Ready made portfolios for generating an income in retirement

zagfles

qwertywerty said:

Really helpful comments here, thank you. I have more reading and thinking to do.
I appreciate you taking the time to reply and post such helpful content and detail.
With workplace schemes the default seems to be a lifestyle option, which moves portfolio into less volatile and mainly bond style investing but that seems really geared to annuity purchases rather than remaining invested to drawdown, yes?

Depends on the scheme, most will give you the option of targeting drawdown or annuity.

gm0

Per @zagfles Lifestyling was first introduced to solve the "crash" just ahead of annuity purchase problem.  Delay (a long time) or halve your income for life say). 

Initial versions (some still around with people in them) were derisking progressively and aggressively for that and not as suitable for the later Pension Freedoms and Dradown. 

Regulation moved on again.  And many schemes modernised lifestyling to have Lump Sum, Annuity, and Drawdown variants.  Auto adjust in your 50s.  Different curves. 

Markets may not co-operate either.  Being moved to bonds into the recent interest rate spike was not pretty.  Some sad threads here.

Loses some of the simplicity behind the original "we do something believed safer".  As you now have a menu of choices again based on a decision in 30 years time

Linton

The pathways seem to be focussed on choosing a portfolio, but in my view that is a second level concern. The primary difficulty is rather one of financial management.

In the accumulation phase it is easy. You choose a portfolio, any well diversified equity based one will do, and you simply drip feed a sensible amount for a few decades ignoring whatever happens on the way.  Very little ongoing management is needed

Retirement investing is very different because you need to be thinking about the short/ medium term with issues like how much to withdraw during a period of poor  market performance which can eat into the core investments you need to generate future income and meet future inflation.

Different people can deal with this issue in different ways. Some may believe that with Safe Withdrawal Rates they will be fine regardless, others will be happy to cut expenditure if required, and many others plan to hold a significant buffer to tide themselves over during the bad times. Portfolio allocations must be based on what approach to market volatility is chosen. Will this be specified by the Pathway providers?

zagfles

gm0 said:

Per @zagfles Lifestyling was first introduced to solve the "crash" just ahead of annuity purchase problem.  Delay (a long time) or halve your income for life say). 

Initial versions (some still around with people in them) were derisking progressively and aggressively for that and not as suitable for the later Pension Freedoms and Dradown. 

Regulation moved on again.  And many schemes modernised lifestyling to have Lump Sum, Annuity, and Drawdown variants.  Auto adjust in your 50s.  Different curves. 

Markets may not co-operate either.  Being moved to bonds into the recent interest rate spike was not pretty.  Some sad threads here.

Loses some of the simplicity behind the original "we do something believed safer".  As you now have a menu of choices again based on a decision in 30 years time

Being moved into bonds wasn't so bad for intended annuity buyers, because annuity rates greatly improved for the exact same reason that bonds fell in value. In fact corp bonds didn't fare as badly as gilts, so those whose lifestyling moved them into bonds rather than gilts probably did quite well. 

Albermarle

zagfles said:

qwertywerty said:

Really helpful comments here, thank you. I have more reading and thinking to do.
I appreciate you taking the time to reply and post such helpful content and detail.
With workplace schemes the default seems to be a lifestyle option, which moves portfolio into less volatile and mainly bond style investing but that seems really geared to annuity purchases rather than remaining invested to drawdown, yes?

Depends on the scheme, most will give you the option of targeting drawdown or annuity.

OP - First point is that not all workplace schemes default to a lifestyle option - some just default to a medium risk diversified fund.
However if it is a lifestyle scheme, then you need to find out what type it is, and how it derisks as you get older. Only then can you decide whether it is suitable for your aims .

zagfles

Linton said:

The pathways seem to be focussed on choosing a portfolio, but in my view that is a second level concern. The primary difficulty is rather one of financial management.

In the accumulation phase it is easy. You choose a portfolio, any well diversified equity based one will do, and you simply drip feed a sensible amount for a few decades ignoring whatever happens on the way.  Very little ongoing management is needed

Retirement investing is very different because you need to be thinking about the short/ medium term with issues like how much to withdraw during a period of poor  market performance which can eat into the core investments you need to generate future income and meet future inflation.

Different people can deal with this issue in different ways. Some may believe that with Safe Withdrawal Rates they will be fine regardless, others will be happy to cut expenditure if required, and many others plan to hold a significant buffer to tide themselves over during the bad times. Portfolio allocations must be based on what approach to market volatility is chosen. Will this be specified by the Pathway providers?

There is no difference between short term market timing during accumulation and decumulation. It's just the same to say "I won't invest this month because the markets are high" as saying "I won't sell this month because the markets are low". Short term market timing is generally a mugs game whenever it's done. Longer term strategies such as "prime harvesting" may have something in them. But a short term (few years) cash buffer I think has been proved to be nothing more than a comfort blanket. 

Of course, a downturn will always hit you harder the more you have, but that applies equally to late accumulation as early decumulation. There may be a problem if your choice of retirement date is affected eg by a bubble in late accumulation. 

Bostonerimus1

To answer the OP about the way people handle retirement drawdown, some will DIY, some will use off the shelf solutions from administrators and some will take advice from financial advisors. 

When it comes to accumulation vs drawdown portfolios I have the attitude that they are essentially the same in that you are looking for your portfolio to grow but rather than reinvesting you will be taking income. That "growth" can come from capital gains, dividends or interest and your attitude to risk and need for return will dictate the asset allocation. In general people start worrying more about capital preservation as they approach retirement and so de-risk from equities into more cash and fixed income. It's debatable if that's a good idea or not. The possible use of annuities is really where drawdown differs from accumulation.

gm0

zagfles said:

gm0 said:

Per @zagfles Lifestyling was first introduced to solve the "crash" just ahead of annuity purchase problem.  Delay (a long time) or halve your income for life say). 

Initial versions (some still around with people in them) were derisking progressively and aggressively for that and not as suitable for the later Pension Freedoms and Dradown. 

Regulation moved on again.  And many schemes modernised lifestyling to have Lump Sum, Annuity, and Drawdown variants.  Auto adjust in your 50s.  Different curves. 

Markets may not co-operate either.  Being moved to bonds into the recent interest rate spike was not pretty.  Some sad threads here.

Loses some of the simplicity behind the original "we do something believed safer".  As you now have a menu of choices again based on a decision in 30 years time

Being moved into bonds wasn't so bad for intended annuity buyers, because annuity rates greatly improved for the exact same reason that bonds fell in value. In fact corp bonds didn't fare as badly as gilts, so those whose lifestyling moved them into bonds rather than gilts probably did quite well. 

Do not disagree. Entirely correct.  Yet many who were offered (and accepted) long ago - lifestyling - but on the assumptions of then (no pension freedoms) and arrived - at the wrong time - but now with an inheritance objective and a wish to take the options of "Now" on board.  Found themselves - at least temporarily - disadvantaged.  They do - as you say - still have the option of higher annuity rates - albeit higher from a low base given what had happened in the decades prior

Bostonerimus1

zagfles said:

Linton said:

The pathways seem to be focussed on choosing a portfolio, but in my view that is a second level concern. The primary difficulty is rather one of financial management.

In the accumulation phase it is easy. You choose a portfolio, any well diversified equity based one will do, and you simply drip feed a sensible amount for a few decades ignoring whatever happens on the way.  Very little ongoing management is needed

Retirement investing is very different because you need to be thinking about the short/ medium term with issues like how much to withdraw during a period of poor  market performance which can eat into the core investments you need to generate future income and meet future inflation.

Different people can deal with this issue in different ways. Some may believe that with Safe Withdrawal Rates they will be fine regardless, others will be happy to cut expenditure if required, and many others plan to hold a significant buffer to tide themselves over during the bad times. Portfolio allocations must be based on what approach to market volatility is chosen. Will this be specified by the Pathway providers?

There is no difference between short term market timing during accumulation and decumulation. It's just the same to say "I won't invest this month because the markets are high" as saying "I won't sell this month because the markets are low". Short term market timing is generally a mugs game whenever it's done. Longer term strategies such as "prime harvesting" may have something in them. But a short term (few years) cash buffer I think has been proved to be nothing more than a comfort blanket. 

Of course, a downturn will always hit you harder the more you have, but that applies equally to late accumulation as early decumulation. There may be a problem if your choice of retirement date is affected eg by a bubble in late accumulation. 

I tend to agree about the questionable long term investing benefit of a cash buffer in retirement, but it is useful for liquidity and every day practicalities and the psychological benefit should not be minimized;  to the extent that it dampens the panic selling of equities in down markets it can be useful.

Hoenir

zagfles said:

gm0 said:

Per @zagfles Lifestyling was first introduced to solve the "crash" just ahead of annuity purchase problem.  Delay (a long time) or halve your income for life say). 

Initial versions (some still around with people in them) were derisking progressively and aggressively for that and not as suitable for the later Pension Freedoms and Dradown. 

Regulation moved on again.  And many schemes modernised lifestyling to have Lump Sum, Annuity, and Drawdown variants.  Auto adjust in your 50s.  Different curves. 

Markets may not co-operate either.  Being moved to bonds into the recent interest rate spike was not pretty.  Some sad threads here.

Loses some of the simplicity behind the original "we do something believed safer".  As you now have a menu of choices again based on a decision in 30 years time

Being moved into bonds wasn't so bad for intended annuity buyers, because annuity rates greatly improved for the exact same reason that bonds fell in value. In fact corp bonds didn't fare as badly as gilts, so those whose lifestyling moved them into bonds rather than gilts probably did quite well. 

In essence the funds performed their objective. No buying power was actually lost. 

 Loss is only temporary on paper. Bonds will return to nominal par value as redemption date approaches.

Interest received will be being reinvested into higher yielding Gilts. Producing better returns. 

Sometimes investing is simply about maths.