Age 60, should my pension investment move to 'cash'?

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Cathdel

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Hi - so currently 9% of my pension pot is in cash. Turned 60 some months ago. With just under 5 years left to work, should I look at moving the majority of my pension pot into cash now?
Also, is it too late to maximise AVC contributions or would better option be to payoff rest of mortgage (about 24k left, tracker mortgage, but interest rates have been hiked several times already this year).
Would appreciate insights.
 
24k mortgage won't be difficult to service
If you can max your pension contributions tax free you'll get them back in 5 years.

I wouldn't be putting entire pension into cash. You hopefully have long number of years ahead of you. And opportunity to see pension fund grow.
 
I take it that you are a member of a Defined Contribution (D.C.) scheme?
If so, then you need to consider what your retirement plan will be. After taking the retirement lump sum (tax free up to €200k), will you invest the balance into an ARF or will you buy an Annuity?
If you intend to invest the balance into an ARF (where you will have to make a potentially long term investment decision), then it probably doesn’t make sense to increase the Cash content in the run up to retirement only to then reinvest the residual fund into a more diversified mix in an ARF.
If you intend to buy an Annuity at age 65, then there may (may) be a case for reducing the investment risk in the run in to retirement by increasing the Cash content (as a strategy to limit the downside risk over the last 5 years) . But then you must accept that your investment return is likely to be low over the next few years (lower than inflation possibly), but at least you also limit the downside risk.
As for AVC’s , it probably depends on the numbers - current fund value, current marginal tax rate, likely marginal tax rate in retirement etc. Can you post current fund values?
 
There’s possibly merit in kind of protecting one’s lump sum and moving to 25% cash.

It’s not quite as simple as that maths-wise, but it’s not a bad starting point.
 
This is something that is difficult to answer with the introduction of the ARF. At retirement, you are going to crystalise 25% of the value of your pension. The other 75% will continue on its investment journey. So as Gordon says, there is an argument for moving 25% to cash. The not so simple part of his post is the tax free lump sum is calculated as 25% of the whole value so if the other 75% falls, the amount you receive will fall.

And this is where human behaviour kicks in. I have found the tax free lump sum to be of huge psychological importance to people. It tends to be a large amount of money, it is tax free and it is lodged into your bank account as cash. The rest of the pension is still at arms length in an ARF. A major fall in value can have a big impact on someone's mood and approach to money.

On the other side, keeping it in equities means it can continue to grow. Even if it does fall before retirement, the growth before that may mean that you are still in a better position than if you had moved to cash 5 years before maturing your pension. But people tend to look at the high point of their pension and not the real gains. So they tend to discount the fact that they are still in a better position by staying in equities. If you move to cash, you will have to start your investment journey again for 75% of your money when you retire and start compounding from the very beginning. Your money will probably be invested for another 30 years in an ARF, so it is a long time.

There really is no definitive correct answer to this when you consider all the factors.

Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Steven’s right. It really is a tricky one with maths and behavioural stuff intertwined. It’s actually easier for people where the €2m threshold is relevant. If you hit €2m/€2.15m close to retirement, the decision is probably pretty easy…move it all to cash.

I don’t know what the right answer is on the road to €2m. Possibly to move something to cash, maybe 25%?
 
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For the vast majority of people, the answer is that you should remain 100% invested in equities.

When you retire, the name on your money just changes from "pension fund" to "my own money" and "ARF". They should both be fully invested in equities so there is no reason to go into cash only to put them back into equities later.

The only exception is where you might be buying an annuity. And even then, it's not clear that you should be switching to cash.

Brendan
 
Brendan Burgess said:
For the vast majority of people, the answer is that you should remain 100% invested in equities.

When you retire, the name on your money just changes from "pension fund" to "my own money" and "ARF". They should both be fully invested in equities so there is no reason to go into cash only to put them back into equities later.

The only exception is where you might be buying an annuity. And even then, it's not clear that you should be switching to cash.

Brendan
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Hi Brendan,

I’m an advocate of the 100% equities approach.

But the 25% lump sum aspect creates a slightly different dynamic. Very few people take the 25% and just reinvest it in equities. They typically have it earmarked for ‘something’.

So the issue is what to do when ‘something’ is happening to 25% of the fund in the near future which is analagous to buying an annuity, whereas the other 75% is remaining invested.

The further nuance is the potential 4/6% that forced out of the ARF from age 61. Sarenco and others such as myself post about the dangers of ‘sequencing of returns risk’ with an ARF or other income generating pool of assets. Basically, if markets are weak in the early years and you’re drawing from the pool, that has a devastating effect later on.

I’ll keep my ARF in equities and you probably do too, but I suspect that we both have other assets. The same is probably true of another high profile advocate of the ‘all equity’ approach, Colm Fagan. But if all I had in the world was my ARF, there’s no way I’d have it all in equities.

Gordon
 
The number of people invested entirely in equities in pre-retirement pension funds is very small. OP says 9% Cash but I doubt balance is all equities.

The number of people who choose (via execution only services) 100% equities in pre/post-retirement products is very small.

The number of people who are advised to invest 100% equitities in pre/post-retirement products is very small.

If they're not choosing or being advised to go 100% equities then there's something else at play. Like diversification, being somewhat risk-averse or (the big one) accountability for the advice.

Gerard

www.prsa.ie
 
GSheehy said:
If they're not choosing or being advised to go 100% equities then there's something else at play. Like diversification, being somewhat risk-averse or (the big one) accountability for the advice.
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There is a "long tail" of people with pretty small pensions, google gives results of in or around the €100k balance at retirement in Ireland as an average. When your pot is this small you need to be risk-averse. So the patterns you see above (and the advice given) probably make sense for a large majority of people!

AAM posters are a self-selecting bunch who are much more knowledgeable and probably much wealthier than average.

I think all-equities forever makes sense in certain circumstances but you need to know what you are doing and why.
 
Gordon Gekko said:
Steven’s right. It really is a tricky one with maths and behavioural stuff intertwined. It’s actually easier for people where the €2m threshold is relevant. If you hit €2m/€2.15m close to retirement, the decision is probably pretty easy…move it all to cash.

I don’t know what the right answer is on the road to €2m. Possibly to move something to cash, maybe 25%?
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Please explain why the pft limit makes a difference and move it all to cash?
 
Brendan Burgess said:
For the vast majority of people, the answer is that you should remain 100% invested in equities.

When you retire, the name on your money just changes from "pension fund" to "my own money" and "ARF". They should both be fully invested in equities so there is no reason to go into cash only to put them back into equities later.

The only exception is where you might be buying an annuity. And even then, it's not clear that you should be switching to cash.

Brendan
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Hi Brendan,

I think this advice is too generalised and takes no account of different people's different requirements, although it may work well for some. As Gordon has said, a lot of people earmark the 25% tax-free lump sum for "something" - visiting the kids in Australia for a couple of months, the fancy cruise, buying a new car after giving up the company car, buying out the company car etc. Lots of people just don't have the luxury of taking the lump sum and reinvesting it in equities.

There's also the psychological aspect of it. Lots of people become more risk averse in retirement. It's all very well being tolerant of the ups and downs of the equity markets when your salary at the end of each month meets your day-to-day needs and your pension fund is an almost notional sum of money that you only see when you log into your pension provider's website. But when that salary stops coming in at the end of each month and you realise that your pension fund is a finite sum that must last for the rest of your life, it can cause a big change in risk tolerance.
 
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ClubMan said:
Really?
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That has to go down as the one of the silliest posts I’ve ever read. You’re attempting to be pedantic, but it just comes across as naive and lacking understanding :)

If you know that you need the money in the short term, you shouldn’t be 100% invested in equities. One can be an advocate of the 100% equities approach and not have 100% of one’s money in equities.
 
Interstellar said:
Please explain why the pft limit makes a difference and move it all to cash?
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If I’ve €2.15m in my pension fund and I’m ‘retiring’ in a year’s time, the risk/reward position disincentivises further growth. Why? Because it’ll be subject to penalty tax. So if the fund increases, you get penalised, but if it falls, that’s your hard luck.
 
Brendan Burgess said:
For the vast majority of people, the answer is that you should remain 100% invested in equities.
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I really think this is dangerously bad advice.

An ARF with a starting balance of €1m in 2000, that was 100% invested in a fund that tracks the MSCI world index, would have been completely depleted by 2018 if the retiree withdrew €50k per annum, adjusted for inflation.

The total return on global equities over that 18-year period was actually around 5% per annum on average. However, the retiree in this case bombed out because of a particularly unfortunate sequence of returns.

Sequence of returns risk is very real and is one of the primary reasons why the vast majority of folks should have a balanced portfolio in the run up to retirement.
 
Hi Sarenco

But what if I invested €1m in cash in 2000 and took out an inflation adjusted €50k a year? How much would I have had left in 2018?

People who switch their entire fund to cash who withdraw inflation adjusted amounts will get wiped out too.

There is no risk-free option.

The problem is that people think that cash is risk-free and it's not.

Not sure exactly what you are proposing? Is it 25% cash and 75% equities? Do you rebalance it every time equities fall or rise?


Brendan
 
Brendan Burgess said:
But what if I invested €1m in cash in 2000 and took out an inflation adjusted €50k a year? How much would I have had left in 2018?
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A little less than €100k.

But I wouldn’t advise anybody to have 100% of their ARF in cash.

My view is that the majority of folks should have a balanced portfolio in the run up to retirement. So, roughly 50% in bonds, 50% in equities.

And, yes, the portfolio should be rebalanced from time to time.
 
Hi Sarenco,

Just double checking your figures, albeit pretty unscientifically.

When I stick €1,000,000 in at January 2000 and run it until December 2019, with the annual management charge set at 5% (to simulate 4% drawdown plus 1% fee), it says I’ve €922,347 at the end.

This is using the backtesting function at curvo.eu.

Where are you taking those figures from?

On the graph I’m looking at, the fund falls below €500,000 in 2003 and 2009, but it comes roaring back in the 2010s.

Gordon
 
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