Vanguard Life Strategy vs Target Retirement

zagfles

BritishInvestor said:

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.

You really think it's controversial that a 20 year old should have a higher % equities than a 60 year old about to retire? Really? What the equity balance should be at the point of retirement, and into retirement, and whether it should be static or dynamic, is controversial. Having a higher equity balance in an investment that won't be touched for at least 35 years (eg the 20 year old investing in a pension) compared to one that is about to be accessed (eg a 55/60 year old retiree), is hardly controversial.

And if that equity balance is higher at 20 than 60, by definition it needs to reduce over the years.

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.

The logic is that the more % you are in equities, the greater a risk of a large proportion of your wealth being wiped out in a crash, or a prolonged downturn. You seem to be assuming the only objective anyone would ever have is to retire as early as possible with the minimum needed to hopefully last them the rest of their lives. Some people may have that as their objective. Others might not be frantically counting down the years to "financial independance" like a prisoner's chalk marks on a cell wall, and maybe actually enjoy working, even if they don't "need" to, and have sufficient such they only need their investments to keep up with inflation for their pot to last them.

The strategies for the two will be completely different, because the balance between the shortfall risk and the adverse market risk will be different.

"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. 

Yet "prime harvesting" does seem to produce better results than static allocations even with periods of 100% equities. Loads on it online. Obviously not for everyone, particulary those who have an emotional attitude to risk.

Albermarle

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. 

I do not quite follow this . How does deferring the SP get you index linked income, any more than not deferring it ?

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.

Although with the current outlook for bonds , it could be argued that the OP's choice of VLS40 is potentially more risky than VLS 60  in the short and longer term .

Linton

ANother factor re derisking in retirement is not a matter of the equity/bond ratio....

The real risk you face is insecurity of income, which is best handled in my view by holding sufficient cash to last you 5-10 years. If you take that approach you then need to start accumulating significant cash perhaps10 years before your retirement date.  There is no particular reason to make major changes to the allocation of your investmnebnts.

zagfles

Linton 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.

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.

Nor mine, the point is that the TR funds are funds aimed at drawdown, not annuities. Also that some sort of strategy which changes asset allocation away from equities with age is sensible at least up to the point of retirement, the extent is controversial, as is what happens after retirement, but anyone arguing that a 20 year old should have the same equity allocation in their pension as a 60 year old I think loses credibility. 

jamesd

zagfles said:

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  

For drawdown the pot wouldn't be wiped out, since most doesn't get spent during down time, at least if safe withdrawal rates are used.

Can you link to some analysis of the prime harvesting you like? It seems to be a variation on rising equity glidepath that incorporates a wealth rule similar to the one in Guyton-Klinger, so it should be more efficient than 4% rule with a higher initial drawing rate. But not as high because if lacks cut rules.

jamesd

ErinGoBrath said:

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

Could well be, it really depends on risk tolerance and plans.

zagfles

jamesd said:

zagfles said:

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  

For drawdown the pot wouldn't be wiped out, since most doesn't get spent during down time, at least if safe withdrawal rates are used.

Can you link to some analysis of the prime harvesting you like? It seems to be a variation on rising equity glidepath that incorporates a wealth rule similar to the one in Guyton-Klinger, so it should be more efficient than 4% rule with a higher initial drawing rate. But not as high because if lacks cut rules.

See https://monevator.com/dynamic-asset-allocation-and-withdrawal-in-retirement/ and there's a PDF link to part of McClung's book.

jamesd

Albermarle said:

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.

Although with the current outlook for bonds , it could be argued that the OP's choice of VLS40 is potentially more risky than VLS 60  in the short and longer term .

The state pension is increased by 5.8% for each year of deferral. Assuming £9,500 SP that's an extra index-linked £551 for each year deferred. The £9,500 withdrawn to live on while deferring has become even safer than gilts from an income generation perspective. Might well regard it as a present but no longer tangible gilt holding from some aspects of a portfolio risk view.

Well, I'd say medium term, while equity risk in some major markets seems quite high in the short to medium term.

BritishInvestor

zagfles said:

BritishInvestor said:

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.

You really think it's controversial that a 20 year old should have a higher % equities than a 60 year old about to retire? Really? What the equity balance should be at the point of retirement, and into retirement, and whether it should be static or dynamic, is controversial. Having a higher equity balance in an investment that won't be touched for at least 35 years (eg the 20 year old investing in a pension) compared to one that is about to be accessed (eg a 55/60 year old retiree), is hardly controversial.

And if that equity balance is higher at 20 than 60, by definition it needs to reduce over the years.

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.

The logic is that the more % you are in equities, the greater a risk of a large proportion of your wealth being wiped out in a crash, or a prolonged downturn. You seem to be assuming the only objective anyone would ever have is to retire as early as possible with the minimum needed to hopefully last them the rest of their lives. Some people may have that as their objective. Others might not be frantically counting down the years to "financial independance" like a prisoner's chalk marks on a cell wall, and maybe actually enjoy working, even if they don't "need" to, and have sufficient such they only need their investments to keep up with inflation for their pot to last them.

The strategies for the two will be completely different, because the balance between the shortfall risk and the adverse market risk will be different.

"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. 

Yet "prime harvesting" does seem to produce better results than static allocations even with periods of 100% equities. Loads on it online. Obviously not for everyone, particulary those who have an emotional attitude to risk.

"You really think it's controversial that a 20 year old should have a higher % equities than a 60 year old about to retire? Really?"

 
As mentioned, putting aside the discussion around risk appetite changing as we age (another discussion), I'm not clear why you think it should change dramatically.


"Having a higher equity balance in an investment that won't be touched for at least 35 years (eg the 20 year old investing in a pension) compared to one that is about to be accessed (eg a 55/60 year old retiree), is hardly controversial. "

I'm not really sure why you are splitting the financial plan into two parts. Far more efficient to treat it as one continuous process.

"And if that equity balance is higher at 20 than 60, by definition it needs to reduce over the years. "

It doesn't need to, and potentially shouldn't, as an enormous amount of evidence shows.

"You seem to be assuming the only objective anyone would ever have is to retire as early as possible with the minimum needed to hopefully last them the rest of their lives."

In my experience, that is what the vast majority of people aspire to - namely achieve financial independence asap. Whether they choose to work for non-financial reasons beyond this point is another discussion.

"The strategies for the two will be completely different, because the balance between the shortfall risk and the adverse market risk will be different. "

Not significantly different. If having achieved financial independence, the person in question chooses to work for a few more years they may well have the option to reduce their equity exposure as they have already "won the game". Assuming an increase in gifting isn't on the cards.

"Yet "prime harvesting" does seem to produce better results than static allocations even with periods of 100% equities. Loads on it online. Obviously not for everyone, particulary those who have an emotional attitude to risk."

It depends what you mean by "better". Having discussed this with many people at retirement, the vast majority say that 100% equities isn't something they would be comfortable with, especially if it forms a large part of their retirement income.

zagfles

BritishInvestor said:

zagfles said:

BritishInvestor said:

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.

You really think it's controversial that a 20 year old should have a higher % equities than a 60 year old about to retire? Really? What the equity balance should be at the point of retirement, and into retirement, and whether it should be static or dynamic, is controversial. Having a higher equity balance in an investment that won't be touched for at least 35 years (eg the 20 year old investing in a pension) compared to one that is about to be accessed (eg a 55/60 year old retiree), is hardly controversial.

And if that equity balance is higher at 20 than 60, by definition it needs to reduce over the years.

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.

The logic is that the more % you are in equities, the greater a risk of a large proportion of your wealth being wiped out in a crash, or a prolonged downturn. You seem to be assuming the only objective anyone would ever have is to retire as early as possible with the minimum needed to hopefully last them the rest of their lives. Some people may have that as their objective. Others might not be frantically counting down the years to "financial independance" like a prisoner's chalk marks on a cell wall, and maybe actually enjoy working, even if they don't "need" to, and have sufficient such they only need their investments to keep up with inflation for their pot to last them.

The strategies for the two will be completely different, because the balance between the shortfall risk and the adverse market risk will be different.

"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. 

Yet "prime harvesting" does seem to produce better results than static allocations even with periods of 100% equities. Loads on it online. Obviously not for everyone, particulary those who have an emotional attitude to risk.

"You really think it's controversial that a 20 year old should have a higher % equities than a 60 year old about to retire? Really?"

 
As mentioned, putting aside the discussion around risk appetite changing as we age (another discussion), I'm not clear why you think it should change dramatically.

It's investment basics. If a 20 year old's equity investments plummet in a crash, they have 40 or more years for them to recover, plus they will now be buying investments from future pension contributions at a lower price. If a 60 year old retiree's investments plummet, they will likely need to sell at least some at a lower price, plus they aren't adding to the investment so don't get the benefit of buying at a lower price.

And yes I'm not talking about people who are driven by emotional attitude to risk, rather those who prefer an analytical analysis of the appropriate risk to take.

"Having a higher equity balance in an investment that won't be touched for at least 35 years (eg the 20 year old investing in a pension) compared to one that is about to be accessed (eg a 55/60 year old retiree), is hardly controversial. "

I'm not really sure why you are splitting the financial plan into two parts. Far more efficient to treat it as one continuous process.

Because there's less controversy over the idea that a 20 year old should have a higher % equity in their pension than a 60 year old, than what the asset allocation should be into retirement. I just wanted to park the uncontroversial stuff that most people agree on, but it seems not all...

"And if that equity balance is higher at 20 than 60, by definition it needs to reduce over the years. "

It doesn't need to, and potentially shouldn't, as an enormous amount of evidence shows.

Really? Can you point me at some of this "enormous" evidence that shows a 20 year old should have the same % equity in their pension as a 60 year old? What % equity at 20 would be sensible do you think? I'd have thought 100% equity at 20 would almost always provide the best outcome, given that a crash could even be advantageous as they'd be buying at a lower price. Whereas 100% at 60 would not.

"You seem to be assuming the only objective anyone would ever have is to retire as early as possible with the minimum needed to hopefully last them the rest of their lives."

In my experience, that is what the vast majority of people aspire to - namely achieve financial independence asap. Whether they choose to work for non-financial reasons beyond this point is another discussion.

"The strategies for the two will be completely different, because the balance between the shortfall risk and the adverse market risk will be different. "

Not significantly different. If having achieved financial independence, the person in question chooses to work for a few more years they may well have the option to reduce their equity exposure as they have already "won the game". Assuming an increase in gifting isn't on the cards.

"Yet "prime harvesting" does seem to produce better results than static allocations even with periods of 100% equities. Loads on it online. Obviously not for everyone, particulary those who have an emotional attitude to risk."

It depends what you mean by "better". Having discussed this with many people at retirement, the vast majority say that 100% equities isn't something they would be comfortable with, especially if it forms a large part of their retirement income.

It's not an objective of the strategy, but it's a possible (almost certainly) temporary outcome in some scenarios. Here's some graphs which demonstrate, yes very US biased but also with some negative scenarios comparing to traditional asset allocation.

https://justusjp.medium.com/prime-harvesting-vs-rebalancing-graphs-2687930a995b