De-risking closer to retirement

I

ivannomonet

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A question for those of you more knowledgable on the pensions front. I see a lot of reading that says to take maximum risk in the early years of saving for a pension and then de-risking/de-leveraging say 10 years or so out from retirement. Now what confuses me is why is this prudent? If I assume I wont take an annuity but will take an ARF then surely I would want that ARF to be making the best return possible? So why move to low risk options before retirement only to move to high risk afterwards?
Apologies if this seems like a stupid question, just trying to understand the strategy as you normally read it? Can anyone explain please?
 
Its a common theme

Historically one has de-risked a pension to retirement date if purchasing an annuity - the perfect hedge against annuity risks is a long-bond fund and the original "lifestyling" options progressively sold down to a 25% cash 75% bond position at retirement.

You are absolutely correct that in an ARF you need to keep your foot on the gas but you also have sequence of return risk to deal with.

In a perfect world you want all of your investment returns on the last day before retirement and then all of your investment returns on the first day of your retirement.

Sadly the world doesn't work anything like that.

Some of the planning issue, maths and historical data is explored in our guide here

[broken link removed]
 
Thanks for that insight Marc. The guide to download no longer seems to be available. Or at least there is no live url. Has it been pulled?
 
Its there. You just complete a form and it is sent by email.

5037

I just tested it there and its working perfectly
 
ivannomonet said:
So why move to low risk options before retirement only to move to high risk afterwards?
Click to expand...

As Marc says above - Sequence of Return Risk (SORR).

It's an insurance policy if you will.

It will help you sleep easier if a tail event occurs and markets start diving as you commence your de-accumulation journey.

By following a glidepath to dial back up equity exposure into retirement, you are buying equities as prices are falling.

You also have a larger fixed income component to your portfolio than you might otherwise so that you can sell bonds to fund withdrawals.

You will give up some upside if markets rally right after retirement but there is a higher probability of your portfolio lasting in retirement if a nasty SORR scenario presents itself.
 
ivannomonet said:
A question for those of you more knowledgable on the pensions front. I see a lot of reading that says to take maximum risk in the early years of saving for a pension and then de-risking/de-leveraging say 10 years or so out from retirement. Now what confuses me is why is this prudent? If I assume I wont take an annuity but will take an ARF then surely I would want that ARF to be making the best return possible? So why move to low risk options before retirement only to move to high risk afterwards?
Apologies if this seems like a stupid question, just trying to understand the strategy as you normally read it? Can anyone explain please?
Click to expand...

Your point is perfectly valid. What gets in the way is emotions towards money. First up is the tax free lump sum. While the 75% of your pension will continue into the ARF, 25% of it will be crytallised and taken as cash. People don't want to see their potential lump sum fall. if you have a fund of €800k and it falls 20%, you have lost €40,000 in tax free cash. That's a decent amount of money.

Next up is the vulnerability some people feel without the security of a monthly pay cheque. They are now living off their investments and don't like the feeling of their income coming from something that can go up and down in value. These investors tend to be more cautious with their investments. Advisors should also be looking at "capacity for loss" in this scenario to assess whether the retiree's lifestyle will be significantly altered in a worst case scenario. If all their money is in an ARF, having a best possible return investment approach won't be suitable as a 50% fall in fund value will have a serious impact on their lifestyle either now or in the future when if their fund runs out.


Steven
www.bluewaterfp.ie
 
Excellent point about: capacity for loss.

Because of this I think it's wise to make your pension say 50% of your wealth.

In this way it's more likely to have an increased level of risk.

If you consider de risking starts aged 55 and continues indefinitely possibly. Then maybe 30 years of low risk/low returns
 
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