Vanguard SIPP query - target retirement fund / lifestrategy fund

zagfles

DairyQueen said:

I'm not convinced that de-risking is achieved by a glide-path into bonds as their (recent decades) inverse relationship with equities no longer holds true and they are so exposed to inflation risk. If OTOH you are only seeking to reduce volatility as spouse's retirement date approaches then target retirement funds are an option.

Despite their volatility, equities are the preferred hedge against inflation over a 10+ year investment timeframe. Asset allocation for a <10 year timeframe is a tougher call. De-accumulation investing is tougher than accumulation IMO.

I wish to drawdown the max TF annually via UFPLS in retirement years 1 through 5. I will then move to a low annual withdrawal rate (<2%) but wish to retain flexibility to increase/reduce/suspend drawdown.

Year 1 is imminent (this or next tax year) and I have used 'buckets' to structure my portfolio in the lead-up. Many here would disagree with this approach but it works for me as the funds earmarked for near-term drawdown are invested at a risk level commensurate with their investment timeframe and not with my generally high tolerance for risk 

Years 1 thru 5 -100% cash
Year 6 - 100% bonds
Years 7 thru 10 - 20/80 
Years 10+ - 80/20. I resisted 100% equities as a I don't have the stomach to see a possible 50% reduction on a large chunk of my portfolio when the market crashes. A 40% drop is within my comfort zone.

I decided the known inflation hit on cash was the least worst option for the short-term. I am hoping that the 20% equity allocation will mitigate against inflation risk on bonds for years 7 thru 10 but a market crash and/or high inflation would put-paid to that. The 20/80 allocation will likely be glide-pathed into cash when I rebalance annually.

Mr DQ's portfolio is very low bonds despite his imminent retirement. Other than cash intended for drawdown over the next 5 years (and a smidge of bonds and WP) he is 100% equities. But his drawdown aims and constraints are different from mine.

How you structure your portfolio in preparation for, and during, de-accumulation is a product of more than risk/volatility tolerance. It also depends on your drawdown schedule, tax situation, LTA position, other income, inheritance plans, etc. There is no one-size-fits-all strategy.

Cash doesn't necessaily have an inflation hit - my cash investments on average are earning interest above inflation, as I got some fixed rates at 2 - 2.5%, also just invested some in Nationwide's fixed rate ISA at 0.75% which is above current CPI & CPIH inflation (now at least). I too prefer cash to bonds at the moment but this may change.

As I've mentioned here before, the other thing to consider is DB pension risk, something that never seems to be talked about, people seem to assume a DB pension is safe and its value will stay the same until death. Our DB pensions like most are "limited price indexation", ie they are capped at 3 or 5%. A decade like the 1970's would more than halve their real value, not that I think that will happen, but a preiod of inflation above 3 or 5% is certainly possible. I think foreign unhedged equities may help here to preserve real value when the pound is falling in value.

jamesd

While the decumulation posts and links are interesting, she's nine years from retiring and still in the accumulation phase. Perhaps you might want to address mixes for the later part of accumulation?

BritishInvestor, I suspect that Bill Bengen was being a bit optimistic in writing that a retiree "will" be comfortable somewhere between 50% and 75% equities.