as 0.1%.

Here is a nice article on the subject

https://www.kitces.com/blog/the-impact-of-investment-costs-on-safe-withdrawal-rates/

Jimbo911

bostonerimus wrote: »

I'd stop thinking like that. You want to balance risk with potential return......the biggest pot possible would require you to go 100% equities, but you'd also have a high chance of losing money. So you should be looking to grow your pension fund consistently, balancing risk and return to maximize the probability that you'll have enough to fund your retirement.

I have balanced my risk by using the suggested mix of investments in my target date fund of 2020 - 2022.

UK Equities, 4.4%
Global Developed Market Equities, 17.5%
Global Multi-Factor Equities, 3.9%
Global Small-Cap Equities, 2.3%
Emerging Market Equities, 3.7%
Global Property, 3.4%
Commodities, 1.4%
Global Corporate Bonds, 7.1%
UK Corporate Bonds, 8.4%
Gilts, 12.2%
Index-Linked Gilts, 35.6%
Cash, 0.0%