Risk reduction?

AndrewB22

Thanks all. I like the approach of matching assets against future outgoings. I’ve assumed we maintain our present standard of living in retirement, growing at inflation plus 2%. We can cover that with my wife’s pension, drawing on our ISAs and eventually state pensions.  That means my pension is unlikely to be needed. 

We plan to donate the vast majority of our estate to charity. So the way I see it, I’m investing my pension to leave to my wife on death or to give to charity, or in case something incredibly unexpected happens. That might be that we forget to renew the insurance and the house burns down, or we get divorced, or one or both of us requires 24/7 care for many years. 

I know from questionnaires and my overall demeanour that I’m risk tolerant. I hate gambling (seems stupid to me, as I get no pleasure from being lucky) but I am happy to take calculated risk with eg my life or in business. I am a rather unemotional person.  I don’t particularly seek the “thrill” of risk, but I know the ups and downs of business, finance and investing and am chilled. I can roll with the punches. I know what it feels like to get knocked down. 

In that context, I don’t think I would benefit from de-risking. It seems de-risking is appropriate if there is a credible risk of not having enough, or if asset prices falling would affect someone psychologically, causing pain that could be avoided by holding less volatile assets. I don’t think that applies to me and I can happily invest my surplus in long run assets - like VLS100.  I can then forget about them and focus on living. (That said, I have very much enjoyed learning about pensions and reading this forum. There are some amazing people contributing to this forum, helping a lot of people through stressful decisions.) 

AlanP_2

Are you considering all your assets though?

Are your wife's pension and your ISAs invested in the same way as they were / will it be invested in the same way as pre-retirement or have you lowered the risk profile?


I'm not knocking your view, but it is surprising how often we get posters on here with a "I am 100% equities, go big or go home" approach and then a few posts later you find out they have 8 years cash put aside as well.

The overall position is the real indicator, not an individual pot.

AndrewB22

My wife’s pension is DB, index linked. Our savings are roughly 85% VLS100 ISAs, 5% NS&I index linked, and 10% across a portfolio of EIS and SEIS venture capital investments. I am likely to work for the next 2-4 years and will save most of my net pay. We can’t contribute more to pensions or ISAs because we’ve hit all the limits. 

If you value my wife’s DB pension as a multiple of say 30x, exclude home equity, and discount back the state pensions at 5% but multiply them by 40x, to convert the non-capital amounts into equivalent capital sums, and then take off the future LTA charges from my pension, I think we’re about 65% equities and 35% index-linked. 

The 35% that is index linked covers about 60% of our spending. The other 65% have to yield a real return of about 0.7% to cover our spending while maintaining the capital, or if they fell in value by 80% and never recovered we could draw down the remaining 20% and it would last about 30 years. 

So I think we have a relatively high equities exposure but with very good downside cover. I don’t think we need to reduce risk. This exercise has been very helpful - putting the assets against the outgoings and thinking of the surplus is a useful thought experiment. 

bostonerimus

There have been studies (US based) by folks like Wade Pfau that show it can be beneficial to increase risk in a portfolio during retirement and I've applied that, but after guaranteeing a base of income, so a bit cowardly really.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2324930

My approach has been to go into retirement with a liability matching approach component and an increasing percentage of equity investments in my portfolio. Roughly 20 years before retirement I bought a house with a rental apartment that I planned to provide early retirement income along with a DB pension and for my DC money and regular investments I had a 60:40 index tracker portfolio. In retirement the liability matching component is index linked and covers my spending and the rest of the portfolio has drifted from 60% equities up to over 80% as I have stopped rebalancing and so it has a lot of volatility/risk, but if you include the rental and DB and then state pension too the whole portfolio has very little risk as a method to fund retirement. The only risk is to the amount my heirs might get. My philosophy is that I'll risk the size of their inheritance as the probabilities are that my approach will make it grow considerably and if it falls I won't be around to hear the complaints...