Reducing volatility risk prior to retirement

Ballard

I'm not a regular reader of the pension forum but did look through a few pages but couldn't find that this had been questioned recently. I couldn't think what to search for so apologies if this is asked every other week.

I'm 52 and aim to retire in around 10 years time (as soon as I think that I'm financially able). I have two pensions, one from an old employer and one from my current employer and both contain funds which are deemed as volatile (between 5 & 7 out of 7). I have 9 funds in each pension with what I think is a reasonable balance and in both cases the main fund is classed as 5/7 for volatility. Looking over the last 3 years, most have gained between 20-40% so I'm happy with the performance.

I'm no pension expert but my understanding is that you should look to move funds into less volatile funds as you approach retirement so as to try to lock in gains and hopefully avoid late drops in value. I see that this makes sense but wonder what other think. Is this something that others are planning to do/have done and at what age? My thinking is that I should look to change funds around 55. I don't currently have an advisor but am open to employing the services of one at some point.

Thanks.

Albermarle

It depends on how you plan to take your pensions. In the 'old days ' buying an annuity was the norm and in this case derisking was necessary to the point of holding 100% cash or similar in the final year before retirement.
Now as most people use some form of drawdown then you need to remain invested during retirement.
In this case then derisking should be more limited if carried out at all . It depends how risky your current portfolio is of course .
As you are at '5' then maybe you could look to going to '4' at some point but some people never derisk and some probably overdo it . No black and white answer.
One issue is that derisking is not so simple, especially in the current market situation. See this thread .
DC Pot is 'big enough' but can't see how to lock in the value in real terms? — MoneySavingExpert Forum

Ballard

Thanks Albermarle. That was very informative. At this stage I haven't decided what to do with my pension upon retirement (although I'm minded not to take out an annuity). I'm simply trying to build as big a pot as I can so that I can make the decision nearer the time.

I've bookmarked that thread for later as I don't have time for that right now.

tacpot12

I am drawing down from my pension, and as I expect to live for another 30-40 years, I have a cash buffer covering the next two years expenses, but all the rest of my pension pot is invested in relatively risky funds. 

MaxiRobriguez

You may want to de-risk a little but your investing horizon is still likely to be 30 years - so a reasonably high equity allocation isn't something to shy away from. 

Whilst de-risking feels nice, you introduce "running out of money" risk.

OldMusicGuy

I am very risk averse and have to rely on a DC pot for 30 plus years (apart from state pension). I hold a large cash buffer some in my SIPP, most outside. The cash outside is mostly in a bond ladder, although with rates so low I am not sure what I will do with some of these as they mature over the next few years. My cash could cover five years of expenditure if needed. 

The bulk of my SIPP is still invested at a moderate level of risk so that volatility is reduced at the expense of growth. This worked as I hoped during the COVID downturn and recovery.

This strategy works for me as I am risk averse and it allows me to sleep at night. Less risk averse folks probably wouldn't do this.

The most important thing is to understand your attitude to risk and also to look at your retirement planning holistically (ie what role do the DC funds play in your strategy). Before spending a lot of money on an advisor, spend some time reading here and also look at videos on YouTube by PensionCraft. This one might interest you: https://www.youtube.com/watch?v=w_cPHn9U-Ik  

gm0

At some point during the next 10 years derisking to the invested portfolio target that's right for you on the subsequent 30-40 years retirement makes sense.  Cash and less volatile assets if buying annuity on a fixed date to remove market volatility as a risk to long term income level/retirement date.  Or your target portfolio if using drawdown.  Or the correct mixture of the two based on your plans.

This portfolio may very well be the same as or slightly less risk embracing than what you used during accumulation - but it is entirely up to you to figure out how variable an income you can tolerate and how much potential prolonged volatility is "too much" to live through comfortably.

If you are going to lower risk (sell volatile growth assets) then you have two choices - cliff edge or bit at a time in the years approaching.   The latter option risks losing returns in a prolonged bull market such as the one we recently have had and inflation may attack the cash or other instruments as well over several years.  But both move you from A to B. 

And "cliff edge" change fails if the P/E valuation correction turns up at the wrong moment.  I used a cliff edge approach to move down from 100% equities to my target - but was essentially "lucky" that the 2020 correction was small and brief and the P/E valuation longer wave correction cycle has yet to turn up.  If it had before I made the change - my plans would have been disrupted.  Now they won't be.

The other factor to consider is what plans you have which are based on taking tax free cash at the point of pension commencement.  Whether this is car replacement, cruises, camper vans, travel in early retirement, house repairs - anything.  Whatever it is.  It is no good if this cash is not available when wanted due to a 60%+ correction and grow back cycle.  Now can't have that cash without selling far too many equities in the drop to extract the same amount which would be bad for your longer term drawdown plans.  Implication - *if* you plan a chunk of tax free cash - then look to make that securely available to extract in good time.  Not so far ahead (e.g. decade) that inflation does its evil work but a year or two is probably fine to "secure" your plans against volatility/sequence and events

kuratowski

If you're interested to compare approaches, here is the approach vanguard's target retirement series takes to derisking (look for the chart mid way down the page):
https://www.vanguardinvestor.co.uk/investing-explained/what-are-target-retirement-funds
I'm not suggesting that these particular funds are right for you - in particular the start and end points (at 80% and 30% equities) may not match your risk appetite.

[Deleted User]

Drawdown or not, poor sequence of return is a very serious risk to people immediately prior and soon after retirement.  The risk is that as portfolio is depleted during the lean years, it may never recover and the pension may run out of money too early.  

You can deal with it by having more fixed income.  That could include DB pensions, bonds or various types of annuities. 

cfw1994

Deleted_User said:

Drawdown or not, poor sequence of return is a very serious risk to people immediately prior and soon after retirement.  The risk is that as portfolio is depleted during the lean years, it may never recover and the pension may run out of money too early.  

You can deal with it by having more fixed income.  That could include DB pensions, bonds or various types of annuities. 

.....or indeed holding cash to ride things out....    😉

Thrugelmir

cfw1994 said:

Deleted_User said:

Drawdown or not, poor sequence of return is a very serious risk to people immediately prior and soon after retirement.  The risk is that as portfolio is depleted during the lean years, it may never recover and the pension may run out of money too early.  

You can deal with it by having more fixed income.  That could include DB pensions, bonds or various types of annuities. 

.....or indeed holding cash to ride things out....    😉

Markets can remain irrational longer than you can stay solvent. 

Markets don't always react as they did in early 2020.