New member with 400k to invest

[EthicsGradient]

...Try this: https://www.vanguardinvestor.co.uk/articles/latest-thoughts/retirement/why-your-pension-likes-a-target-retirement-fund

Now it doesn't work directly. Um... But the link is valid.

You can find it from here: https://www.vanguardinvestor.co.uk/investing-explained/our-latest-thoughts/retirement

Keep clicking on: "Load more articles (29)" until you find it.

Thanks - some website trickery to make you look at titles of other articles first, it seems.

[GeoffF100]

If you go into the Vanguard website and type "why your pension likes a target retirement fund" into the search box, you will find it as the top hit. Clicking on that brings up the page, but if you type it into another tab and hit CR, it does not load. You cannot load it from your browsing history either. Curious. The most relevant bit is:

"As a result, Vanguard’s Target Retirement Funds are 80% invested in a highly diversified global portfolio of shares for most of an investor’s younger adult life, up to the age of 43. This is then gradually reduced until it rests at 30% during retirement.

The fact that the share allocation in a Target Retirement Fund doesn’t drop to zero is important and another facet of its intelligent design. This is because your pension savings – ideally – still need some room to continue growing during your retirement to help sustain you through what, after all, might be another 20, 30, or more, years of your life."

That is a very different approach to 100% equities for life.

[EthicsGradient]

They've also managed to break their internal links - if you click on their hyperlink for " live off your investment portfolio instead" near the end of the article, it fails.

They have the greatest rate of selling stocks for bonds from age 70 to 75, and then stop. This sudden strategy change at age 75 is not really explained.

They also claim that "Research also shows that investors who fail to de-risk on retirement risk seeing their investment portfolios stagnate or even fall in value just when they need the money most", but when you look at the XPS booklet it refers to - https://clientinsight.xpsgroup.com/view/23971387/2/ - all it says about derisking it that people who retire later than their target date for retirement, who based their derisking around that, can lose out. That is not, I think, what Vanguard' interpretation is claiming.

[GeoffF100]

Here is what Vanguard US has to say:

https://institutional.vanguard.com/inve ... roach.html

It is noteworthy that Target Retirement Funds are very popular in the US, but not here. What is the difference? In the US investors traditionally make their own financial decisions. In the UK, most people consult a financial adviser. Target Retirement Funds do not leave much of a role for the adviser. Perhaps that has something to do with it.

[scotia]

That is an incredibly high risk portfolio, and far more complicated than is necessary.

A packaged fund like Vanguard LifeStrategy or Vanguard Target Retirement is all that you need. They already contain everything (in varying weights). You do not gain additional diversification by adding more funds.compute the

As far as risk is concerned, I suggest that you consider what would happen if your equities became worthless, and your bonds retained their value. In a severe crash, your equities would probably still be worth something, and your bonds would not be unscathed, but it is a good sanity check nonetheless.

Keep it simple. Do not take unnecessary risk.

I find it difficult to imagine a time when the shares in all companies become worthless - possibly after a nuclear war which destroys most of the planet? And I can't imagine bonds being somehow protected in such a scenario. If civilization as we know it continues with ups and downs then companies will also continue with ups and downs in their profits, and their values will fluctuate. But bonds are effectively loans, and experience shows that even major banks seem unable to compute their risks, and consequently their worth - e.g. leading to the collapse of Lehman Brothers. Even now more Banks seem to be in trouble over holding long term bonds in a rising interest market. I remain unconvinced that bonds are necessarily less risky than collective shareholder equity.
Like the new member I have a comfortable pension and no mortgage. The major part of of my savings is in collective shareholder equity, although I also keep a comfortable cash buffer - a significant fraction of which is in index linked National Savings (new investments no longer available - but existing investments are renewable). I suppose that you could argue that these are bonds, but they can be redeemed at their face value at any time.

[GeoffF100]

I find it difficult to imagine a time when the shares in all companies become worthless - possibly after a nuclear war which destroys most of the planet?

1929 in the US (the most successful market). 80% fall in real terms. 30 years to recover. 1980 Japan. 80% fall. Still has not recovered in real terms after 30 years. Conventional war wiped out stock markets in WWII. and we had nuclear war in Japan. Communist revolution in Russia. Global markets are strongly correlated now - especially when the move sharply downwards. Going forwards we do not know what will happen, except that there will be an environmental catastrophe, but we do not know precisely when.

And I can't imagine bonds being somehow protected in such a scenario. If civilization as we know it continues with ups and downs then companies will also continue with ups and downs in their profits, and their values will fluctuate.

That is a simple indication of the level of risk, not an exact calculation. You can use volatility if you prefer, but that does not predict the future either. All we can do is spread our risk, and not rely on one asset class. Bonds are much less risky than equities. It is foolish to believe otherwise.

[scotia]

I find it difficult to imagine a time when the shares in all companies become worthless - possibly after a nuclear war which destroys most of the planet?

1929 in the US (the most successful market). 80% fall in real terms. 30 years to recover. 1980 Japan. 80% fall. Still has not recovered in real terms after 30 years. Conventional war wiped out stock markets in WWII. and we had nuclear war in Japan. Communist revolution in Russia. Global markets are strongly correlated now - especially when the move sharply downwards. Going forwards we do not know what will happen, except that there will be an environmental catastrophe, but we do not know precisely when.

And I can't imagine bonds being somehow protected in such a scenario. If civilization as we know it continues with ups and downs then companies will also continue with ups and downs in their profits, and their values will fluctuate.

That is a simple indication of the level of risk, not an exact calculation. You can use volatility if you prefer, but that does not predict the future either. All we can do is spread our risk, and not rely on one asset class. Bonds are much less risky than equities. It is foolish to believe otherwise.

And what do you think happened to Russian Bonds in the Communist Revolution? Wallpaper material?
And much more recently than your examples, bonds have wiped out major international banks - and continue to do so.
In catastrophic times I cannot see bonds providing any defence. In less-than-catastrophic times near-cash backed by major government guarantees will probably be the safer alternative for modest investors (my choice). Others may prefer gold - I don't hold any. The property component of my wealth is the house I live in. And for my major component - collective world-wide equity (much of it in trackers) remains my choice.

[EthicsGradient]

1929 in the US (the most successful market). 80% fall in real terms. 30 years to recover.

Not quite that bad. With dividends reinvested, the Dow Jones was back to a gain in real terms in 16 years, by 1945 - see https://dqydj.com/dow-jones-return-calculator/ . And the total return on the slightly broader S&P Composite (90 stocks back then, not the 500 of today) got permanently back above the 1929 level in 1943 (it first managed it in 1936, but there was a second bear market in 1937): https://www.slickcharts.com/sp500/returns

[GeoffF100]

1929 in the US (the most successful market). 80% fall in real terms. 30 years to recover.

Not quite that bad. With dividends reinvested, the Dow Jones was back to a gain in real terms in 16 years, by 1945 - see https://dqydj.com/dow-jones-return-calculator/ . And the total return on the slightly broader S&P Composite (90 stocks back then, not the 500 of today) got permanently back above the 1929 level in 1943 (it first managed it in 1936, but there was a second bear market in 1937): https://www.slickcharts.com/sp500/returns

Recovering in real terms with dividends reinvested would not have been good if you were 100% equities in drawdown. Serious crashes have occurred regularly in the past. There was not much you could do in the most extreme crashes, but good management would have worked in most of them. Vanguard clearly believes that 30% equities is appropriate in drawdown. Here is a more conservative view:

https://www.pensiontimes.co.uk/investme ... -at-my-age

If your other pensions are sufficient for you to live comfortably, you can afford to gamble, but whether that is wise to do so is another matter.

[tjh290633]

If your other pensions are sufficient for you to live comfortably, you can afford to gamble, but whether that is wise to do so is another matter.

If you want a rising income the only way to achieve that is through equities. Fixed interest implies a fall in income in real terms, due to inflation, and a capital value at redemption which is fixed, but which can vary before then. The risk with the traditional Life Strategy ratio is that your income falls dramatically in real terms.

TJH

[GeoffF100]

If your other pensions are sufficient for you to live comfortably, you can afford to gamble, but whether that is wise to do so is another matter.

If you want a rising income the only way to achieve that is through equities. Fixed interest implies a fall in income in real terms, due to inflation, and a capital value at redemption which is fixed, but which can vary before then. The risk with the traditional Life Strategy ratio is that your income falls dramatically in real terms.

(1). Index linked bonds provide a rising income and a redemption value that rises with inflation. Both index linked annuities and escalating annuities provide a rising income. You can also draw a rising income from a portfolio of fixed interest bonds (you will not live forever).

(2). If you have 100% equities and the market crashes, you will have to sell at the bottom to provide income. Including a percentage of fixed interest bonds allows you to increase the inflation adjusted income that can be safely withdrawn.

(3). There is no "traditional LifeStrategy ratio". You choose the ratio: 20%, 40%, 60%, 80% or 100% equities.

[dealtn]

If your other pensions are sufficient for you to live comfortably, you can afford to gamble, but whether that is wise to do so is another matter.

If you want a rising income the only way to achieve that is through equities. Fixed interest implies a fall in income in real terms, due to inflation, and a capital value at redemption which is fixed, but which can vary before then. The risk with the traditional Life Strategy ratio is that your income falls dramatically in real terms.

TJH

To be fair, whilst broadly true, not everyone needs a rising real income. In the real world (pun intended) declining income accompanies general declining expenditure in older age.

[dealtn]

If you want a rising income the only way to achieve that is through equities. Fixed interest implies a fall in income in real terms, due to inflation, and a capital value at redemption which is fixed, but which can vary before then. The risk with the traditional Life Strategy ratio is that your income falls dramatically in real terms.

(1). Index linked bonds provide a rising income and a redemption value that rises with inflation. Both index linked annuities and escalating annuities provide a rising income. You can also draw a rising income from a portfolio of fixed interest bonds (you will not live forever).

(2). If you have 100% equities and the market crashes, you will have to sell at the bottom to provide income. Including a percentage of fixed interest bonds allows you to increase the inflation adjusted income that can be safely withdrawn.

(3). There is no "traditional LifeStrategy ratio". You choose the ratio: 20%, 40%, 60%, 80% or 100% equities.

1) Only if initially bought below par would this be a rising real income though. Buying such an investment above par and with a negative real yield produces a declining real return. That was "normal" for most of this century.

2) Same is true with a 100% fixed income portfolio and if it crashes. Soaring interest rates, high inflation, and a "need" for compensating extra income, are a disaster, if that route to it is selling the underlying investment.

[GeoffF100]

Here is a product aimed a funding an annuity:

https://www.reassure.co.uk/uploads/RE04 ... HR-RLL.pdf

The equity percentage is tapered down from 100% to 0% over a five or ten year period. My index linked pensions provide more income than I am likely to spend. My investments will fund a charitable donation on my death. If I followed the pattern in the link, I would taper my equity exposure when my life expectancy drops to five or ten years.

[GeoffF100]

(1). Index linked bonds provide a rising income and a redemption value that rises with inflation. Both index linked annuities and escalating annuities provide a rising income. You can also draw a rising income from a portfolio of fixed interest bonds (you will not live forever).

(2). If you have 100% equities and the market crashes, you will have to sell at the bottom to provide income. Including a percentage of fixed interest bonds allows you to increase the inflation adjusted income that can be safely withdrawn.

(3). There is no "traditional LifeStrategy ratio". You choose the ratio: 20%, 40%, 60%, 80% or 100% equities.

1) Only if initially bought below par would this be a rising real income though. Buying such an investment above par and with a negative real yield produces a declining real return. That was "normal" for most of this century.

2) Same is true with a 100% fixed income portfolio and if it crashes. Soaring interest rates, high inflation, and a "need" for compensating extra income, are a disaster, if that route to it is selling the underlying investment.

(1). The nominal income and redemption value rise with inflation even if you buy below par (but we could have deflation). Index linked gilt clean prices are currently wobbling around par. I remember when real redemption yields were over 4% (which did not make much sense).

(2). Lots of people buy level annuities and accept the inflation risk. You would have done nicely after the 1930s crash with a bond heavy portfolio. You would have done even better with Japanese bonds after the 1980 crash in Japan. In heavy inflation, you need to be in index linked bonds or very short dated safe debt. (As I was for my bond allocation when the recent inflation surge hit.) Equities are hit by inflation, but eventually outgrow it, unless the economy collapses completely. If you are reliant on drawdown, you need money now.

[tjh290633]

If you want a rising income the only way to achieve that is through equities. Fixed interest implies a fall in income in real terms, due to inflation, and a capital value at redemption which is fixed, but which can vary before then. The risk with the traditional Life Strategy ratio is that your income falls dramatically in real terms.

TJH

To be fair, whilst broadly true, not everyone needs a rising real income. In the real world (pun intended) declining income accompanies general declining expenditure in older age.

Not in my experience in 25 years of retirement and approaching my 90th birthday. If you need care at some stage, your income need will rise dramatically.

TJH

[tjh290633]

If you want a rising income the only way to achieve that is through equities. Fixed interest implies a fall in income in real terms, due to inflation, and a capital value at redemption which is fixed, but which can vary before then. The risk with the traditional Life Strategy ratio is that your income falls dramatically in real terms.

(1). Index linked bonds provide a rising income and a redemption value that rises with inflation. Both index linked annuities and escalating annuities provide a rising income. You can also draw a rising income from a portfolio of fixed interest bonds (you will not live forever).

If you look at the rates available on index-linked securities they were at or close to zero. Index linking of zero income is of little help. Also most were only available at a premium, so despite index linking the capital, you can still suffer a loss in real terms

TJH

[EthicsGradient]

Here is a product aimed a funding an annuity:

https://www.reassure.co.uk/uploads/RE04 ... HR-RLL.pdf

The equity percentage is tapered down from 100% to 0% over a five or ten year period. My index linked pensions provide more income than I am likely to spend. My investments will fund a charitable donation on my death. If I followed the pattern in the link, I would taper my equity exposure when my life expectancy drops to five or ten years.

But the point is that the OP is not about funding an annuity - they already have a comfortable pension sorted. Continued growth is important. That link looks at 2 "lifestyle" options, and the "Balanced" one goes to 25% "Lifestyle Deposit Fund" (short-term money market), and 75% "Lifestyle Retirement Fund", which:

"aims to achieve an annual return above the UK rate of inflation over the medium term through a combination of the returns on income and capital by gaining exposure to a diversified range of asset classes. At the same time, the Fund is managed with a focus on short-term risks posed by markets"

It appears to be this: https://www.trustnet.com/factsheets/P/P ... irement-pn
Sector: PN Mixed Investment 40-85% Shares

though it's tiny - latest size (Sept 2021) £860,000. A breakdown of how much it currently has in shares in that quite wide range is not shown.

[scotia]

If you need care at some stage, your income need will rise dramatically.
TJH

Yes - I couldn't agree more - and its surprising that this is not discussed more often. We are in our upper 70s, and are currently receiving adequate pensions. Our apparent excess accumulation in equity should hopefully ensure adequate care home cover for a substantial period, if necessary.

[dealtn]

To be fair, whilst broadly true, not everyone needs a rising real income. In the real world (pun intended) declining income accompanies general declining expenditure in older age.

Not in my experience in 25 years of retirement and approaching my 90th birthday. If you need care at some stage, your income need will rise dramatically.

TJH

This might come down to definitions.

Broadly speaking "everyday" expenditure declines with age, so real increases in income (or even maintaining it) are broadly not needed.

Broadly speaking care (or equivalent) costs are likely to occur, or rise, towards the end of life. But this can be argued not to be an "income" requirement, but a reallocation and capital spend needed to cover that (often significant) expenditure. Typically these (large) spends signal the end of that "everyday and forever" expenditure that capital is invested to provide income, and that capital itself is redeployed to pay for care etc. until it vanishes and it is paid for at a societal level.

The broader part relevant to this discussion is that the choice of investment portfolio, and its income (and growth) delivery will change. Unlike in earlier life stages it isn't a prerequisite that a portfolio needs to have real uplift in income (and real growth in capital). In ones later years alternative approaches from pure equity only can be valid, despite the potential for real terms drops in income that might follow.