Is a DC derisking/"Lifestyle Strategy" worthwhile if I intend to drawdown?

AIBU

Morning folks
My various (former & current employers') DC pension funds all seem to plan a lifestyle strategy of derisking - moving out of equities and into bonds/cash - on tapering basis in the 10 years before my selected pension age.
This seems a reasonable strategy for people intending to buy an annuity but not for my intended drawdown strategy.
I'd be interested to get your thoughts?
Thanks.

Dox

AIBU said:

Morning folks
My various (former & current employers') DC pension funds all seem to plan a lifestyle strategy of derisking - moving out of equities and into bonds/cash - on tapering basis in the 10 years before my selected pension age.
This seems a reasonable strategy for people intending to buy an annuity but not for my intended drawdown strategy.
I'd be interested to get your thoughts?
Thanks.

If that's the option you chose, that's why they 'all seem to plan' - presumably (like 99% of the population) you slithered into the default option of lifestyling.

If may or may not be a good strategy, depending your age, when you hope to start taking benefits, how you intend to take them and especially your attitude to risk. 

[Deleted User]

Usually it is right to cut debt and increase the proportion of fixed income within our investment pots a few years before retirement. 

At the beginning of our careers we are “fixed income rich”. Think of your education as a fixed term bond which can provide increasing income (salary) for the next 40 years. You can borrow against it (eg mortgage) and you dont need any more fixed income. 

As the bond approaches expiry, you’ll be getting a payout in the form of your pension. Some of it will be fixed income (eg State Pension), but often its a lot less than your cumulative salary potential when you are young. 

So, as you approach your retirement, shifting some (but not all) of your DC funds into fixed income is smart, 

tacpot12

If you expect to live more than 15 years more, you want a large proportion of your portfolio to remain invested in equities. The amount you need to live on for the next three years or so should be held in cash or cash-like investments. 
Lifestyling is a bad idea of most people IMHO.

Thrugelmir

AIBU said:

This seems a reasonable strategy for people intending to buy an annuity but not for my intended drawdown strategy.

What's your plan? 

Moe_The_Bartender

You don’t have to buy an annuity any more so your investment horizon is the day you die. That could be 30 years or more in the future assuming that you are in good health. 100% equities is really the only place to be.

[Deleted User]

tacpot12 said:

If you expect to live more than 15 years more, you want a large proportion of your portfolio to remain invested in equities. The amount you need to live on for the next three years or so should be held in cash or cash-like investments. 
Lifestyling is a bad idea of most people IMHO.

Equities have high short-term risks. 10 years or less is short term. If you need to withdraw from your portfolio in the next 10 years, putting everything except a couple of years’ worth of income into stocks is a high risk strategy. Unfavourable sequence of returns can undermine your plans. 

Albermarle

Most pension plans now also offer some kind of drawdown lifestyle fund as well as an annuity lifestyle fund . So the derisking is less.
Still you would most likely be better to pull out of the lifestyling funds altogether and organise your own portfolio . However do not do this until you are confident you understand what you are doing . Or if the sums are large you could see an IFA.
As a short term fix you could increase your selected retirement date .

michaels

Moe_The_Bartender said:

You don’t have to buy an annuity any more so your investment horizon is the day you die. That could be 30 years or more in the future assuming that you are in good health. 100% equities is really the only place to be.

Modelling based on historic scenarios would suggest that whilst that might maximise your mean return with 100% equities; to get the highest 'no failures' annual return you are actually better off dampening the fluctuations in your portfolio using cash or bonds.

gm0

It does make perfect sense for the trustees and the timing of how this all came about.  Safe default over optimal but higher risk outcomes.  As a default to opt out of. 

Preserves value for a fixed date annuity purchase against volatility without one shot market timing.   No member is hit with the 50% value loss the "day before" and forced to delay retirement by years or halve their income.

You may win or lose during the adjustment based on market SORR (past decade lifestyling wasn't great - leaving bull run equities returns on the table but it isn't always like that and the "default" has to work for both scenarios unknown in advance.

And if people have a "drawdown focus" lifestyle option or a "freestyle" fund selection option (as was also the case with my DC scheme) then those who have chosen to think it over ahead can setup how they choose according to risk appetite.  I strongly believe in 100% equities in accumulation but there is a need to tilt it down to a degree at some point.

Whether that is down at 40% equities or up at 80% as approaching drawdown. 

As others have pointed out past market data does suggest that the long term 40 year return journey is indeed often more profitable for your heirs at 100% but failures from SORR start to appear and a slightly lower % may be optimal for many of us during retirement.

Everyone's family and "other pension" circumstances and pot size vs income is different so these are generalities at best.

AnotherJoe

Deleted_User said:

tacpot12 said:

If you expect to live more than 15 years more, you want a large proportion of your portfolio to remain invested in equities. The amount you need to live on for the next three years or so should be held in cash or cash-like investments. 
Lifestyling is a bad idea of most people IMHO.

Equities have high short-term risks. 10 years or less is short term. If you need to withdraw from your portfolio in the next 10 years, putting everything except a couple of years’ worth of income into stocks is a high risk strategy. Unfavourable sequence of returns can undermine your plans. 

I'd say the opposite, if you intend to withdraw from your portfolio in the next ten years then unless you are withdrawing the absolute maximum you need to live on then you want as much to be invested as possible and a few years in cash as a guard against falls. 

I'm withdrawing now, so that's within the next ten years, I have 90% in equities. If the equities halved I'd still be fine, I'd take from the 10% cash. 

I've got, hopefully another 20 years of investing. Would be crazy to go to 10% equities 90% cash.