Pension allocation

[Duke of Marmalade]

There is no definitive, universally applicable answer to this question. It very much depends on your individual circumstances.

Personally, I intend to have 10 years of anticipated spending in “safe” assets (cash and government bonds) at the start of my retirement and I will gradually build up that amount over the 10 years prior to retirement.

Anything over and above that amount will continue to be invested in a global equity index fund.

It’s probably worth saying that my objective is to minimise the risk of running out of money before I run out of life. My objective is not to maximise my terminal wealth.

It is certainly true that there is a very high probability (but definitely no guarantee) that equities will outperform bonds over a 25+ year period.

But that’s not the full story when you’re spending down a portfolio.

The sequence of returns is also hugely relevant and hence my proposed 10 year buffer.

That is the best explanation I have seen yet for the received wisdom of not being 100% in equities in retirement even though life expectancy might be 25 years.
I particularly like the idea of 10 years spending being in cash/bonds for even if equities outperform, by definition you will be spending and so no huge opportunity lost whilst on the other hand a 30% hit to your 10 year spending fund would be a serious matter.

 

[NoRegretsCoyote]

Personally, I intend to have 10 years of anticipated spending in “safe” assets (cash and government bonds) at the start of my retirement and I will gradually build up that amount over the 10 years prior to retirement.

First, thanks for such a precise answer - it’s a habit we could all learn!

Anyway you (presumably) will have a contributory state pension. Does your ten-year spending pot take account of that? If it doesn’t then you are being overcautious in my view. The real value of the state pension isn’t certain but it’s a safe assumption that it will always be enough for basic needs.

My household wealth on retirement (excluding housing) is likely to be something like 35% state pensions, 45% DB pensions, and 20% DC pension fund. In my case I don’t see any point in ever leaving equities.

 

[Sarenco]

Anyway you (presumably) will have a contributory state pension. Does your ten-year spending pot take account of that? If it doesn’t then you are being overcautious in my view. The real value of the state pension isn’t certain but it’s a safe assumption that it will always be enough for basic needs

I plan to retire more than 10 years before I would be eligible for a State Contributory pension so I personally ignore that for planning purposes.

I just treat it as fall back if things really go horribly wrong in the markets.

But you’re right - I am very cautious when it comes to retirement planning.

I only have one shot at getting this right - it isn’t a practice run!

My household wealth on retirement (excluding housing) is likely to be something like 35% state pensions, 45% DB pensions, and 20% DC pension fund. In my case I don’t see any point in ever leaving equities.

Well, I might well take the same view if I had the benefit of a generous DB pension. Unfortunately, I will have no such luxury.

I did try to emphasise that every individual financial position is unique - there is no “one size fits all” answer to establishing an appropriate asset allocation.

 

[Persius]

Personally, I intend to have 10 years of anticipated spending in “safe” assets (cash and government bonds) at the start of my retirement and I will gradually build up that amount over the 10 years prior to retirement.

How do you intend to invest in government bonds? Most pension providers AFAICS provide government bond funds, rather than access to actual individual government bonds. And those funds have lost significant value over the last year or so as interest rates rose.

 

[Sarenco]

How do you intend to invest in government bonds?

Through an indexed, euro zone government bond fund.

2022 was literally the worst calendar year ever for bond returns.

But you know what?

Global equities were even worse!

 

[Kev1964]

There is no definitive, universally applicable answer to this question. It very much depends on your individual circumstances.

Personally, I intend to have 10 years of anticipated spending in “safe” assets (cash and government bonds) at the start of my retirement and I will gradually build up that amount over the 10 years prior to retirement.

Anything over and above that amount will continue to be invested in a global equity index fund.

It’s probably worth saying that my objective is to minimise the risk of running out of money before I run out of life. My objective is not to maximise my terminal wealth.

It is certainly true that there is a very high probability (but definitely no guarantee) that equities will outperform bonds over a 25+ year period.

But that’s not the full story when you’re spending down a portfolio.

The sequence of returns is also hugely relevant and hence my proposed 10 year buffer.

I started a post on ARF V Annuity a month or so ago. I was very interested in the various contributions. This post has in my opinion introduced a new factor that I hadn’t considered. Namely the 10 years of spending in safe assets covering the first years of retirement. That is something we are in a position to do and allows my wife and I to defer a decision on our DC funds until well after retirement date (which for both of us is well before state retirement age).

 

[Gordon Gekko]

I think Sarenco’s approach makes a lot of sense. 10 years’ worth of cash/bonds is also a completely different proposition now than it was, say, even a year or so ago. The ‘safer’ portion of a pension portfolio is probably clipping out 3%-ish anyway, and whilst 10 years sounds like a lot, expressed in percentage terms as part of the overall portfolio it probably doesn’t sound as much.

I think we’ll probably have DB (both State and ‘pure’ DB) delivering around 25% of our target income in retirement, so I’d be comfortable enough with 100% of the pension assets in global equities.