Pension advice - 43 old looking for advice on re-balancing funds

[zapbrannigan]

Hi,

I'm age 43 and have €200k pension all currently invested in the S&P 500 as my retirement is 17 years away (looking to retire at age 60). My pension is with Standard Life(SL) (100% allocation, 0.90% AMC fee).

Not from a finance background and started only real paying for pension last few years as had lot other expenses with young kids (x2) and mortgage in my 30s.

Currently managing to contribute €4000 a month into the SL pension as I'm self employed and earning €150k last few years - I'm a higher earner and I expect this to continue for next 10+ years minimum bar some black swan event or ill health (have income protection in this event).

At the moment have everything invested in the "Vanguard US 500 Stock Index Fund" - my aim is reasonably high growth in pension pot for next 10 years and then to slowly diversify.

For retirement think I'll need €1m to €1.5M so as to have ideally €30-40k each year in retirement. I have two kids who will be through college by then. I will be mortgage free in 7 years (remaining mortgage is 70k), mortgage quite low after overpaying for a good few years to bring it down.

Currently I'm very conscious of the fact my pension is very exposed in (a) equities and (b) extremely exposed in U.S equities.

In terms of re-balancing my pension portfolio would moving some percentage of my funds to some World Equities be sensible short term?

Thinking of moving 20-30% to some World Equities index fund. As for bonds I'm thinking in time I'll move some small percentage such as 1-2% each year after age 50 to bonds. So at retirement I'd have 80-90% in equities and 10-20% in bonds.

Like to get some feedback as I'm very much a novice.

 

[TRS30]

I would definitely consider move to a World Equity fund.

I'm 5 years older than you and have circa €450K solely in various passive world index funds.

The key is allocation rate and especially charges, check the TER for the funds, not just the AMC.

 

[conor_mc]

I agree with your hunch here that you're a bit too concentrated in US equities. Humans have short memories but it's only 3 decades since Japan was the second biggest stock market in the world, five decades since US equities had a lost decade or more of anaemic growth in the 70's/early 80's, not to mention all of the structural problems in the US financial world like quantitative easing, huge deficit, etc.

 

[zapbrannigan]

Thanks for the comments. I'm trying to devise what would be a reasonable reallocation of the funds.

I'm thinking maybe 20-30% into World Equities and rest in S&P 500 Vanguard fund for 8 years. From age 50 thinking I should move 1-2% into bonds so I'll have 10-20% in bonds at age 60 when drawing down.

Would the above sound reasonable or should I buying bonds this far out already? I'm certainly not risk averse but equally know it be prudent to have something in bonds to delay drawing down the main fund for a few years if equities nose dived for 2-3 years in & around retirement age.

 

[Gordon Gekko]

It sounds ridiculous to be blunt. 60%-ish of the global market is in the US. Presumably you live in Ireland? Why not just invest globally?

 

[conor_mc]

Yeah, 100% in world equities. Check out the data-sheets, particularly the % concentration in top 20 stocks, it’s all the same stocks just more reasonable exposures.

 

[zapbrannigan]

It sounds ridiculous to be blunt. 60%-ish of the global market is in the US. Presumably you live in Ireland? Why not just invest globally?

Yes I'm based in Ireland. I'm not sure I understand the advice here. Are you saying just to move everything to the equivalent World Equities fund such as Standards Life Vanguard Global Stock Index Fund? Keen to understand the thinking behind it for my own benefit.

Had been thinking of putting 20-30% in world equities and rest in S&P 500 for next 8+ years before slowing moving a small percentage to bonds (10-20%) at 50 on wards before retirement

 

[conor_mc]

By putting 30% in world equities, you’re only really diversifying 40% of 30% of your portfolio (=12%) away from US, since US constitutes ~60% of a world equities index anyway as Gordon says.

There are World Equity Ex-US funds, maybe that’s what you’re thinking?

The alternative, and I think what Gordon is also recommending, is to put 100% into world equities, which gets you 60% US exposure and 40% rest of world.

 

[zapbrannigan]

By putting 30% in world equities, you’re only really diversifying 40% of 30% of your portfolio (=12%) away from US, since US constitutes ~60% of a world equities index anyway as Gordon says.

There are World Equity Ex-US funds, maybe that’s what you’re thinking?

The alternative, and I think what Gordon is also recommending, is to put 100% into world equities, which gets you 60% US exposure and 40% rest of world.

Yeah I'm aware that most World Index are heavily geared towards the U.S. Standards Life Vanguard Global Stock for example which I'm looking at is 70% U.S equities with the usual big hitters like Apple, Microsoft and NVidia.
Yeah guess going 100% into World Equities offers some diversification as well a reasonable chance of growth.

Would it still make sense to gradually reduce to bonds 10 years out from retirement? Say 1-2% each of the those final 10 years or is it better to have the 10-20% in bonds this far out

 

[conor_mc]

For a US F.I.R.E. audience, but worth reading this guy’s work on sequence of returns risk and glide paths. In short, SoRR has biggest impact early in retirement, so he recommends diversifying into bonds 5 or so years out, for maybe the first 5-10 years of retirement before transitioning back to equities-heavy.

ERN’s Safe Withdrawal Series (note, 60-odd posts in this series!)

 

[Fortune]

Thanks for the comments. I'm trying to devise what would be a reasonable reallocation of the funds.

I'm thinking maybe 20-30% into World Equities and rest in S&P 500 Vanguard fund for 8 years. From age 50 thinking I should move 1-2% into bonds so I'll have 10-20% in bonds at age 60 when drawing down.

Would the above sound reasonable or should I buying bonds this far out already? I'm certainly not risk averse but equally know it be prudent to have something in bonds to delay drawing down the main fund for a few years if equities nose dived for 2-3 years in & around retirement age.

Just go 100% into world equities. It'll still have the US exposure that you seem to want.

 

[Fortune]

Yes I'm based in Ireland. I'm not sure I understand the advice here. Are you saying just to move everything to the equivalent World Equities fund such as Standards Life Vanguard Global Stock Index Fund? Keen to understand the thinking behind it for my own benefit.

Had been thinking of putting 20-30% in world equities and rest in S&P 500 for next 8+ years before slowing moving a small percentage to bonds (10-20%) at 50 on wards before retirement

Have you been reading American financial blogs and books? That's the only reason I can think of for your approach to geographic diversification

 

[zapbrannigan]

For a US F.I.R.E. audience, but worth reading this guy’s work on sequence of returns risk and glide paths. In short, SoRR has biggest impact early in retirement, so he recommends diversifying into bonds 5 or so years out, for maybe the first 5-10 years of retirement before transitioning back to equities-heavy.

That's a very interesting series I'll have a read of that.

Have you been reading American financial blogs and books? That's the only reason I can think of for your approach to geographic diversification

No as I'm pretty much a novice in all aspects as not from a finance background. Just like to have some diversification even if Im aiming for high growth and aware of the pitfalls that can come with that close to retirement if the US tanks.

 

[theObserver]

Hi,

I'm age 43 and have €200k pension all currently invested in the S&P 500 as my retirement is 17 years away (looking to retire at age 60). My pension is with Standard Life(SL) (100% allocation, 0.90% AMC fee).

Not from a finance background and started only real paying for pension last few years as had lot other expenses with young kids (x2) and mortgage in my 30s.

Currently managing to contribute €4000 a month into the SL pension as I'm self employed and earning €150k last few years - I'm a higher earner and I expect this to continue for next 10+ years minimum bar some black swan event or ill health (have income protection in this event).

At the moment have everything invested in the "Vanguard US 500 Stock Index Fund" - my aim is reasonably high growth in pension pot for next 10 years and then to slowly diversify.

For retirement think I'll need €1m to €1.5M so as to have ideally €30-40k each year in retirement. I have two kids who will be through college by then. I will be mortgage free in 7 years (remaining mortgage is 70k), mortgage quite low after overpaying for a good few years to bring it down.

Currently I'm very conscious of the fact my pension is very exposed in (a) equities and (b) extremely exposed in U.S equities.

In terms of re-balancing my pension portfolio would moving some percentage of my funds to some World Equities be sensible short term?

Thinking of moving 20-30% to some World Equities index fund. As for bonds I'm thinking in time I'll move some small percentage such as 1-2% each year after age 50 to bonds. So at retirement I'd have 80-90% in equities and 10-20% in bonds.

Like to get some feedback as I'm very much a novice.

It's true the US market has out performed most other markets over the last 30 years. Some of the drivers of that success are 1) the rise of tech giants and 2) the fact the US with 5% of the world population consumes around 33% of the world resources because the international order is rigged in their favor. How comfortable are you that this status quo will continue for the next 25 years especially given the instability of geopolitics at the moment?

Perhaps you decide you also want G7 counties so you re-balance into a FTSE Developed fund which is still around 65% US large cap but with countries like Canada, Japan, Germany and so on. But you also need to consider the correlation between these regions because it turns out what happens in the US also affects these other counties because their economies are tightly correlated.

Then you might realize investing in the US and Developed markets might not diversity you enough because of the correlation between the regions so you might look towards the emerging markets like China and India. And it turns out there is still a correlation between the US and the emerging markets but its a lot lower than between the US and other Developed regions, meaning, the Emerging Markets is the better diversifier but it comes with more risk of instability, war, geopolitics.

And now you are thinking more about managing risk than simply investment return, and so you might read somewhere that bonds can, instead of hampering your return, can actually increase your return by softening market crashes because bonds are a different financial instrument than stocks and are often negatively correlated to stocks, meaning when eg the s&p 500 goes down, bonds funds can go up, protecting your pension pot.

Now you decide you want more bonds after all but still need to decide what type of bonds ! People say bonds would match your investment horizon so the first 10% or so will be long term bonds which are more volatile but this works out long term (or so some claim). You don't want corporate bonds because of the default risk during crashes so its likely treasury bonds that will interest you and the us treasury backed dollar bonds is still the standard. Except it might not be in 25 years or the US might default 17 years from now. Who knows?

But of course both stocks and bonds suffer in times of high inflation so perhaps you also want some inflation linked bonds like TIPS closer to retirement and perhaps some single government bonds you intend to hold to maturity to reduce the risk of a market crash when you start to draw your pension.

Maybe you want some gold or some RETIs.

If you think about this for long enough, you will likely reach the same "This post will be deleted if not edited immediately it" conclusion as 90% of the people out there and opt for the default passive lifestyle investment strategy and get on with your life of making money.

Or you can opt for a global index fund and let the weighting of the stocks inside the fund do the work for you while you figure out your next steps over the next few years. You may find the next steps involve a "This post will be deleted if not edited immediately it" moment anyway and opting for the default lifestyle strategy.

 

[theObserver]

Thinking of moving 20-30% to some World Equities index fund. As for bonds I'm thinking in time I'll move some small percentage such as 1-2% each year after age 50 to bonds. So at retirement I'd have 80-90% in equities and 10-20% in bonds.

Like to get some feedback as I'm very much a novice.

At a certain point you will hopefully reach your financial goals. Having won the game, you can stop playing. You don't need the risk that comes with having 80%-90% of your pension in the stock market after retirement. You will need to protect what you have from inflation and market crashes.