What stock/bonds ratio would you suggest for my pension? [UK]

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Gliss
Posts: 5
Joined: Tue Nov 30, 2021 1:18 pm

What stock/bonds ratio would you suggest for my pension? [UK]

Post by Gliss »

Hi Guys,

I'm in the UK but I just came across your forum, and I wanted to ask a question please, which I am wondering if you can help with please?

Up to now, I have taken a hands off approach to pension and savings, but after watching a number of the Jack Bogle videos on youtube, I've created a Vanguard account and I'm in the process of consolidating my existing pensions (where possible) into Vanguard. But one thing is troubling me - the basic allocation between stocks and bonds.

I realise this is very important, and I've seen the rules of thumb which involve using 110 minus your age to get an indication of right allocation, but this doesn't seem to take into account the the financial position of the person, so I'm wondering if I could outline my situation and get your opinion of what you would do in my situation please?

The numbers below are based on the combined saving of my wife and I - I've converted these figures to USD (although I'm based in the UK) as I realise most people are in the US just to make it easier. We are both 48 years old and we plan to retire at 60 but maybe slow things down from 55.

I'm fortunate to run my own business which makes a decent profit (circa $500k-$700k per year).

We have $1.5m as 'retained profit' in a business, which has basically corporation tax paid, but not income tax. I use this money in the business to help with cashflow. But it could be withdraw if we sold the business, but we would still need to pay dividend tax each year.

I have a "defined benefit" contribution pension from an earlier career, which will pay a pension of around $34k per year from the age of 60. This in index linked and is very safe.

In addition we have joint pension savings of around $1.4m which is currently invested (i.e. before I move it to Vanguard) in a 60/40 "life strategy" pension product similar to Vanguard. We pay into the pension at the UK maximum which is around $106k per year, although we are probably getting to the point that with some realistic growth we will both reach the UK 'life time allowance' which affects tax relief on contributions and pension savings.

In addition, we have around $400k of savings now with Vanguard, currently in a life strategy 100, split between a general Vanguard account and ISA accounts (UK tax efficient savings plan). In addition we have around $100k in cash which is for our emergency fund plus some living expenses.

We don't have a mortgage on our property (value circa ~$1.7m) and we plan to save (in addition to our current pension contributions) an additional around $100k per year of our personal income which will go into ISAs, junior ISAs (for our children) and the balance into our Vanguard general account.

So I am thinking, if we consider the $1.5m "retained profit" pot in our business, and the $34k per year from 60 years old as almost like "cash", would you invest the pension pots and our personal savings account ($1.4m + $0.4m) into 100% equities or would you go for a lower risk split?

At the point we retire we would hopefully also get the proceeds from the sale of our business, although we don't when or how much this would be.

I watched one of those FIRE videos, and their idea was to think about the retirement savings divided up into three pots e.g. 3-4 years in cash, 4-5 years in income generating (but lower risk) bonds/equities, and everything else all in equities,

So on that basis, I would have enough from the defined benefit pension and retained profit to more than cover the first two pots. So using their logic I would increase the risk and put the pension and other savings into equities.

But would be interested in views on what you would do in my position, in terms of the stock/bond ratio?
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David Jay
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Location: Michigan

Re: What stock/bonds ratio would you suggest for my pension? [UK]

Post by David Jay »

At BH we teach that Asset Allocation (ratio of stocks to fixed income) is the primary control knob between potential growth and stability.

Asset Allocation is a very personal decision, I would not accept any "rule-of-thumb". AA is basically a negotiation between your head and your gut. Your head thinks logical thoughts like: "More stocks means higher potential growth", but when the market drops 30% (or more) the gut yells: "Get me out of here!".

The two principles I like are: 1. Can you "stay the course" in the face of a 50% downturn in the market? and 2. Can you sleep well at night?. No asset allocation should be so stock-heavy that it creates stress in your life. Retirement years are for enjoying life, not stressing over market conditions. It is also common for us to become somewhat more risk-averse with age, so that should be recognized and factored into the evaluation.

From a math perspective, author Rick Ferri has suggested that a portfolio in retirement should be at least 30% stocks to keep up with inflation. Above that, you need to find your own comfort level. We have a few individuals here who are 100/0 in retirement, but that would be the exception. My feeling is that there is a lot of 60/40, 50/50 and 40/60 here at BH.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
xxd091
Posts: 492
Joined: Sun Aug 21, 2011 4:41 am
Location: UK

Re: What stock/bonds ratio would you suggest for my pension? [UK]

Post by xxd091 »

You need to decide what income you need in retirement
£100000 in a 60/40 portfolio gives a safe £3000 per annum
70/30 right through to 30/70 -stocks and bonds portfolios give similar results over the long term
So it really comes down to have you saved enough for your chosen retirement income?
The stock bond allocation is not your primary problem
As a guide I spent the same in retirement as when working-more time to fill,more travelling etc
xxd09
Valuethinker
Posts: 48954
Joined: Fri May 11, 2007 11:07 am

Re: What stock/bonds ratio would you suggest for my pension? [UK]

Post by Valuethinker »

Gliss wrote: Tue Nov 30, 2021 1:54 pm Hi Guys,

I'm in the UK but I just came across your forum, and I wanted to ask a question please, which I am wondering if you can help with please?

Up to now, I have taken a hands off approach to pension and savings, but after watching a number of the Jack Bogle videos on youtube, I've created a Vanguard account and I'm in the process of consolidating my existing pensions (where possible) into Vanguard. But one thing is troubling me - the basic allocation between stocks and bonds.

I realise this is very important, and I've seen the rules of thumb which involve using 110 minus your age to get an indication of right allocation, but this doesn't seem to take into account the the financial position of the person, so I'm wondering if I could outline my situation and get your opinion of what you would do in my situation please?

The numbers below are based on the combined saving of my wife and I - I've converted these figures to USD (although I'm based in the UK) as I realise most people are in the US just to make it easier. We are both 48 years old and we plan to retire at 60 but maybe slow things down from 55.

I'm fortunate to run my own business which makes a decent profit (circa $500k-$700k per year).

We have $1.5m as 'retained profit' in a business, which has basically corporation tax paid, but not income tax. I use this money in the business to help with cashflow. But it could be withdraw if we sold the business, but we would still need to pay dividend tax each year.

I have a "defined benefit" contribution pension from an earlier career, which will pay a pension of around $34k per year from the age of 60. This in index linked and is very safe.

In addition we have joint pension savings of around $1.4m which is currently invested (i.e. before I move it to Vanguard) in a 60/40 "life strategy" pension product similar to Vanguard. We pay into the pension at the UK maximum which is around $106k per year, although we are probably getting to the point that with some realistic growth we will both reach the UK 'life time allowance' which affects tax relief on contributions and pension savings.

In addition, we have around $400k of savings now with Vanguard, currently in a life strategy 100, split between a general Vanguard account and ISA accounts (UK tax efficient savings plan). In addition we have around $100k in cash which is for our emergency fund plus some living expenses.

We don't have a mortgage on our property (value circa ~$1.7m) and we plan to save (in addition to our current pension contributions) an additional around $100k per year of our personal income which will go into ISAs, junior ISAs (for our children) and the balance into our Vanguard general account.

So I am thinking, if we consider the $1.5m "retained profit" pot in our business, and the $34k per year from 60 years old as almost like "cash", would you invest the pension pots and our personal savings account ($1.4m + $0.4m) into 100% equities or would you go for a lower risk split?

At the point we retire we would hopefully also get the proceeds from the sale of our business, although we don't when or how much this would be.

I watched one of those FIRE videos, and their idea was to think about the retirement savings divided up into three pots e.g. 3-4 years in cash, 4-5 years in income generating (but lower risk) bonds/equities, and everything else all in equities,

So on that basis, I would have enough from the defined benefit pension and retained profit to more than cover the first two pots. So using their logic I would increase the risk and put the pension and other savings into equities.

But would be interested in views on what you would do in my position, in terms of the stock/bond ratio?
Hello

Can I refer you to this post and associated link, if you are seeking portfolio advice ?

viewtopic.php?f=22&t=289099

I read through your post but I am afraid I couldn't focus enough on the detail to say anything sensible.
Stork
Posts: 175
Joined: Wed Feb 17, 2021 9:44 am
Location: Portugal (EU)

Re: What stock/bonds ratio would you suggest for my pension? [UK]

Post by Stork »

xxd091 wrote: Thu Dec 02, 2021 5:50 pm ...
70/30 right through to 30/70 -stocks and bonds portfolios give similar results over the long term
...
This statement puzzles me. I did some reading up in the beginning of the year, and I seem to remember that the _worst_ (10, 20%?) of outcomes were similar but the best or even average certainly weren't.

If you invest a lump sum today, how much would you put in government bonds which you are certain gives very little return? Interest rates cannot go much lower, so the upside has been had which is what you see from the last decades of bond returns.
xxd091
Posts: 492
Joined: Sun Aug 21, 2011 4:41 am
Location: UK

Re: What stock/bonds ratio would you suggest for my pension? [UK]

Post by xxd091 »

Bonds are often/always included to reduce the portfolio,s volatility -this their main job
Some growth from them is a bonus but is a secondary function
Portfolio increase comes mainly from the equities
The investor then has to chose his/her asset allocation ie how much equities, how much bonds -according each investors individual circumstances
xxd091
Ldnr
Posts: 11
Joined: Fri Oct 05, 2018 6:01 pm
Location: United Kingdom

Re: What stock/bonds ratio would you suggest for my pension? [UK]

Post by Ldnr »

Just some further food for thought regarding your retained profit cash pile in the business.

1) you can setup directors pension from company, and pay in to vanguard sipp each year up to £40k. This would be free of corporation tax.
2) have you thought about winding up the company and using entrepreneurial relief of 10% taxation?

There’s a lot of detail on those two options on which your business accountant could advise.
There’s no panacea in investing - John Bogle
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