Choice of Funds in my pension - any advice?

greatkingrat

FatherAbraham wrote: »

Never mind about the geographic diversification, that portfolio is one hundred percent in equities, and you're only eight years from date you want to start drawing on it?

How come you haven't got any gilt funds or real-estate funds in there to reduce volatility?

On the other hand, he already has a safe 10k pa DB pension, so I think it is reasonable to take more risks with this relatively small DC pot, as whatever happens you eventually have DB + State to fall back on.

FatherAbraham

greatkingrat wrote: »

On the other hand, he already has a safe 10k pa DB pension, so I think it is reasonable to take more risks with this relatively small DC pot, as whatever happens you eventually have DB + State to fall back on.

Real estate carries plenty of risk, but it's not highly correlated with equities. Mixing different risks can reduce volatility overall.

As for the gilts, is the eight years to drawing on the pot which would unsettle me. There's not even a measly 20% allocated to gilts in that portfolio.

Anyway, I guess dunstonh has already raised the target volatility issue.

michaels

How expensive is it to take the fb early in terms of reduction?

You might be better of delaying touching it as long as possible, running down dc funds first or even using equity in your home via a mortgage (say get a 10 year fix just before you early retire)?

Miiade

michaels wrote: »

How expensive is it to take the fb early in terms of reduction?

You might be better of delaying touching it as long as possible, running down dc funds first or even using equity in your home via a mortgage (say get a 10 year fix just before you early retire)?

Thanks for the feedback

The DB reduces 5% a year, nra is 60. I am not looking to extend my mortgage to fund my early retirement

cogito

FatherAbraham wrote: »

As for the gilts, is the eight years to drawing on the pot which would unsettle me. There's not even a measly 20% allocated to gilts in that portfolio.

What return to you get on gilts?

michaels

Miiade wrote: »

Thanks for the feedback

The DB reduces 5% a year, nra is 60. I am not looking to extend my mortgage to fund my early retirement

I wasn't suggesting equity withdrawal but instead seeing this as a possible cheap 'credit line' to bridge the gap between when you want to retire and the most efficient moment to take your fb pension.

For example if I wanted to retire at 50 but could only get my dc tfls at 55 I could use my mortgage as a line of credit costing only 2% and repay the borrowing using the tfls.

With your 5% pa reduction I guess it is a longevity bet - say you expect to live 40 years delaying for 1 year loses you 1/40th of what you will get but increases the amount you get for the remaining 39 years by 5%. I am not sure if this is good value or not.

FatherAbraham

cogito wrote: »

What return to you get on gilts?

A low return.

How safe is the capital value of equities?

Bimbly

I am doing similar. I have DB pensions to pay out from 65 and I want to be able to retire at 60 and bridge the gap using a DC pension I am currently paying into. My employer uses salary sacrifice so the tax breaks are good. My employer scheme, like yours, has a limited number of funds I can invest in. I have a bit longer to do it, though: 11 years. I also want to use this pot to pay down the mortgage so will need to save more than you.

Before I moved out of the default investments, I read widely. Tim Hale's Smarter Investing and John Edwards DIY SIPP pensions (or similar title) were useful.

I decided on a whole of the market approach to my equities. There isn't a global equity fund available to me, so I am invested in a mix of Global Developed ex UK, Emerging Markets and UK.

I also decided to de-risk rapidly over the course of this investment by moving into bonds at an increasing percentage each year (and cash too towards the end). The last thing I need is to think I have it all sorted, only for a market crash to come along near retirement and I've made a loss when I haven't got time to wait for recovery.

I looked at it from the perspective of equity investments should be held for ten years. Buying shares soon to when I want the money is too risky to me and is generally not advised.

I can mostly increase my percentage of bonds with new contributions so I don't have to sell off equities. This makes me feel happy as when my money goes into a bond fund, I plan (on the whole) to keep it in there for 10 years or more.

I assume you have kept your holding in the 50/50 fund and are adding to your pot using the other funds. Once you decide on your strategy, you may find that such a heavy weight in UK equities is too much, then you can sell it and buy what you need. I mean, don't stay tied into it if it doesn't fit your startegy. But work out your plan first.

Bimbly

I thought your numbers looked optimistic, so I did some very rough calculations.

You have 8 years to invest. You have £9,600 already and are adding £377 /month.

You want to drawdown £5000 per year for 12 years.

Very roughly, that's a pot of £72,000 not allowing for inflation or tax (phased drawdown where you take 25% tax free each time would help there).

But let's say your pot will continue to grow during drawdown and you have a target of £60,000 pot (I'm being optimistic here, I'd want more, personally).

With your current contribution plan you need a return of 7% for your investments. I assumed no increase in contributions with pay rises, but then I didn't take inflation into account either.

I know I'm just an amateur, but this seems hughly optimistic to me. Maybe you could achieve 7% when heavy on equities, but then equally you could achieve -50% in a crash pre retirement.

All of those calculations assume good growth in both the accumulation phase and in drawdown with no bumps in the road.

I could also live on £1500 /month day to day, but that wouldn't cover me for new car / new boiler / new roof / nice holidays.

We've also had a good ten years for equities, and even bonds have done well recently, but there is no guarantee that will continue. Indeed, worryingly for me, it suggests that my ten years of investing could be bumpy.

Do the calculations for yourself (as I'm not a maths genius) and see where you end up. It looks to me like working longer and/or boosting contributions would necessary.

DairyQueen

I'm with the sceptics on the feasibility of retiring at 55 using OP's figures.

- The OP appears to be using an income estimate projecting 20 years into the future without inflation adjustment. Assuming 2.5% inflation, by age 55, OP's £18k pa expenses will be £22k and, by SP age, close to £30k.
- Is the 10k p.a. DB the amount projected at age 55? If so, it will be worth considerably less in real terms by then.
- I agree with Bimbly that the income figure (at today's value) seems reasonable but what about capital replacements?
- Emergency cash fund?

Including inflation in the income calculation suggests that OP would need to begin drawdown at 12k per year at age 55, and that figure would need to increase with inflation annually to maintain spending power.

The chances of not having to suspend drawdown over a period of 12 years are slim.

Even if the optimistic return Bimbly allows in the projected fund value of 72k materialises, then the fund stands zero chance of supporting drawdown to meet the stated income requirement over a period of 12 years allowing for inflation.

OP: have you checked your SP forecast? A full nSP (if you will qualify for it) is currently around £8400 p.a. Assuming it rises with assumed 2.5% inflation, it will be worth around £10,200 when you are 55, but your £10k DB will only begin inflation-proofing from the same age. So, at SP age (inflation at 2.5%) your guaranteed income will be around £24,5k but your expenses will be in the ballpark of £30k.

I'm no maths genius, nor an expert on drawdown, but a safe withdrawal rate for a 30-year retirement is around 3%/3.5% in the UK. Given that your drawdown will take place over a much shorter period, and given the volatility of markets over shorter periods, I think that a safe drawdown rate over 12 years would be around 5%/7%. That's well short of the inflation-rising £12k you would need.

Hopefully jamesd will be along to give far more accurate and educated figures but, superficially, it looks an impossible ask to me. If the bull run lasts until you are 60 (highly unlikely) then it may be just about do-able to retire then but with no protection against sequence of returns risk, and no cash buffer.

Unless your plan includes releasing equity in your home at a relatively young age, retiring at age 55 is unrealistic, and optimistic at age 60.

Don't shoot the messenger.