Vanguard SIPP - Multiple Target Retirement funds

Albermarle

zagfles said:

Why do people assume the TR funds target buying an annuity or drawing a chunk at a certain date? They don't, as it clearly states here, they are designed to keep you invested during retirement:

https://www.vanguardinvestor.co.uk/articles/latest-thoughts/retirement/why-your-pension-likes-a-target-retirement-fund

Interesting , I have not looked into the detail before.
I understood that most lifestyle type funds start derisking only about 5 years out from the specified retirement age . Here it starts at age 45 but only gradually and is still at 60% at age 65 ( which I think is higher than most other similar funds) 
Then it keeps reducing equity % up to age 75 down to 30% , which seems low for a sustainable drawdown.

m_c_s

The target date funds in NEST seem to be structured differently and equity exposure tapers down very aggressively from 60% 10 years out to only 10% at 1 year away and then when the target date is reached there is no equity exposure. Only short term bonds and cash are left. I assume this is to allow for a transfer or to buy an annuity. It is very easy to swap to a new target fund but if people don't keep checking their account or don't assign the right target year to match their retirement goals then they could lose out in the long run.

dunstonh

Albermarle said:

zagfles said:

Why do people assume the TR funds target buying an annuity or drawing a chunk at a certain date? They don't, as it clearly states here, they are designed to keep you invested during retirement:

https://www.vanguardinvestor.co.uk/articles/latest-thoughts/retirement/why-your-pension-likes-a-target-retirement-fund

Interesting , I have not looked into the detail before.
I understood that most lifestyle type funds start derisking only about 5 years out from the specified retirement age . Here it starts at age 45 but only gradually and is still at 60% at age 65 ( which I think is higher than most other similar funds) 
Then it keeps reducing equity % up to age 75 down to 30% , which seems low for a sustainable drawdown.

This is the problem with using funds that reduce risk automatically as you get older.  They are doing it on a fixed process. They are not doing it to match the investors objectives unless, in some cases, the two things align.

The TR funds are not as extreme in risk reduction as many other funds but they keep going.  Many people would start at a higher risk level than the average consumer is capable of accepting and end at a level that is lower than the average consumer tolerance.  If it fits what you want, then it's perfect.  If it doesn't fit what you want then it isn't suitable.   There is no point shoehorning something that doesn't fit.

If a person has a high or medium/high risk level in the accumulation stage then it is not uncommon to drop it a notch or two to medium at retirement.  However, it is not very common to continue dropping after that.

zagfles

m_c_s said:

The target date funds in NEST seem to be structured differently and equity exposure tapers down very aggressively from 60% 10 years out to only 10% at 1 year away and then when the target date is reached there is no equity exposure. Only short term bonds and cash is left. I assume this is to allow for a transfer or to buy an annuity. It is very easy to swap to a new target fund but if people don't keep checking their account or don't assign the right target year to match their retirement goals then they could lose out in the long run.

There is still some by the looks of it - see the chart on the TR date funds on p.11

https://www.nestpensions.org.uk/schemeweb/dam/nestlibrary/Nest-quarterly-investment-report.pdf

zagfles

dunstonh said:

Albermarle said:

zagfles said:

Why do people assume the TR funds target buying an annuity or drawing a chunk at a certain date? They don't, as it clearly states here, they are designed to keep you invested during retirement:

https://www.vanguardinvestor.co.uk/articles/latest-thoughts/retirement/why-your-pension-likes-a-target-retirement-fund

Interesting , I have not looked into the detail before.
I understood that most lifestyle type funds start derisking only about 5 years out from the specified retirement age . Here it starts at age 45 but only gradually and is still at 60% at age 65 ( which I think is higher than most other similar funds) 
Then it keeps reducing equity % up to age 75 down to 30% , which seems low for a sustainable drawdown.

This is the problem with using funds that reduce risk automatically as you get older.  They are doing it on a fixed process. They are not doing it to match the investors objectives unless, in some cases, the two things align.

The TR funds are not as extreme in risk reduction as many other funds but they keep going.  Many people would start at a higher risk level than the average consumer is capable of accepting and end at a level that is lower than the average consumer tolerance.  If it fits what you want, then it's perfect.  If it doesn't fit what you want then it isn't suitable.   There is no point shoehorning something that doesn't fit.

If a person has a high or medium/high risk level in the accumulation stage then it is not uncommon to drop it a notch or two to medium at retirement.  However, it is not very common to continue dropping after that.

Well, obviously. If you don't like the TR glide path it's easy enough to do it yourself eg using VLS funds (others are available) and set your own glide path manually (or not).

MX5huggy

zagfles said:

Why do people assume the TR funds target buying an annuity or drawing a chunk at a certain date? They don't, as it clearly states here, they are designed to keep you invested during retirement:

https://www.vanguardinvestor.co.uk/articles/latest-thoughts/retirement/why-your-pension-likes-a-target-retirement-fund

I think I’m going to blame this guy and in particular the first paragraph. 

https://pensioncraft.com/review-vanguard-target-retirement-funds/

The name TR 2050 says this thing has done it’s job by 2050
Then the glide path graph does not show that the TR date does not line up with 75 on the graph. 

If you have a graph with years on the x instead of ages it may help (although it would only be specific to one TR fund). 

[Deleted User]

Target retirement funds are very good at providing what consumers actually need.  For younger people stocks provide the lowest risk.  As we approach retirement, we become far more sensitive to volatility and now bonds provide lower risk. 

The concept of “risk tolerance” used by advisers is really a folly.  Peoples’ responses to volatility tolerance questions change based on how the question is asked, how sunny it is or what the market is doing on a given day and what is in the newspapers/blogs on this day.  In practice, people who dump retirement savings into a TR pension fund and forget about it do just fine.  There has been no evidence of young people in TR funds withdrawing in March 2020.  

Of course, anyone with more knowledge wanting more control and flexibility can pick something else but TR funds are a great and popular product for a hands off consumer which is based on solid theory that does the job. 

dunstonh

The concept of “risk tolerance” used by advisers is really a folly.

Well, everyone should just invest 100% into emerging markets then if that is your opinion.

zagfles

dunstonh said:

The concept of “risk tolerance” used by advisers is really a folly.

Well, everyone should just invest 100% into emerging markets then if that is your opinion.

Well, that's a non sequitur.

There's a difference between basing investment strategy on emotion, ie "what risk are you happy with", and objective analysis, ie "what risk is it appropriate to take".

100% emerging markets is unlikely to be appropriate for anyone, regardless of their emotional attitude to risk.

zagfles

Deleted_User said:

Target retirement funds are very good at providing what consumers actually need.  For younger people stocks provide the lowest risk.  As we approach retirement, we become far more sensitive to volatility and now bonds provide lower risk. 

The concept of “risk tolerance” used by advisers is really a folly.  Peoples’ responses to volatility tolerance questions change based on how the question is asked, how sunny it is or what the market is doing on a given day and what is in the newspapers/blogs on this day.  In practice, people who dump retirement savings into a TR pension fund and forget about it do just fine.  There has been no evidence of young people in TR funds withdrawing in March 2020.  

Of course, anyone with more knowledge wanting more control and flexibility can pick something else but TR funds are a great and popular product for a hands off consumer which is based on solid theory that does the job. 

Yes, people who use TR funds are likely to be more hands off than those who regularly rebalance, so they probably wouldn't even notice a dip in their fund value and go into panic mode and sell everything, as the stereotypical inexperienced investor does at the slightest hint of a downturn.

It seems "risk tolerance" is just a backside covering exercise by the financial services industry - and a way to blame the customer if their investments underperform. Advisors should really be saying to customers "the appropriate risk to take to achieve your objectives is..." rather than "what risk are you happy to take?". But the former would mean the advisor is fully responsible for the strategy. Some would say that's their job.