Adventurous approach to retirement planning

Strummer22

I'm planning to retire in around 20-23 years, so this is by no means the most urgent call for advice ever. Just putting some ideas down and seeing what you forumites think.

If:

• I don't mind whether I use drawdown, annuity, or a mix of both; and
• I have a few years' income held in an ISA so that the pension would not be needed immediately upon retirement,

then is it wise to aim to maximise the size of my pot and target continued growth into retirement, rather than 'de-risk' as retirement approaches? I can then decide on the best thing to do with this pot at/after retirement, depending on annuity rates etc.

These thoughts were prompted by this thread in which an annuity-targeted fund dropped in value but as it was a hedge against annuity rates, would still provide the same annuity now as it would have in 2021, as annuity rates have increased. However, if fund growth was targeted, then it would have been able to buy an even bigger annuity! 

Would it be foolish/over-adventurous to do little to no de-risking as retirement looms with a view to taking this flexible approach? Is anyone else taking/planning to take a similar approach? 
 

dunstonh

then is it wise to aim to maximise the size of my pot and target continued growth into retirement, rather than 'de-risk' as retirement approaches?

You should de-risk anything that plans to be removed from the portfolio in the short term.   Bucket your portfolio if necessary into short/medium/long and invest accordingly.

These thoughts were prompted by this thread in which an annuity-targeted fund dropped in value but as it was a hedge against annuity rates, would still provide the same annuity now as it would have in 2021, as annuity rates have increased. However, if fund growth was targeted, then it would have been able to buy an even bigger annuity! 

The fund had a hedge against annuity rates but it also included other things.  So, whilst the fund dropped in value and annuity rates had risen, the scale of the drop was less relative to the increase in annuity rates.   So, the poster, if he was actually interested in understanding rather than moaning, would still be in a positive position.

Would it be foolish/over-adventurous to do little to no de-risking as retirement looms with a view to taking this flexible approach? Is anyone else taking/planning to take a similar approach? 

Only time will tell. Do you plan for the worst and hope for the best or do you plan for the best and not for the worst?
i..e what if you get a 20 year period where the average annualised real return is 1% p.a?

Brie

Always good to plan in advance to ensure all the bases are covered.  

Step one, in my opinion, is to get a state pension forecast.  Granted lots could change in the next 20 years but at least you have something to base some assumptions on.

As for de-risking - this seems to be a standard thing in occupational schemes.  You tell them when you expect you might retire and they automatically start to de-risk in the 5 years prior to that date.  How you advise them on that depends on your attitude to risk - I'm pretty flexible and don't stress overly about market fluctuations but the OH can go ballistic when he knows something like that is happening. 

I don't stress as I've got things in different pots doing different stuff.  So if one bit goes weak I know I have something else that I could draw on.  i.e. I was about to retire and cash out a lot of share options while I waited for my state pension but then there was Putin and Ukraine and the shares dropped by about 60%.  OK, no problem (well except for Ukraine but you know what I mean).  I had other cash I could draw on so 3 years later I'm still sitting on most of the shares waiting for them to hit what I've set as my target price.  

ali_bear

You're a long way from retirement so perhaps it is a bit early to be thinking about de-risking in the pre-retirement phase. You will be able to do that when the time comes closer surely? 

But you should be thinking about how your money is invested now. I am not any kind of financial advisor but I would suggest that for the next decade or so you invest a regular amount each month into a diversified but high growth/risk fund. By spreading out the investment over regular small amounts you average-out the ups and downs of the purchase price. And in the 20 or so years until retirement your fund should achieve the best growth despite the shot-term ups and downs of the underlying investments. 

Triumph13

I'd second dunstonh's point about separate pots for separate purposes. And add that it generally makes most sense to build the growth pot first,  to give it time to grow, then use your contributions in the last few years as a big component of your rebalancing. 

Strummer22

Thanks for comments so far. 

I am regularly contributing to a diversified growth fund (RLP Governed Portfolio Dynamic). Contributions (employer and mine + tax relief) currently around £15k p/a.

I like the idea that the last few years of contributions can go into 'rebalancing' pots, that's helpful.

Hoenir

Strummer22 said:

then is it wise to aim to maximise the size of my pot and target continued growth into retirement, rather than 'de-risk' as retirement approaches? 
 

Every investor is targetting growth. Just in varying degrees of risk level. When it comes to being adventurous. How much money would you feel comfortable losing if your choosen strategy backfired.  

DT2001

I would suggest watching Ben Felix’s YouTube video ‘The most controversial paper in finance’ where he discusses holding 100% globally diversified equities portfolio. It is thought provoking.

We are about 85/90% (of our ISAs and SIPPs) in global equity ETFs. OH might retire in 2 years and I have retired. High risk?
We will have £28k p.a. guaranteed income middle of next year and outgoings of 18/20k before travel. We are happy to have a variable income so can cope with dunstonh’s 1% real return over a 20 year period. The key to how you deal with risk is knowing yourself/yourselves and what you want from retirement - as much income as possible or to know on the 30th of each month X amount goes into your account.

Pat38493

If I had my time over again and I was more than 20 years from retirement, I would have my money in 100% equities.  I would only start to change that about 5 years out from stopping work.

Since I am stopping work soon (October this year), I have structured things differently now.  Roughly speaking I have
- 2-3 years of spend in cash or cash type assets like short term money market funds 
- around 3 years in a lower risk like maybe 60:40 equities/bonds.
- Another 5 years in a higher risk mix 80/20
- Anything not to be spent for 10+ years is 100% equities.

Unfortunately I only figured this out about 2-3 years from retirement - if I had figured this out about 10 or 20 years ago I would for sure have already finished work a year or two back.

MeteredOut

Pat38493 said:

If I had my time over again and I was more than 20 years from retirement, I would have my money in 100% equities.  I would only start to change that about 5 years out from stopping work.

Since I am stopping work soon (October this year), I have structured things differently now.  Roughly speaking I have
- 2-3 years of spend in cash or cash type assets like short term money market funds 
- around 3 years in a lower risk like maybe 60:40 equities/bonds.
- Another 5 years in a higher risk mix 80/20
- Anything not to be spent for 10+ years is 100% equities.

Unfortunately I only figured this out about 2-3 years from retirement - if I had figured this out about 10 or 20 years ago I would for sure have already finished work a year or two back.

Whilst I broadly agree, you have to realise this hindsight might only be the case because markets have performed so well over the past 10-20 years. And whilst history tells us that is likely to be the case going forward too, was it a 10-20 year period when markets had not performed so well, you may well have been thankful for the approach you took.

Pat38493

MeteredOut said:

Pat38493 said:

If I had my time over again and I was more than 20 years from retirement, I would have my money in 100% equities.  I would only start to change that about 5 years out from stopping work.

Since I am stopping work soon (October this year), I have structured things differently now.  Roughly speaking I have
- 2-3 years of spend in cash or cash type assets like short term money market funds 
- around 3 years in a lower risk like maybe 60:40 equities/bonds.
- Another 5 years in a higher risk mix 80/20
- Anything not to be spent for 10+ years is 100% equities.

Unfortunately I only figured this out about 2-3 years from retirement - if I had figured this out about 10 or 20 years ago I would for sure have already finished work a year or two back.

Whilst I broadly agree, you have to realise this hindsight might only be the case because markets have performed so well over the past 10-20 years. And whilst history tells us that is likely to be the case going forward too, was it a 10-20 year period when markets had not performed so well, you may well have been thankful for the approach you took.

We will be hard pushed to find any historic period where equity returns were worse than bonds or cash over 23 years with gradual de-risking at T- 5 years.  At 10 years we could maybe debate it, but I think 20 years + I am not sure whether there has ever been a time when you would have been better off with any other mix than 100% equities.  Happy to be corrected on this.

That said, it's quite hard from what I found to get data on the probability of equity returns exceeding cash or bonds over any particular length of time - most of the charts on this just show you whether you have a chance of positive growth over a period or positive net growth, but not necessarily whether you end up better than if you had been in cash or bonds.

Over 20 years though I'd be very surprised if you could have historically got a better outcome.