The life styling concept is most appropriate where you plan to buy an Annuity at retirement.
However if you plan to buy an ARF with the residual fund (after taking the lump sum), then lifestyling (gradually reducing the risk profile as you approach retirement) may not be that sensible. It really all depends on the proposed risk profile you intend to adopt for the ARF.
If you are happy to adopt say a “level 3 or 4” risk profile (similar to a Managed Fund) post retirement for the residual 75% of the retirement fund, then it probably makes little sense in transferring you fund into all Cash in the run up to retirement.
Life styling in the run-in to retirement might be a consideration if you are more focused on maintaining the fund value in order to secure the 25% lump sum or simply reducing the investment risk in order to secure the overall fund.
It is always possible to reduce the risk profile in the run-in to retirement without fully going to Cash.
In my experience retirees tend to be more risk averse than younger investors (generally), but if you are clear what risk profile you will adopt for the ARF then maybe adopting a similar profile in the run-in to retirement might be a reasonable strategy.
Hope this helps.
Interesting question
I enquired about this before
And recall yes you have to cash out unfortunately
But experts can confirm
What approach to take take in terms of equity allocation
Let's say towards end of career 50% cash 50% equities
Take the 25% cash
Then invest the remaining as before
Now it's one third cash, two thirds equities
But can be whatever split desired since it's all cashed in anyway
The ARF does change things in terms the need to lifestyle but it’s not that straightforward.
Sequencing of returns is key.
The problem is that an ARF generally isn’t added to. If markets are weak in the early years it has a greater effect as you’re withdrawing 4/5/6% which means the withdrawn amounts never have a chance to recover.
There are those who would suggest the cash allocation should be higher than 3 years.
Good question eireog. You're spot on in saying that lifestyling is largely irrelevant if you plan to ARF your retirement fund. It's not totally irrelevant, as you should aim to move towards your post retirement strategy (which may differ from your pre retirement strategy) and there is the lump sum element to consider.
However, it doesn't automatically follow that you should be targeteing cash for your lump sum element as this will depend on what you intend to do with the lump sum. To the extent that you are planning to spend it at or close to retirement, targeting a cash amount is the best option from a risk reduction perspective. But if the lump sum is substantial, you may well be planning to invest a significant proportion rather than spending it straight away.
For that part of your lump sum, the strategy should be similar to what you consider appropriate for the non lump sum element. However, it might need to be tweaked to allow for differences in tax treatment between ARF money and money that you have received tax free and are investing outside an ARF environment.
If you're not planning to hold any shares (directly or indirectly) post retirement, then I agree that it makes sense from a risk reduction perspective to reduce your equity exposure in the lead up to retirement.
But that presupposes that you intend following a zero equity approach retirement. While everyone is free to invest as they see fit, adopting such an approach is likely to result in fairly low post retirement returns that may not be sufficient to provide the level of income (including capital drawdown) that is required to sustain your desired lifestyle.
Interesting question
I enquired about this before
And recall yes you have to cash out unfortunately
But experts can confirm
Experts were on holidays so you'll have to make do with me.I can confirm - Yes and No.
If you are in an insured fund pre-retirement, e.g. a pension policy with New Ireland investing in their Managed Fund and you want to have a New Ireland ARF also investing in their Managed Fund post-retirement, you do cash in your units in the Managed Fund and buy new ones.
If you're in a self-administered product pre-retirement, holding shares and you want to move into a self-administered ARF investing in the same shares, it is permissible to move assets from one product to the next "in specie", i.e. without selling them and buying them again. This is commonly used where a property is involved and the client is happy with the property and the tenant. It is possible to move a property from a pre-retirement vehicle like a Personal Pension or PRSA to a post-retirement vehicle like an ARF. Saves on transaction costs.
Regards,
Liam
http://ferga.com
Drip feeding money into equities (sometimes called Euro cost averaging) as opposed to lump sum investing is a form of market timing - you're just deferring the risk (and potential reward) of investing in equities. On average, investing as soon as you are in a position to do so achieves a better return.Would it make sense that when you cash in your pension fund,to put it in cash and then drip feed it into equity funds over a year or two in case of a down turn?
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