De-risking Assets Before Pension Draw Down

I guess it’s all about risk management, which starts with defining what you call risk. Some people (myself included) would not define something as a risk as ‘only if it will leave you destitute’ and would happily ‘buy’ the peace of mind that buckets, or annuity or a more cautious strategy will give them. If you like they can afford to buy a level of certainty. This certainty might be to live well until at least 70/75/80.

If you plan to retire early at 55/60 it’s based on a plan that gives probably a 98% upwards chance of being comfortable in retirement. Whether that’s buckets, or a conservative plan, or you can actually afford to take reasonable risks because you want the future return and your pot is big enough either way.

Going back to the original question, it can still make sense to give yourself certainty 6 months or a year out but moving everything to cash for a short time, even if it’s just while actually retiring in the 1-2 months it can take to move everything around.
 
Setforlife said:
it can still make sense to give yourself certainty 6 months or a year out but moving everything to cash for a short time, even if it’s just while actually retiring in the 1-2 months it can take to move everything around.
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No, it makes no sense at all to have a different strategy 6 months before retirement than the one 6 months after retirement.

If you believe in the "baskets" theory of finance, which I most certainly don't, then you should implement it well before retirement. But it's wrong then. It's wrong 6 months before retirement. And it's wrong 6 months after retirement.
 
I really don’t understand @Brendan Burgess attitude on this topic.

It’s like saying place all your chips on black. It will probably work out fine and sure if it doesn’t you can always fall back on the State pension.

No thanks. The State pension alone wouldn’t fund my desired retirement.

My objective is to maximise the probability that I will be able to fund my desired lifestyle in retirement. My terminal wealth is of far less importance to me.

And that means diversifying away from an all equity approach when about to start spending down a portfolio.
 
Every single person that posts here has personal biases. You cannot put fort opinions that are independent of these. You just have to accept that those opinions/biases are based on the personal financial circumstances of the poster. They might be right for them. They might be wrong for someone else. No one is asking the poster to stand over the opinions/biases.
 
Sarenco said:
It’s like saying place all your chips on black. It will probably work out fine and sure if it doesn’t you can always fall back on the State pension.
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It is nothing at all like that.

It's more like being the owner of the roulette table. You will have a positive outcome most of the time. But when you take it over with a pot of €400k, it's possible that the punters could get a run against you. Very unlikely and very unlucky. But possible.

And if you have only €400k and no house and no state pension, then, although the returns on owning the roulette table should be positive, you should not take it up.
 
Sarenco said:
As regards your broader question on asset allocation in the run up to retirement, I personally take the view (which many on here consider overly conservative) that it is prudent to have 10 years of anticipated expenses (10X) in cash.
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I 100% agree with this strategy but yes, I do think it is overly conservative but if that's what you are comfortable with, you are not wrong. No point in you feeling uncomfortable with not having enough in cash. You know what the trades off are.

Sarenco said:
Critically, the 10X doesn’t have to be held in your ARF - you could hold 10X outside your ARF.
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This is another very important point. When we get to retirement, we tend to have multiple sources of income, ARF, State pension, savings, investments, rental income. Your retirement income will come from more than one place and a lot of people find this difficult to get used to after decades of getting a salary.

Some insurance companies used to market strategies of moving 25% of the pension to cash to protect the lump sum (I think one of them may still have it). I used to point out exactly what you said, their strategy couldn't possibly work and used to get a shrug of the shoulders.
 
@Brendan Burgess

I take the view that it’s prudent to have 10 years of anticipated expenses in cash at retirement.

That wouldn’t constitute a particularly large % of a €4m portfolio.

It would certainly make up a large % of a €400k portfolio but then I personally wouldn’t retire with such a modest portfolio.
 
OK, so if I hit 65 with €4m, and my expenses are €50k a year , I should have €500k in cash and €3.5m in equities?
Is that all the time? Do I cash €50k worth of equities each year to maintain the ten years expenses in cash?
 
@Brendan Burgess you are beginning to grasp the concept of risk capacity.

A 65 year old with a 4m pension can secure a pension of c€207,000 pa for life. If their expenses are really only 50k pa they have a surplus pension fund in excess of their “needs”

It would therefore be appropriate for that investor to invest some or perhaps even all of their pension in equities because a significant fall of say 50% would reduce their pension fund to say 2m but they would still be able to secure a guaranteed income of c€100,000pa so their objective of income security is intact.

Contrast this with someone who has a more modest pension say 400,000 a 50% decline in the market would drop their pension fund to say €200,000 and they would only be able to secure a guaranteed income of €10,000pa their risk capacity is lower then the investor with more money.

The first investor can afford to invest in a 100% equity strategy, although they have no need to do so, they could conceivably leave their money on deposit and potentially never run out of money given they have 80 years of cover ignoring tax for now.

The second investor, objectively, absolutely cannot afford to take that much risk.
 
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@Brendan Burgess

I would re-balance the portfolio on an annual basis to maintain the initial asset allocation.

So, say I start with a €1m portfolio and €40k projected annual expenses. I would initially have €600k in a global equity fund and €400k in cash. I would then rebalance the portfolio on an annual basis to maintain a 60/40 allocation throughout retirement.

For planning purposes, I’m assuming that tax and the State pension will be pretty much a wash.

Again, my objective is to maximise the probability that I will be in a position to fund my desired lifestyle throughout retirement. My terminal wealth is of secondary importance.
 
@Brendan Burgess

I agree that somebody with a €4m portfolio and €50k annual projected expenses has no need to hold any cash.

But equally they have no need to hold any equities.

With such a large portfolio and relatively modest projected expenses, it really doesn’t matter what asset allocation they select - they will be in a position to fund their retirement regardless.

Of course, I would argue that somebody that ends up at 65 with a €4m portfolio and €50k projected annual expenses really should have considered early retirement a long time ago. But I guess that’s a different issue.
 

My own view on this is to look after myself first, but within reason. Most people would expect to leave money to their estate. If I had €4m and my home and the OAP, then I would be fully invested in directly held equities. My investment horizon at 65 is not 20 years - it's the investment horizon of my children. (Speaking theoretically as I don't have children.)
 
I have set out the various case studies in this post.

Key Post - Pensioners should have 100% of their retirement funds in equities

Marc has raised the question here: https://www.askaboutmoney.com/threads/should-retirees-be-100-invested-in-equities.238746/ A few people have told me that they could not follow the thread so... 1) I will summarise the arguments from that thread 2) Explain why I believe that investing 100%...
www.askaboutmoney.com


Agree if they do not own their own home and are not entitled to the OAP.

But if they own their own home worth say €500k and have the OAP, then a 50% fall in the portfolio in the first two years will not be nice, but it won't leave them poor. They will still own their home. They will still have the OAP. And if they run out of money after 10 years, they can take out a lifeloan.
 
Well, lifeloans may not be available - didn’t they completely disappear from the market post-crash?

If somebody has projected expenses of €50k a year, then they shouldn’t be retiring with a €500k portfolio.

They would need something closer to €1.5m to be confident that they could sustain a €50k per annum level of spending over an expected 30-35 year retirement.

Assuming the portfolio is held within a pension wrapper, the State pension could be expected to meet taxes on drawdowns but not much more.
 
Brendan Burgess said:
Sequence of risk applies only if running out of money will leave you in destitution
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Not quite, sequence of returns risk can occur at any stage of retirement, as such a cash “bucket” strategy or reserve in cash instead of selling equities makes financial sense. You avoid the necessity to sell equities at the wrong time when there’s a bear market, or a Trump moment.
Am in a similar planning situation, pension, AVCs, rental income and equities are my de-risk strategies.
Expenses are the key metric upon which the strategy is founded upon. I am more for taking upfront what I can at the lowest tax rate, and living it up in a cheaper country!

No country for old men!
 

This is too simplistic. You are effectively saying that all retired people should take a very high risk with their retirement, essentially gambling with their pensions simply because they own a house.

So, if the market tanks they still have capital. But their capital isn’t liquid. They have to live somewhere and in reality most people own a home not a house and few would want to have to sell up

Should We Count the Family Home in Retirement Planning? | Marc Westlake CFP, TEP, EFP, APFS

Should We Count the Family Home in Retirement Planning? Financial planners often encourage retirees to tap into their home equity through downsizing or equity release to fund retirement. After all, many retirees are “house rich” and “cash poor.” On paper, it makes perfect sense. But people...
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