Not too long ago I wrote about one problem rarely discussed with all in one encompassing managed funds in retirement, such as balanced, conservative, growth etc. Funds that hold a mixture of stocks, bonds and cash.
The gist of the problem being that with these funds you don’t get to decide whether to drawdown from stocks or bonds, because the fund doesn’t differentiate between the two. End result is the health of your investment balance will be worse off than otherwise.
Well today I have another not very well highlighted problem with these types of funds.
It goes along the lines of this. You will get to within 10 years of retirement and may decide you want to switch your growth fund to balanced. Then you may get to 5 years of retirement and decide to switch from balanced to conservative. Sounds like a pretty smart move right? After all, that’s what everyone says you should do.
The problem being you probably won’t need ALL of the money immediately.
Let’s say you have $400,000 in a balanced fund 5 years out from retirement. Now let’s assume that you will need to withdraw $30,000 a year in retirement from this fund. That means you only need $30,000 in 5 years time, not the whole $400,000. Yet many people move the entire fund to conservative, when in this instance, less than 10% of the fund may only be needed in conservative.
How a typical fund looks for a soon to be retired person in 5 years, based on standard advice:
$400,000 conservative assets – For all spending 5 years +
How it probably should look based on the example above:
$30,000 conservative – For spending in 5 years
$30,000 balanced – For spending in 6 years
$30,000 balanced – For spending in 7 years
$30,000 balanced – For spending in 8 years
$30,000 balanced – For spending in 9 years
$30,000 growth – For spending in 10 years
$30,000 growth – For spending in 11 years
$30,000 growth – For spending in 12 years
$30,000 growth – For spending in 13 years
30,000 growth – For spending in 14 years
30,000 growth – For spending in 15 years
$30,000 growth – For spending in 16 years
$30,000 growth – For spending in 17 years
That means five years out from retirement:
$30,000 in conservative
$120,000 in balanced
$240,000 in growth
This is a very simplified example, but that is an extra $360,000 in balanced and growth assets for the first year (five years out from retirement), reducing by around $30,000 a year.
That is a heck of a lot extra money in stocks than you would have otherwise, and completely changes your asset allocation.
With more growth assets you should expect better long term returns and you aren’t taking on more risk than you need because you are still investing according to your time horizon. The difference is you aren’t moving all your money to conservative too soon. This could result in a lot of money left on the table.
The difficulty with these types of funds are that they don’t make it easy to put 10% in conservative, 40% in balanced and 50% in growth for example. Most people just stick to 100% in one or the other. Just be weary of the advice you are receiving.
This is why I think you are much better off selecting your own stock and bond and cash funds when it comes to drawdown. Your returns should be better with proper management and at no additional risk. In fact, I would argue the greater risk is being too conservative and running out of money thanks to inflation and lack of growth.
If you need help with your personal retirement planning, then get in touch today.
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