Vanguard Life Strategy vs Target Retirement

Nosmo_King_2

Having more or less decided to transfer my £250K pot into the Life Strategy 40% Equity Fund, I had a look at Vanguards Target Retirement 2020 (50/50) Fund and was wondering, given the similarities between them, albeit with different percentages, which of the 2 anyone out there would recommend.

Linton

Target Retirement funds (also known as Lifestyling) is really only highly desirable if you are going to buy an annuity.  In that case you need to have all the money available needed to buy the annuity right at the start of retirement. An inconvenient crash could cause serious problems.

However if you are planning to drawdown nothing much happens when you retire since you will only be withdrawing a relatively small amount compared to the total pot size.  You dont want to switch all your money into very cautious investments as you will need to stay invested to a significant extent in equity to ensure that your future income will match inflation.

kuratowski

Isn't another possible use for target retirement funds the case where you are seeking a short term "bridge" between retiring (giving up work) and the commencement of a Defined Benefit pension?  I.e. you want to drawdown your DC pot over a comparatively short period like 2-5 years (say).  In which case a very cautious allocation by the time you retire would seem wise.

Thrugelmir

Linton said:

Target Retirement funds (also known as Lifestyling) is really only highly desirable if you are going to buy an annuity.  In that case you need to have all the money available needed to buy the annuity right at the start of retirement. An inconvenient crash could cause serious problems.

Simply select a date further into the future and derisk to a lower level of equities later. 

zagfles

Linton said:

Target Retirement funds (also known as Lifestyling) is really only highly desirable if you are going to buy an annuity.  In that case you need to have all the money available needed to buy the annuity right at the start of retirement. An inconvenient crash could cause serious problems.

However if you are planning to drawdown nothing much happens when you retire since you will only be withdrawing a relatively small amount compared to the total pot size.  You dont want to switch all your money into very cautious investments as you will need to stay invested to a significant extent in equity to ensure that your future income will match inflation.

The Vanguard TRFs are clearly designed for people who want to drawdown in retirement, as it says here https://www.vanguardinvestor.co.uk/articles/latest-thoughts/retirement/why-your-pension-likes-a-target-retirement-fund

Even if you are going to drawdown it's usually sensible to derisk as you approach retirement. It never derisks completely which annuity targeting lifestyling does, but it is does derisk approaching and into retirement, but remaining at least 30% equities.

BritishInvestor

zagfles said:

Linton said:

Target Retirement funds (also known as Lifestyling) is really only highly desirable if you are going to buy an annuity.  In that case you need to have all the money available needed to buy the annuity right at the start of retirement. An inconvenient crash could cause serious problems.

However if you are planning to drawdown nothing much happens when you retire since you will only be withdrawing a relatively small amount compared to the total pot size.  You dont want to switch all your money into very cautious investments as you will need to stay invested to a significant extent in equity to ensure that your future income will match inflation.

The Vanguard TRFs are clearly designed for people who want to drawdown in retirement, as it says here https://www.vanguardinvestor.co.uk/articles/latest-thoughts/retirement/why-your-pension-likes-a-target-retirement-fund

Even if you are going to drawdown it's usually sensible to derisk as you approach retirement. It never derisks completely which annuity targeting lifestyling does, but it is does derisk approaching and into retirement, but remaining at least 30% equities.

"Even if you are going to drawdown it's usually sensible to derisk as you approach retirement"

I'm not sure what you mean by derisk? Take more equity exposure and therefore reduce the risk of running out of money further down the road?

zagfles

BritishInvestor said:

zagfles said:

Linton said:

Target Retirement funds (also known as Lifestyling) is really only highly desirable if you are going to buy an annuity.  In that case you need to have all the money available needed to buy the annuity right at the start of retirement. An inconvenient crash could cause serious problems.

However if you are planning to drawdown nothing much happens when you retire since you will only be withdrawing a relatively small amount compared to the total pot size.  You dont want to switch all your money into very cautious investments as you will need to stay invested to a significant extent in equity to ensure that your future income will match inflation.

The Vanguard TRFs are clearly designed for people who want to drawdown in retirement, as it says here https://www.vanguardinvestor.co.uk/articles/latest-thoughts/retirement/why-your-pension-likes-a-target-retirement-fund

Even if you are going to drawdown it's usually sensible to derisk as you approach retirement. It never derisks completely which annuity targeting lifestyling does, but it is does derisk approaching and into retirement, but remaining at least 30% equities.

"Even if you are going to drawdown it's usually sensible to derisk as you approach retirement"

I'm not sure what you mean by derisk? Take more equity exposure and therefore reduce the risk of running out of money further down the road?

Read the link above, it explains it. Personally it's not a strategy I'd choose, and 30% equities does seem a little low in retirement, but derisking, as in lower % equities at the point of retirement than when you were in your 20's, is hardly controversial. At the point of retirement your wealth is at its peak, and so you're more susceptible to a crash wiping out half your wealth, something that would be hard to recover from if you're no longer adding to your pot.

Personally I'm quite interested in the "prime harvesting" dynamic allocation model, something that seems to have actually been researched on non US markets, in which you start with an allocation of maybe 50-60% equities at the point of retirement, drawdown from bonds/cash, never buy more equities and sell 20% equities once they've risen 20%. This tends to increase the equity % in retirement, up to 100% in some scenarios. But usually does better with less fails than fixed allocations/annual rebalancing  

jamesd

zagfles said:

The Vanguard TRFs are clearly designed for people who want to drawdown in retirement, as it says here https://www.vanguardinvestor.co.uk/articles/latest-thoughts/retirement/why-your-pension-likes-a-target-retirement-fund

Even if you are going to drawdown it's usually sensible to derisk as you approach retirement. It never derisks completely which annuity targeting lifestyling does, but it is does derisk approaching and into retirement, but remaining at least 30% equities.

They aren't very suitable for drawdown because they reduce the equity percentage to 30% from age 75, having started to switch to lower growth investments at 43! At least most of the switch to low growth happens after age 63.

Safe withdrawal rates don't vary hugely until you go below 50% equities. This product does and that sacrifices the amount and sustainability of income. That doesn't reduce risk - of poor drawdown outcome - it increases it.

I'm unimpressed by starting to switch to reduced growth at 43, perhaps 25 years from state pension age. Probably more time in low growth than high for that portion. But there are far worse lifestyling profiles than these.

There's a far more effective derisking approach available from state pension age: secure the income by deferring claiming the state pension, to get index-linked income for life. That'll work well for the pot sizes most commonly seen here. The point of derisking is typically claimed to be protecting income but that becomes futile when you can directly protect it instead.

As the percentage of guaranteed income to needs rises, increased risk becomes suitable because of the reduced consequences of volatility. These funds don't seem suited to that.

The Lifestrategy funds are a better choice because you can more accurately set your investment volatility level based on where you are in your own retirement plan.

There is a drawdown strategy that does do classic initial derisking: the rising equity glidepath, which starts high in bonds and gradually increases equities. It's one of the more efficient approaches. These funds go the opposite way.

ErinGoBrath

Looking at the target funds, instead of Target NRD, I think Target NRD + 20 years has a more sensible equity allocation by age?

BritishInvestor

zagfles said:

BritishInvestor said:

zagfles said:

Linton said:

Target Retirement funds (also known as Lifestyling) is really only highly desirable if you are going to buy an annuity.  In that case you need to have all the money available needed to buy the annuity right at the start of retirement. An inconvenient crash could cause serious problems.

However if you are planning to drawdown nothing much happens when you retire since you will only be withdrawing a relatively small amount compared to the total pot size.  You dont want to switch all your money into very cautious investments as you will need to stay invested to a significant extent in equity to ensure that your future income will match inflation.

The Vanguard TRFs are clearly designed for people who want to drawdown in retirement, as it says here https://www.vanguardinvestor.co.uk/articles/latest-thoughts/retirement/why-your-pension-likes-a-target-retirement-fund

Even if you are going to drawdown it's usually sensible to derisk as you approach retirement. It never derisks completely which annuity targeting lifestyling does, but it is does derisk approaching and into retirement, but remaining at least 30% equities.

"Even if you are going to drawdown it's usually sensible to derisk as you approach retirement"

I'm not sure what you mean by derisk? Take more equity exposure and therefore reduce the risk of running out of money further down the road?

Read the link above, it explains it. Personally it's not a strategy I'd choose, and 30% equities does seem a little low in retirement, but derisking, as in lower % equities at the point of retirement than when you were in your 20's, is hardly controversial. At the point of retirement your wealth is at its peak, and so you're more susceptible to a crash wiping out half your wealth, something that would be hard to recover from if you're no longer adding to your pot.

Personally I'm quite interested in the "prime harvesting" dynamic allocation model, something that seems to have actually been researched on non US markets, in which you start with an allocation of maybe 50-60% equities at the point of retirement, drawdown from bonds/cash, never buy more equities and sell 20% equities once they've risen 20%. This tends to increase the equity % in retirement, up to 100% in some scenarios. But usually does better with less fails than fixed allocations/annual rebalancing  

"but derisking, as in lower % equities at the point of retirement than when you were in your 20's, is hardly controversial. At the point of retirement your wealth is at its peak, and so you're more susceptible to a crash wiping out half your wealth, something that would be hard to recover from if you're no longer adding to your pot."

But evidence shows us that higher % equity typically gives a higher SWR, so I would say it's reasonably controversial.

For most people, their portfolio equity percentage is capped by how much volatility/drawdown they are willing to take (some people have more than enough so their equity percentage is driven by how much growth they need to get while minimising volatility).
Again, most people want to have the option to achieve financial independence as soon as possible. Putting aside the discussion around changing risk appetites as we move through life, if, for example, you have had a 70/30 portfolio from age 30-55 and a robust planning exercise says you can now finish work at n55 and not worry about running out of money (given prudent assumptions), if you now decide to "derisk" and reduce your equity exposure you have a very good chance that it probably isn't prudent to finish work now. Not clear on the logic here.


"This tends to increase the equity % in retirement, up to 100% in some scenarios."

Not many people in my experience are happy with 100% equity portfolios once they appreciate the potential downsides. 

Linton

zagfles said:

Linton said:

Target Retirement funds (also known as Lifestyling) is really only highly desirable if you are going to buy an annuity.  In that case you need to have all the money available needed to buy the annuity right at the start of retirement. An inconvenient crash could cause serious problems.

However if you are planning to drawdown nothing much happens when you retire since you will only be withdrawing a relatively small amount compared to the total pot size.  You dont want to switch all your money into very cautious investments as you will need to stay invested to a significant extent in equity to ensure that your future income will match inflation.

The Vanguard TRFs are clearly designed for people who want to drawdown in retirement, as it says here https://www.vanguardinvestor.co.uk/articles/latest-thoughts/retirement/why-your-pension-likes-a-target-retirement-fund

Even if you are going to drawdown it's usually sensible to derisk as you approach retirement. It never derisks completely which annuity targeting lifestyling does, but it is does derisk approaching and into retirement, but remaining at least 30% equities.

30% equities is much too low in retirement in my view - I am currently at around 55% after more than 15 years since retiring.  Say you retire at 60, more than half your money may not be touched for 15 years which is surely plenty of time for a high equity portfolio to be pretty safe.  Furthermore it is the equity  that is going to provide the protection against inflation. You do not want to lose out to inflation in the early years.