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29th April 2024
In Blog 241 in February this year I shared my analysis of Lifestyle and Default Investment strategies for pension funds in Ireland. The results, even over the recent decade of market appreciation, were not good for pension investors who choose the ‘Do It For Me’ approach to investing their pension pots, instead of the ‘Do It Myself’ approach and choosing mostly equity over defensive assets.
This was very similar to my findings that I shared in Blog 53 (almost 7 years ago!). My conclusion in that piece was “..Life-Styling, while reducing your volatility as you approach retirement, will potentially rob you of much of the gains to be had by investing in the first place…”.
For the past 7 years, I have been making the case for avoiding Lifestyling for most investors (those that can handle volatility). And it’s been a lonely place! While I had nothing but positive feedback from investors regarding these pieces – there was been little if any coverage of it from anyone else. Was I mad, or missing something? It appears not.
A deep-dive white paper titled ‘Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice’ was published at the end of last year – and it does a heck of a job in analytically back-testing Lifecycle (as they call it) versus other strategies.
In the hope that it might get some momentum going on challenge the narrative that one must reduce risk as they approach and enter retirement years with Lifestyle and Default Investment strategies, I am sharing the piece and it’s findings.
Full paper here, but here is how they approached it:
Here were the findings, which may or may not surprise you!
No major surprises here for Informed Decisions readers; the table below shows the 50% US/ 50% non-US Stock approach delivered better outcomes at retirement across the million backtest scenarios the researchers completed. Those investors achieved a pension pot of c€1.07m at retirement versus a Mean of €810k for those using a Money Market Fund approach and €820k for those in a Lifestyle approach.
If you retire with a larger pot, and all pots were set to send you 4% of the pot value, the bigger the pot you have, the larger the income you would get in the research. So the Diversified Stock approach trumped all others here too – including the US only stock approach over the long term of the analysis.
If you have a larger pot at retirement, and you also have a larger income in retirement, did the research also show that you’d have a larger pot at death too? Yes!
Real wealth at death of the Diversified Stock approach was €2.97m
Real wealth at death of the Lifestyle approach was c€1.2m
The best till last. The risk of ruin is noted in the final column above, and is the risk of running out of retirement savings from each of the strategies.
From highest to lowest risk of each of the 4 main approaches:
Highest Risk – 100% Bills/Bonds: 35%
High Risk – 100% US Stocks: 17%
Lower Risk – Target Date Funds: 16.9%
Lower Risk – Lifestyle Funds: c15%
Lowest Risk – Diversified Equity: c8%
Investing in US Stocks or Lifestyle approach say you have double the risk of your pension pot running out in retirement versus a globally diversified equity portfolio. Wow!
4-0 Globally Diversified Equity Approach
This is really great quantitative data to have, and here are my thoughts on what it might get us to consider, discuss and explore further.
Please share this with someone you care about – and someone you feel may be walking into a higher risk of financial ruin – it could be the difference between them avoiding it or not.
Paddy Delaney
Disclaimer
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The content of this site including blogs and podcasts is for information purposes only. Everybody’s financial situation is different and the content we share on our site and through podcasts may not be applicable to you.
The articles, blogs and podcasts are not investment advice. They do not take account of your individual circumstances, including your knowledge and experience and attitude to risk. Informed Decisions can’t be held responsible for the consequences if you pursue a course of action based on the information we share.
Informed Decisions are one of Ireland’s only remaining independent financial advice firms. We specialise in retirement & investment planning for successful individuals, so that our clients only have to retire once.