A critique of the lifestyling approach to pensions

[nest egg]

I came across a paper which may help the PA answer some of those questions: "Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice" https://www.netspar.nl/assets/uploads/19.-Cederburg-ACO_Manuscript.pdf

"Our findings suggest that financial advice and pension regulations should be revised to consider all-equity strategies as viable and legal alternatives for retirement savers; we call for alternative approaches to mitigate the costs of short-term losses, such as financial education on staying the course, retirement account reporting standards that emphasize long-term performance, and regulations that assist retirement savers with maintaining a long-term focus."

 

[Brendan Burgess]

@nest egg

Wow, that paper should be required reading for the Pensions Council and the guys in the Civil Service responsible for pensions planning.

Abstract
We challenge two central tenets of lifecycle investing: (i) investors should diversify across stocks and bonds and (ii) the young should hold more stocks than the old. An even mix of 50% domestic [i.e. American] stocks and 50% international stocks held throughout one’s lifetime vastly outperforms age-based, stock-bond strategies in building wealth, supporting retirement consumption, preserving capital, and generating bequests. These findings are based on a lifecycle model that features dynamic processes for labor earnings, Social Security benefits, and mortality and captures the salient time-series and cross-sectional properties of long-horizon asset class returns.

Given the sheer magnitude of US retirement savings, we estimate that Americans could realize trillions of dollars in welfare gains by adopting the all-equity strategy.

 

[Dr Strangelove]

Wow, that paper should be required reading for the Pensions Council and the guys in the Civil Service responsible for pensions planning.

I think they know the truth deep down themselves Brendan!

They are just afraid of what would happen after an equity market crash and pensioners calling Liveline and saying my all-equity ARF was worth €600k two years ago and €400k today. Trying to convince Joe that it would be worth only €300k today if the pensioner had shifted bonds in the run-up to retirement is a fool’s errand.

 

[Gordon Gekko]

Whilst personally I stick to an all equities strategy and will do in perpetuity, I’m not sure I would do if I was entirely reliant on my portfolio and I no longer had the capacity to work. Our old friend ‘sequencing of returns risk’ is an issue whether we like it or not. Basically the scenario where markets are rubbish in the early years of retirement but you’re sucking out cash at the bottom which then never has a chance to recover so you run out of money at the end.

 

[Dr Strangelove]

You have to take a view from the totality of expected income and total wealth.

Most people will have a full state pension and a mortgage-free roof over heads.

Personally I have some DB pensions so I’ll only have about 25% of household wealth in a DC fund by retirement and I’d be mad to keep it in fixed income.

 

[Fortune]

Whilst personally I stick to an all equities strategy and will do in perpetuity, I’m not sure I would do if I was entirely reliant on my portfolio and I no longer had the capacity to work. Our old friend ‘sequencing of returns risk’ is an issue whether we like it or not. Basically the scenario where markets are rubbish in the early years of retirement but you’re sucking out cash at the bottom which then never has a chance to recover so you run out of money at the end.

No-one ever seems to consider sequence of returns risk for "safe" bonds...

 

[Dr Strangelove]

No-one ever seems to consider sequence of returns risk for "safe" bonds...

In the last two years German ten year bonds have fallen in value by about 30% and inflation has been 14%. That’s the safest asset denominated in € down 45% in real terms!

That’s not far off a worst-case scenario for equities over same horizon.

Maybe I’m cherry picking, but there was no possibility of the same return with the opposite sign with bonds. There are lower bounds to inflation and interest rates that makes it impossible.

 

[time to plan]

Whilst personally I stick to an all equities strategy and will do in perpetuity, I’m not sure I would do if I was entirely reliant on my portfolio and I no longer had the capacity to work. Our old friend ‘sequencing of returns risk’ is an issue whether we like it or not. Basically the scenario where markets are rubbish in the early years of retirement but you’re sucking out cash at the bottom which then never has a chance to recover so you run out of money at the end.

Reliance on portfolio is an important point. I was a late starter to my pension and am piling cash in monthly to 100% equities. But I have a small but not trivial NHS pension kicking in when I am 60 and then Irish and UK state pensions kicking in at the respective retirement ages.

 

[Gordon Gekko]

Agreed, it’s important to look at the overall pot rather than thinking about things in silos. Any defined benefit type income is like owning a bond, often an inflation linked bond. What’s the capital value of the State Pension for example? €300-350k?

 

[Dr Strangelove]

It’s an interesting academic exercise to calculate capital value of contributory state pension value but not all that relevant.

I think of it (and so does government) as the bare minimum to avoid poverty.

 

[time to plan]

It’s an interesting academic exercise to calculate capital value of contributory state pension value but not all that relevant.

I think of it (and so does government) as the bare minimum to avoid poverty.

I agree. I would look at it the other way around. My 2 state pensions and NHS pension will pay about €550 per week in today's money. So I am insulated against stock market swings for my private pension which is 100% equities.

 

[Gordon Gekko]

So it is relevant then…

It doesn’t matter how you look at it, either the return the different pots can generate or the capital value of those pots.

The key point is not to consider silos in isolation. It’s all about the overall pot.

 

[time to plan]

So it is relevant then…

It doesn’t matter how you look at it, either the return the different pots can generate or the capital value of those pots.

The key point is not to consider silos in isolation. It’s all about the overall pot.

Certainly not irrelevant enough to have am Xmas Eve fight over!

The other thing to add (using my case) is spouse's pension. She also has Irish and UK state pensions and a small UK university pension and is starting on the Irish university (Public sector) pension scheme. Maybe I should be going higher risk!

 

[Gordon Gekko]

Certainly not irrelevant enough to have am Xmas Eve fight over!

The other thing to add (using my case) is spouse's pension. She also has Irish and UK state pensions and a small UK university pension and is starting on the Irish university (Public sector) pension scheme. Maybe I should be going higher risk!

I think for people in retirement, an overall 60:40 allocation is pretty sensible. For that I’d exclude my home, but include investment property, cash, bonds, and DB pension income (including the State pension) as part of the ‘40%’, and then have the 60% equity allocation inside a pension vehicle.

 

[ClubMan]

This seems to be a revised/updated version of the paper:

Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

<div> We challenge two tenets of lifecycle investing: (i) diversify across stocks and bonds and (ii) <span>reduce equity allocations with age. An op

papers.ssrn.com

Date Written: March 03, 2025

The Most Controversial Paper in Finance

The 2025 paper Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice suggests that investors should hold globally diversified 100% stoc...

youtu.be

 

[theObserver]

s seems to be a revised/updated version of the paper:

Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

<div> We challenge two tenets of lifecycle investing: (i) diversify across stocks and bonds and (ii) <span>reduce equity allocations with age. An op

papers.ssrn.com

The Most Controversial Paper in Finance

The 2025 paper Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice suggests that investors should hold globally diversified 100% stoc...

youtu.be

I like Ben Felix and learned a lot from his videos. Thanks to Ben and others, I decided to move my PRSA from lifestyling into a 100% global passive index tracking Developed Markets with a small tilt into Emerging and Small Cap Value.

I do however still have bonds outside my PRSA. Instead of holding a 20/80 or a 40/60 portfolio, I think in terms of years: how many years of funding in cash/bonds do I need for peace of mind? Right now that answer is one year in cash savings and two years in Irish/Eurozone bonds.

Ben studied engineering in college before pivoting to finance and IMO he adapts an overally positive attitude to so-called financial science. I don't share his faith and I certaintly wont be risking my financial future by becoming an early adaptor of any financial paper.

However .. I am however persuaded by his argument of 33% in your home region to protect against political instability and opted for EU/Irish bonds over the higher yields of the so-called safe haven US dollar bonds. Right now this feels like a pretty good decision.

 

[joe sod]

I think they know the truth deep down themselves Brendan!

yes they do, but by having this requirement to have such a high proportion of bonds in most pensions gives them (governments) guaranteed access to finance and keeps interest rates lower than they otherwise would be. Its also based on the presumption that bond prices don't fall, but they do fall occasionally like after trump tarriffs and after covid and the 70s were brutal for bonds

 

[Flybytheseat]

Certain analysts that I follow are projecting an increase in european government bond coupons from current rates of ca 2.8% to 4.5-6% in the coming 1.5 years so bond prices will likely fall when the upcoming global soverign debt crisis kicks off in earnest. Medium and Long Term US tresury bonds will be first to be hit and worst effected. Time to shift your allocation out of bonds (and US equities).

 

[Steven Barrett]

Lifestyling funds are adopted as the default strategy to discharge the trustees obligations for prudent investment. It is a one size fits all strategy in the absence of individual investment advice to each scheme member. A Balanced Managed fund used to be the default fund for most schemes. When the great financial crash happened, there was outrage that members would be exposed to such investment risk nearing retirement. Lifestyling was adopted as the default approach as a result. The fact that bonds have produced next to nothing over the last 10 years while equities have generated double digit annualised returns over the same period has highlighted the obvious flaws in this strategy. But until each individual member gets bespoke advice, I can't see a better alternative.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Dr Strangelove]

The fact that bonds have produced next to nothing over the last 10 years while equities have generated double digit annualised returns over the same period has highlighted the obvious flaws in this strategy.

A lot of investment professionals (you are not one) simply don’t understand that bond returns have a hard upper limit due to the lower bound for interest rates.

I fixed my mortgage for a long time in 2022 because I knew that in practical terms mortgage rates could not go lower. I encouraged a few friends to do the same at the time, but they simply didn’t understand.

A lot of people also fail to understand that there is no theoretical upper limit to equity returns. Every day that there is equity trading you run the risk of zero (which we all know about) but also unlimited upside over the long run.