Defined Contribution Pension - Target Date Fund Investments

Jimbo911

coyrls wrote: »

The fact that you have 35% in index linked gilts suggests that your Target Date fund has been designed with the assumption that you will be purchasing an annuity. Is that your intention? If so, have you considered the alternatives? If you are not purchasing an annuity you should review your investment strategy to align with how you plan to fund your retirement.

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%

Jimbo911

coyrls wrote: »

The fact that you have 35% in index linked gilts suggests that your Target Date fund has been designed with the assumption that you will be purchasing an annuity. Is that your intention? If so, have you considered the alternatives? If you are not purchasing an annuity you should review your investment strategy to align with how you plan to fund your retirement.

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%

Jimbo911

Linton wrote: »

Target date funds work on the assumption that you need less risk as you approach retirement. If you are planning to take drawdown at 55 this is arguable since you may not be touching half the the money for 20 years, planty of time to justify a 100% equity portfolio.

No-one knows which way our economy is going in the next 4 years and none knows how your funds are going to perform. That is why one holds a broad range of investments and hopefully most of the equity is invested overseas. A major fall in sterling may actually be to your benefit.

I agree with bostonorius that your equity seems very low which will significantly reduce your potential return but as we dont know your circumstances we can only assume that your retirement plans have taken this into account .

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%

Jimbo911

dunstonh wrote: »

These funds are aimed at people who intend to buy an annuity or fully encash the pension as a lump sum at retirement. So, does that description fit you?
They are not suitable for those that intend to use drawdown.

Nobody knows. Impossible to answer. You should invest appropriate for your risk level, your capacity for loss and your behaviour and knowledge. Not anyone elses.

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%

dunstonh

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.

Fees are a secondary concern. Not a primary one. Important but not the driver.

The safe withdrawal rate model is a theoretical model based on assumptions. As are all models. The real world is different and does not work that way. You would certainly not reduce the income to 2.5% because of 1% charges.

Jimbo911

AnotherJoe wrote: »

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 ???

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: »

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%

This is a defensive allocation and not designed for growth. If you are doing drawdown you need to be thing on a 30 or 40 year time scale....not the next 4 years.

bostonerimus

dunstonh wrote: »

Fees are a secondary concern. Not a primary one. Important but not the driver.

The safe withdrawal rate model is a theoretical model based on assumptions. As are all models. The real world is different and does not work that way. You would certainly not reduce the income to 2.5% because of 1% charges.

Yes, with 1% fees you should probably go from 3.5% to 3% withdrawal.
I cannot agree with you about fees though. They should be a primary concern for every investor particularly in the UK where they can still be ridiculously high.

Models are based on historical data and come with uncertainty baked in. So let's concentrate on the certainties like fees and expenses and do everything to minimize those fixed costs.

dunstonh

Yes, with 1% fees you should probably go from 3.5% to 3% withdrawal.

No you shouldnt. You would go with 3.5%. Or 4% or even 5%.

I cannot agree with you about fees though. They should be a primary concern for every investor particularly in the UK where they can still be ridiculously high.

In which case, everyone would be in savings accounts which are paying around 0.5% and have no explicit charges.

Or perhaps I should tell the client that who got 39.5% over the last 3 years but had charges of 1.7% that he should have been in the fund that got 29.4% but cost 0.2% because charges are more important than the investment itself?

How would you explain to the people that have been drawing 5% a year for the last 20 years whilst paying charges of around 1.5% pa that they should have been paying less and drawing less?

bostonerimus

dunstonh wrote: »

No you shouldnt. You would go with 3.5%. Or 4% or even 5%.

If you can promise better than market returns then I agree......I would not plan on better than market returns though

In which case, everyone would be in savings accounts which are paying around 0.5% and have no explicit charges.

While a savings account is good for short term cash, it would not be sensible for money that you want to grow over decades. Its sensible to take more risk with that money, but not sensible to pay large fees when investing that money.

Or perhaps I should tell the client that who got 39.5% over the last 3 years but had charges of 1.7% that he should have been in the fund that got 29.4% but cost 0.2% because charges are more important than the investment itself?

How would you explain to the people that have been drawing 5% a year for the last 20 years whilst paying charges of around 1.5% pa that they should have been paying less and drawing less?

This is the argument about whether fees are worth it. In some instances and for some people they are worth it.....your example is very attractive, but will you give a counter example where the client did poorly. Would you advise a client to start drawdown at 5% with 1.5% in fees? That sounds scary to me.

I'm just a single example of how keeping fees down and indexing has worked out well in the last 30 years. I've averaged 8% annual return without breaking a sweat. Of course I don't know if the next 30 years will work out the same way, but I won't be paying more than I have to to find out so I'll stick with 0.1% fees.

Obviously, there are market scenarios where more than 3.5% or 4% can be withdrawn. The 4% rule emerges from all combinations of all historical markets with a success probability criteria. 5% for 20 years is possible in many scenarios, but not in others.

Simply put I feel that the guaranteed savings of keeping fees low is better than the advertised benefits of higher fees. I do not expect you to agree.