Ten Years to Retirement Investing

Bimbly · 5 January 2018 at 9:24PM

I have not done badly, all things considered, in the pensions department. This is what I project to have at age 65 (ish):

£6k / year DB pension #1 (actually £4.5k at 60, but would defer to 65)
£9k / year DB pension #2 (assuming I pay in until 60 then stop)
£8k / year full state pension at 67
= £23k

I want my DC pension to cover me for the five years from 60 until 65, pay off the mortage, and possibly make up a bit of shortfall until SP kicks in. I am 49 now, so that gives me 11 years (I know I used 10 in the headline) to save more. The DC scheme is an additional voluntary employer run scheme in addition to DB Pension #2 and allows salary sacrifice, plus employer chips in £25/month.

I have £14,500 in there at the moment and have just increased contributions to £500/m (ish) gross. In a couple of years, I'll have paid off a couple of 0 interest things and can double contributions, plus add a bit more a couple of years after that. All being equal.

The question is, what sort of investment strategy should I adopt? I'm currently reading Tim Hale's Smarter Investing and he offers the common wisdom of ten years from retirement, gradually put all your investments into bonds. That's great if you're saving steadily for 40 years then buy an annuity at the end. With me, a lot of my funds will be put in towards the end of the term and I'll still be looking for a bit of growth. Plus, with drawdown, I'd generally like to leave some invested. Although, the current plan is to take it out more or less across 5 years, so I can't be too ambitious (unlike someone whose pot will last them 30 years).

My DC pension moved from Friends Life to Aviva last year and I'm in the default investing plan which currently is 75% equities and 25% corporate bonds, which gradually turns into half corporate bonds and half gilts by retirement date. I'm going to take control of these funds anyway as I think they're too exposed to UK equities (40%), but I'm looking for a strategy after that. I'm thinking stick with a 75/25 equities bonds mix (trackers) until about 5 years out, then increae percentage of safer funds. I have a Goldilocks attitude to risk (not too hot, not too cold).

I'm really looking for some ideas to put together this plan. So perhaps suggest somethings to read, or give me your ideas.

The plan could change, of course, as the unexpected happens in life, but you can't tweek a plan which you don't have.

ermine · 5 January 2018 at 11:11PM

Bimbly wrote: »

The question is, what sort of investment strategy should I adopt? I'm currently reading Tim Hale's Smarter Investing and he offers the common wisdom of ten years from retirement, gradually put all your investments into bonds. That's great if you're saving steadily for 40 years then buy an annuity at the end. With me, a lot of my funds will be put in towards the end of the term and I'll still be looking for a bit of growth. Plus, with drawdown, I'd generally like to leave some invested. Although, the current plan is to take it out more or less across 5 years, so I can't be too ambitious (unlike someone whose pot will last them 30 years).

You have to bottom out what you are trying to do. At the point of retiring you aim to runout your DC cash over 5 years. Inflation is unlikely to kill you in 5 years, so at that point you want your DC pot to be very low risk indeed. Unless you are chilled about eating a stock market crash just after retiring which could see the value halved. If you can reduce your spending in such conditions to avoid being a forced seller in a down market, usually a lot recovers in the next couple of years.

So you have roughly ten years of investment horizon. Personally, with all that DB pension floor I'd go all in equities in the first year, though I wouldn't like to start at current high valuations

Then derisk it by shifting out of equities 20% of the pot each year.

Early retirement in your case is about saving hard, it's not about compound interest, and it's not really that much about investment gains.

Also don't be in such a damn hurry to pay off that mortgage. Sure, have a plan of how you will do it, but if you can pay it off from the PCLS of your pensions, you effectively got to pay it off from pre-tax salary. Pay less off the mortgage and lob more into your pensions, with the aim of using that more saving + the tax saving to pay the mortgage off at the end. Interest rates are at all-time lows, make that work for you!

TheTracker · 6 January 2018 at 7:19AM

Bimbly wrote: »

I'm currently reading Tim Hale's Smarter Investing and he offers the common wisdom of ten years from retirement, gradually put all your investments into bonds.

I couldn’t recall reading this in the book, though it’s been a while. I spent half an hour searching and couldn’t find any such statement in the edition I hold. Do you have a quote?

Common wisdom is not to invest for less than ten years. Many people will shift down a notch in equity:bond ratio about ten years out, but not move “all” to bonds. It all depends on personal circumstance - ability to fund retirement, risk tolerance, etc.

Bimbly · 6 January 2018 at 8:24AM

ermine wrote: »

Also don't be in such a damn hurry to pay off that mortgage. Sure, have a plan of how you will do it, but if you can pay it off from the PCLS of your pensions, you effectively got to pay it off from pre-tax salary. Pay less off the mortgage and lob more into your pensions, with the aim of using that more saving + the tax saving to pay the mortgage off at the end. Interest rates are at all-time lows, make that work for you!

Thanks, Ermine, some excellent things to think about.

That's funny what you say about the mortgage because I've got a fairly large mortage (decided a nice home would make me happy, and it has) and my plan was pay it off before I was 60 through overpayments. This left a retirement funding gap which I wasn't sure I could fill unless my writing sideline became much more profitable. Then I looked again at the tax relief on pension contributions and thought I would be mad to turn it down when mortgage interest rates are so low. So I decided to pay into the pension instead.

When I mentioned that on this forum, lots of people said I was stupid and should pay off the mortage (odd, I thought, as I had read a lot of the opposite on this forum). But I stuck to my guns.

The thing is, after 10 years I might want the equity in the property to move. I really don't know. It's great at the moment as it's 3 miles from parents, 4.5 miles from work and 12 miles from friends in town. If I stay in the house and interest rates are low then pootling along paying it off gradually by 75 are fine. If not, then I want to know I can pay it. This is actually a complicated thing as I'd quite like to get a place with long-term boyfriend eventually, but [insert long, laregly irrelevant story here] and I don't know how that will pan out.

Oh, actually I wasn't planning to use the tax free lump sum to pay off the mortgage. Well, not in the main. That's for new car (current can hopefully keep running untili then), maintenance on the house (white goods now all new may need replacing) and general savings pot, I might even have a foreign holiday (I hear people can do such things) with possibly some going to mortgage. Drawdown would finally pay it off over five years. I was thinking I could go offset at that time, but it depends on market conditions.

Sorry for the waffle!

Interesting about going all out for equities in the beginning. Although, as you say the market is up. However, you are supposed to set a plan and stick with it. Waiting for a downturn to buy equities cheap might be like trying to guess the market. I'll look into it.

Bimbly · 6 January 2018 at 8:35AM

TheTracker wrote: »

I couldn’t recall reading this in the book, though it’s been a while. I spent half an hour searching and couldn’t find any such statement in the edition I hold. Do you have a quote?

I meant more, from 10 years out, start shifting into bonds, not have all in bonds for last ten years. I may have plucked the ten year figure, although he says:

"If this money represents generali funds to support your future lifestyle, own your age in bonds and the rest in equities." That would be 49% bonds.

Also: "...as you approach retirement, own index-linked bonds and hold them to maturity"

My point really was that he doesn't say a great about it in the book beyond these generalisations so isn't much help.

Bimbly · 6 January 2018 at 8:49AM

ermine wrote: »

So you have roughly ten years of investment horizon. Personally, with all that DB pension floor I'd go all in equities in the first year, though I wouldn't like to start at current high valuations Then derisk it by shifting out of equities 20% of the pot each year.
!

Just re-read this. Can I clarify?
Year one, all equities. Year two 20% bonds, 80% equities, year three 40% bonds etc? So all bonds by year 6?
Or with five years to go, start shifting into bonds?

I think you mean the first option, so the last five years are all bonds. I think you're right that it's about saving hard, not so much about making the stock market work.

I know what you mean about difficulty going in for all equities in the first year while markets are high. Toughie. I could just do it anyway.

TheTracker · 6 January 2018 at 3:05PM

Bimbly wrote: »

I meant more, from 10 years out, start shifting into bonds, not have all in bonds for last ten years. I may have plucked the ten year figure, although he says:

"If this money represents generali funds to support your future lifestyle, own your age in bonds and the rest in equities." That would be 49% bonds.

Also: "...as you approach retirement, own index-linked bonds and hold them to maturity"

My point really was that he doesn't say a great about it in the book beyond these generalisations so isn't much help.

OK. Well "your age in bonds/fixed" is a common starting point and frequent industry quote, but most people end up with more equity than that after looking at their risk appetite. The book probably doesn't say much more as your bond/equity split is very personal and age is but a crude estimator. IIRC the book gives a set of 6 or so portfolio splits, and gives pointers on how to understand your risk appetite (see an IFA, do a survey, introspect, etc) as to which to go with.

Bimbly · 8 January 2018 at 12:05PM

So, I drew up a plan which starts with equities (90% world, 10UK), then quickly moves 20% then 40% into bonds, and increases this at a slower rate (10% chunks then 4% chunks) until all bonds on retirement year.

Then I looked at the world ex-uk equities fund I can access. It's 60% US which seems a bit high. With some europe, japan and pacific rim.

Then I looked at my bond allocation and it's 50% corprorate bonds, which sounds a but high. UK Index linked gilts and 15 year gilts makes up the rest. I modelled this on the lifestyle plan my company offers. But the only other thing I could add into the mix is overseas bonds I'm nit sure about those.

Then I thought, I am making this too comolicated. Perhaps I should just use the lifestyle planmy employer has. The equity fund is BlackRick 60:40 (60% Uk, 40% world). It starts 75% equities and 25% corporate bonds and then starts increasing the bond allocation from now'ish, with corporate bonds giving way to 5 year index linked and15 year gilts coming into the mix at little more each year.

Is it safest just sticking with this lifestyle plan which someone (supposedly) knowledgeable has put together, despite my reservations? I could do better, but maybe I could do worse. I could set it up and leave it. I'd love to do it myself, but it's a lot of money.

I'd have to tweak my retirement date as currently it's set for 65, so whenever I do that, I jump fove years ahead along the plan.

(Also bumping for people who don't read at the weekend).

Ten Years to Retirement Investing

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