Pension portfolio

M

moneymakeover

Registered User
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In current environment, markets performing well,
With say 10 to 20 years to retirement
What's a good spread of investments in a pension?
There is a range of funds in my scheme fund: risk 1 cash to risk 7 emerging equities.

Some funds available on my scheme:
  • Cash (risk 1)
  • Equity/cash/property/bonds (risk 3)
  • Global equities (risk 6)
What is a good distribution I suppose in light of the bull market over the past 9 years?

I guess some people will be equity all the way. While others will be more cautious.

Some will say do not time the market

With quantitative easing maybe there's more room for markets to go higher?
 
Hi moneymakeover,

It’s very hard to answer that in isolation without getting under the bonnet of the rest of your life and understanding how you are likely to react in the event of material market weakness.
 
What I find is that at the pot total becomes significant, my appetite for risk is decreasing.

Previously I was 100% global equity

What I'm thinking now is to gradually move it to
Option 2 (risk 3 above) 60%
Option 3 (risk 6 above) 40%

New deposits into option 3

This way it will tend back towards 50/50
 
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What level of income do you need in retirement?
What other assets do you have?
What outgoings do you have?
Are you on target to meet your goals?
If not, what do you need to do to reach your goals?

When it comes to retirement planning, people let the tail wag the dog ie their happiness in retirement is based on whatever random number they have when they stop working. With 10 years to go, you have plenty of time to put a plan in place so you know how much you need when you retire. If you know that number, you can calculate how much you need to put in and what return you need.

If you are 20 years out from retirement, you should be invested in equities unless having 100% equity exposure makes you uncomfortable.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
So imagine I have some other income say rental income 500 per month
Say I have 300k in pension pot
And contributing 2k gross per month
10 years to retire
Aiming for total 600 pension pension pot on 10 years
 
moneymakeover said:
So imagine I have some other income say rental income 500 per month
Say I have 300k in pension pot
And contributing 2k gross per month
10 years to retire
Aiming for total 600 pension pension pot on 10 years
Click to expand...

From a purely mathematical perspective, if the €600,000 target is not adjusted for inflation, then your requirement needs about 1.5% annual growth, net of charges per year. That would steer you in the direction of one of the lower-risk options, but the choice should also be looked at in the context of your overall financial circumstances and your own appetite for taking risk.
 
Thanks Liam

It seems at 20 years ahead it's simple: 100% global equities

And it gets complicated at 10 years out

What are the factors?

  • Alternative income
  • Risk appetite
  • Bull market (over priced)
  • Number of years until the funds are needed
  • Size of current pension pot

I was thinking the answer should be able to generalise a portfolio taking the factors into account
 
Well, my rule of thumb for market timing (which is really what you’re suggesting) is pretty simple - don’t do it!
 
It occurs to me there is a silver lining if the prices collapse

Buying at the lower prices ie dollar cost averaging

So as long as the future contributions exceed the value invested in equities then I think the risk is reduced/limited.
 
Dollar cost averaging is just another form of market timing.

Yes, your risk of loss is reduced. But then so is your potential reward.

Why? Because your savings at “at risk” for a shorter time period.

There is an umbilical link between risk and reward - there’s no way around it.
 
My proposed rule of thumb:

Only expose that amount equal or less than future contributions

So if contributing X per year then
Where R is year of retirement
Year, amount exposed to 100% equities
R-5, 5x
R-4, 4x
R-3, 3x
R-2, 2x
R-1, x
R, 0

So by 1 year out (R-1) from retirement only one year of contributions is fully exposed to equities

Then, new approach post retirement: create arf etc
 
Sorry but I really can't follow your proposed rule of thumb.

Say I'm 6 years from retirement with a €500k pension pot, 100% allocated to global equities and I'm currently contributing €15k per annum.

What would my allocation look like next year according to your proposed rule of thumb? And the year after?
 
Firstly let me say this is just thinking out loud and I would agree it's conservative.
And doesn't account for the fact that 75% of the fund after retirement will go to some equity fund after anyway.

So 6 years out the potential contributions will be 90k

So this theory says the most one should be putting at risk is 90k. The reason being if stocks drop you can still benefit to the extent you will be contributing (90k). The 90k will have much better purchasing power after stocks drop. The more they drop the better for the 90k.

So at this stage one would already have moved 410k to some cautious equities fund including cash and bonds.


After that 30k per year would have to move to cautious to reduce the exposure by 15k and to account for the added 15k

So
year, cautious, equities
R-6, 410, 90
R-5, 440, 75
R-4, 470, 60
R-3, 500, 45
R-2, 530, 30
R-1, 560, 15
R, 590, 0
 
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So you go from 0% allocation to equities on "R" to 75% in equities the following day?

That doesn't seem to make much sense.

If you really want a rule of thumb (with all the caveats previously mentioned re personal circumstances) how about your age less 20 in bonds/cash with the balance in equities? So at 50 you would have 30% of your pot in bonds/cash, at 60 you would have 40% in bonds/cash, etc.
 
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