Asset Allocation

Meno

Hi - i am 50 and investing into a SIPP to bridge the gap from possibly 57, definitely 60 to getting my DB pension at 65. So, I will draw it all down until 65 then use the DB pension. Vanguard suggest an asset allocation of 65/35 equity/bonds split. Anyone got any thoughts on this? Sounds quite conservative, but i guess 7-10 years isnt long....

Audaxer

I would say 65/35 equity bonds is medium risk. As 7 to 10 years isn't long term, there is a risk that your SIPP value could lose money in that timeframe.

Thrugelmir

Meno said:

 Sounds quite conservative, but i guess 7-10 years isnt long....

How much can you afford to lose? 

kinger101

I think it's a reasonable allocation for 7-10 years out.  But it's always gonna be quite risky over a relatively short period.
I might be inclined to work backward and work how much I need for those bridging years, and see whether I could get away with a higher bond allocation.  You can't be at 65/35 on retirement day if it's a bridging fund.  

NedS

I'm in a similar boat to you with mine and OH's SIPPs, hoping to retire in 6-7 years, with both SIPPs required to bridge the gap to our DB/State pensions. Don't forget you will not need the whole amount in the first year, so your time frame is actually more like 7-15 years, but it's not easy working out an effective strategy. Remember investment rule number one - not to lose capital. I don't mind taking some risk now but I am keeping a very close eye on stop losses. I have been considering increasing my allocations to wealth preservation funds / corporate bond allocations to try to keep some semblance of growth (or rather offset inflation) whilst adhering to rule number 1. I'll be interested to hear others thoughts.

DairyQueen

It's common to de-risk a few years before you begin drawdown. As you intend to drawdown the entire portfolio over a shortish period (5-8 years), and the fund is an important income source, you may wish to consider the asset allocation you will need on day one of drawdown in order to avoid sequence of returns risk during that short, critical, drawdown period. Then consider how/when you will achieve that allocation.

For example, you may decide that holding two years drawdown in cash and taking the inflation hit, plus the rest in bonds (although low-to-zero returns on gilts, higher risk on corporates), is reasonable. Whatever allocation you choose when will you move to that position? Two years out? Three? Or will you take the risk of a crash the year before you begin drawdown? 

If you begin drawdown age 57 it could be that you are looking at a 4-7-year time frame before de-risking. If age 60 then the timeframe is perhaps 7-10 years. 

What is your attitude to risk? Would you, for example, be prepared to take a punt that the markets hold-up until just before you retire? And if they don't then plan B may be that you work for a little longer? If so a higher equity %age and delaying de-risk may be a good option. 

OTOH are you determined to retire at latest age 60 come what may? If so, a too-high equity allocation would scupper your plans if a crash occurred a year or two before your retirement date. In this case you may wish to consider a lower equity %age and de-risking sooner.

Your attitude to risk, and flexibility on retirement age, will determine asset allocation now and also when/if you decide to de-risk.

Meno

Thanks - Im looking at vanguard retirement date funds either 2025 which is a 60/40 or 2030 which is 65/45. Both phase into bonds the closer you get to retirement; which I guess what i need to do. 

kinger101

But you need to bear in mind the glide-paths of those funds are designed more for drawdown for the duration of retirement.  Not bridging pots.  I'd be worried about a 50/50 allocation at retirement date.  

Meno

Oh, I see - this is trickier than I thought.

Meno

i guess the alternative is to use a Vanguard life strategy say 60/40 now and then move to less aggressive positions periodically

Meno

Really useful advice, thank you. I guess I have to work with what I know now i.e. my earliest retirement date is in 6-7 years, so I can invest say 60/40 now and then then take stock of plans in a couple of years and make a decision, and so on.