The Vanguard Target Retirement Funds are the state-of-the-art in investing convenience. They slice ‘n’ dice your money into a diversified portfolio, potentially juice your returns in the early years by holding a bigger dollop of riskier assets, and then stiffen the mix with more bonds towards the end so you’re less likely to have egg on your face when your pension pot comes out of the financial oven. [Tosses tortured metaphor to one side as it slips into unconsciousness.]
It’s hard to imagine an investment fund that can make life any easier than this.
- The fund offers a diversified, global asset allocation in a single product.
- It automatically rebalances that asset allocation for you.
- It gradually dials down the equities and dials up the bonds as you age – lowering your risk exposure as retirement draws nearer.
- It does almost everything for you bar filling out the direct debit.
All you have to do is decide when you’re going to retire.
Target date
Each Vanguard Target Retirement Fund comes with a target date that identifies the earliest year its investors are expected to retire.
For example, Vanguard Target Retirement Fund 2020 is aimed at investors who plan to flick the Vs to working life between 2020 and 2024, while the Vanguard Target Retirement Fund 2025 is just the ticket if you’re planning to hold your F.U. party between 2025 and 2029.
And on we go in five-year steps out to the impossibly futuristic Vanguard Target Retirement Fund 2055 – by which time The Investor will be tapping out posts with his cyber fingers and I’ll be an upload in The Cloud.
If you’re a forward-thinking 15-year old who’s already dreaming of a life on a Martian golf course from 2060, then no doubt Vanguard will soon be releasing a fund for you, too.
At this point, I should point out that the Target Retirement Funds are passive investor friendly:
- They invest in an underlying selection of Vanguard index funds.
- They are cheap. The Ongoing Charge Figure (OCF) is expected to be 0.24%.
Taken together the Target Retirement Funds are like cars on an asset allocation rollercoaster that careers downhill from peak equity to the bond flats below.
The asset allocation ride looks like this:
Vanguard’s example supposes the journey starts at age 25 and ends with retirement at age 68.
- Equity allocation is 80% for the first 18 years up until age 43. The other 20% is in bonds.
- The portfolio gently derisks until you are 50:50 equities to bonds by age 68.
- There’s a steep decline over the next seven years until you’re 30% equities, 70% bonds.
- At that point, the asset allocation flatlines. It remains 30:70 in favour of bonds for as long as ye shall live (or your money lasts).
Of course, the fund trundles on regardless of what age you are when you hop aboard.
The Target Retirement Fund 2015 is split 50:50 (at the time of writing) so that would be your initial asset allocation if you piled into that fund right now, regardless of whether you happen to be 21 or 97. Over the next six years it will glide down to 30:70.
This means that even if you’re a glamorous showbiz personality who has spent a lifetime fibbing about your age, you should be honest with yourself when you’re deciding which fund is right for you.
Lifestyle choice
Frankly, the approach offered by Vanguard’s new funds is all very reasonable and based on a standard investment technique known as lifestyling.
The idea is you load up on equities when you’re young and time is on your side, to benefit from their historic knack of outperforming bonds over the longer term.
Then you gradually store more of your wealth in bonds – which are less apt to lose half their value in the blink of an eye – reducing the chance of your gravy train being wrecked just as you were about to put your feet up.
There is plenty of debate about whether this approach is right, wrong, defeatist, or optimal.
The reality is that it will depend on your individual circumstances and unknowable future investment returns.
But lifestyling is a perfectly sound theory and it makes a great deal of sense, particularly if you don’t have the time, knowledge or temperament to manage your own investments.
It’s also reassuring that Vanguard is happy to lay down its methodology cards on the table.
Global diversification
Vanguard manages the finer points of the asset allocation for you.
The following pic colours in the detail:
At the start of the journey (left-hand side of the graph) you’ll be in:
- 20% UK equity (yellow)
- 60% Global equity ex-UK (magenta)
- 5% UK nominal bonds (blue)
- 15% Global ex-UK bonds (green)
Five years before retirement, UK index-linked gilts (cyan) come into play to help protect the portfolio from inflation.
By the time the glidepath touches down at age 75 your final asset allocation is:
- 10% UK equity (yellow)
- 20% Global equity ex-UK (magenta)
- 2.5% UK nominal bonds (blue)
- 17.5% UK index-linked gilts (cyan)
- 50% Global ex-UK bonds (green)
Again, it’s all perfectly sane.
The main debating points are:
- There is home bias in the allocation to UK equities, which makes increasing sense as you come to retire and want to dampen currency risk.
- The bond allocation includes global bonds and corporate bonds to diversify returns in this era of ZIRP (Zero Interest Rate Policy). But none of yer junk bonds or emerging market ones.
- The global bond funds are rightly hedged to reduce currency risk. Meanwhile the non-government bond allocation of the 2015 fund is approximately 15% – so not worryingly excessive.
- Emerging market equities are underweight, representing 8.5% of the equity allocation in the far-out funds and 5.6% of equity in the near-term 2015 fund.
Personally, I’d prefer a heftier index-linked gilt allocation (it maxes out at 30% of the bond allocation), no corporate or global bonds and more emerging market equities in my mix.
But if I couldn’t be bothered to going to the trouble of managing it myself then I could happily live with Vanguard’s broth.
Temptingly, the index-linked gilts are short-dated (0-5 year maturities) which makes them less exposed to interest rate hikes knocking lumps off your capital value.
Lower volatility options like that are ideal as you come to retire and there’s currently no short-dated index-linked alternative available as a separate tracker fund.
Pros and cons
Cons first.
The most obvious danger is that being young is no guarantee that you can hack an 80% equity allocation.
Theoretically, you’ve got years to recover if things go south. But that’s cold comfort if you freak out and sell during a bear market because you’re in way beyond your risk tolerance.
Of course, you could choose the Target Retirement Fund with the equity-bond mix that best suits your risk tolerance rather than your age. But take care to check its asset allocation serves your needs as you countdown to retirement.
If you go for a 50:50 split you may not want to be 30% in equities when the fund powers down seven years later but your retirement is still over a decade away, for example.
To get a feel for these issues, estimate your risk tolerance or try this respected test.
The other big danger comes from relying so heavily on Vanguard’s auto-pilot that you forget to check if you’re still on course before the fund touches down.
Ultimately your fund will need to hit your target number by its target date.
That will happen if:
- Your fund meets or exceeds its expected returns…
- …while you put enough money in…
- …over a long enough period of time.
If performance is falling short, human intervention is needed in order to up your contributions, extend your timeline, or reduce your needs.
A few smaller cons:
1. A Target Retirement Fund may not be tax efficient if it isn’t entirely sheltered by your ISAs, SIPPs and personal savings allowance. That’s because bond interest payments are taxed at income tax rates rather than dividend income rates.
2. You can buy cheaper. The underlying components of the 2055 fund can be bought in the same proportions for 0.14% per year rather than 0.24% in management fees. That’s a 32% discount for self-management, assuming you don’t pay dealing fees on fund transactions.
Naturally that has to be set against the hassle factor and the chimp factor – that is, the fair chance you’ll self-sabotage at some point because we’re all barely down from the trees in investing terms.
3.There’s no tilt to property, nor any of the factors that can further diversify a portfolio.
But the overwhelmingly massive pro is that the Vanguard Target Retirement Funds are like a self-inflating survival shelter for people who can’t:
- Afford advice
- Learn the ropes
- Stay on top of their portfolio
- Make rational investing decisions
I’ve got lots of friends and family in this camp. I would happily put every last one of them in a Target Retirement Fund.
The alternative is likely to be much worse.
Take it steady,
The Accumulator
P.S. Vanguard has occasionally made changes to the US version of the formula in response to market conditions. It previously increased the equities allocation and also broadened international exposure to equities and bonds. If you’re buying into the Target Retirement Funds for convenience – rather than because you have strong views – then you’ll probably be glad someone is keeping an eye on things, but beware.
Thanks for an excellent review. Fascinating!
There is much to ponder here about Asset Allocation, whether inside or outside of this fund, extremely educational.
Of particular interest :-
+ the Global Bonds ex UK hedged
+ the UK Stock weightings.
Had you noticed the quirk in UK nominal bonds; holding less at age 75 than at age 62ish? Suspect this is more related to their being the residue, rather than a deliberate policy decision?
Definitely an article well worth coming back to from time to time, and an excellent reference point for thoughts about Asset Allocations.
Thanks again.
Hello
Very interesting. Just a quick question, regarding the below:
“Temptingly, the index-linked gilts are short-dated (0-5 year maturities) which makes them less exposed to interest rate hikes knocking lumps off your capital value.”
This is very tempting, but when I look at the underlying funds, the UK index linked portion seems to be made up of the ‘United Kingdom Gilt Inflation Linked’.
And when I look at the maturity of the bonds in this fund it seems to be 23.3 years. Have I misunderstood or missed something here? I’d love to access a short-duration index linked UK bond fund!
a very useful product, on balance, probably a very sensible route to take.
on a slight tangent, is there any known reason why vanguard couldn’t create a lifestrategy ETF?
I desperately want one
And I want more than just Vanguard providing them.
While I’m not sure whether those ETFs will ever appear, I am reasonably confident other investment companies will eventually release lifestrategy equivalents (and when I say equivalent, that also means equivalent OCFs)
Just want them to get on with it and make it happen.
I’m interested in the comment about tax efficiency:
“A Target Retirement Fund may not be tax efficient if it isn’t entirely sheltered by your ISAs, SIPPs and personal savings allowance. That’s because bond interest payments are taxed at income tax rates rather than dividend income rates.”
I’ve read somewhere that in a taxable account, mixed funds – funds with both equities and bonds – are taxed as either all dividend or all income depending on the weighting of the allocation. Is this correct? Or am I completely wrong?
I think the principle of ‘lifestyling’ and target retirement funds is a good one. It is particularly well suited to investors who intend relying on capital not protected in a tax shelter (SIPP, ISA), since it avoids the need to trigger a potential capital gains tax liability switching from ‘growth’ to ‘income’ assets on stopping work.
However I think there are further risks than those you’ve identified, that merit highlighting:
1. Bonds and gilts aren’t risk-free. On the contrary, in the current environment I’d argue they’re riskier than a globally diversified portfolio of solid dividend-payers;
2. Given the rate at which longevity is rising – I believe British men in particular are gaining an additional year of expected lifespan every half-decade – many people currently in the accumulation phase of an investing life can expect to be retired a very long time. Given the extent to which inflation can erode the purchasing power of income derived from bonds, compared with that sourced from equities, I wonder whether the assumption that drawdown equates to being in fixed income still holds, at any level;
3. In an increasingly insecure, transactional and youth-obsessed employment market, many investors who believe they can choose their retirement date are likely to be disappointed. Target date funds risk creating an unintended mismatch between planned and actual drawdown commencement dates. Holding growth equities within a tax shelter while working and switching them to income-generating assets – which could still be equity-heavy – may be more prudent.
@Dave
“the index-linked gilts are short-dated (0-5 year maturities) which makes them less exposed to interest rate hikes”
but seems to be up of the ‘United Kingdom Gilt Inflation Linked’
And when I look at the maturity of the bonds in this fund it seems to be 23.3 years. Have I misunderstood or missed something here? ”
As others will be able to explain far better, maturities and duration are very different terms.
google ‘bond duration’ for more info
Bonds with short maturities but low coupons can have long durations!
These new funds do not yet seem to be available for retail clients with my brokers AJ Bell & Halifax Share Dealing. I was wondering if they may only be offered via the adviser platforms.
The brochure on their UK website suggests this is the case –
“This document is directed at professional investors and should not be distributed to, or relied upon by retail investors”.
Outside of this fund, how can the average investor get exposure to the largest fund allocation for retirees of Global Funds ex UK Hedged?
Nearest ETF found so far is GHYS, Global High Yield GBP hedged (4 year duration). Not an ideal allocation!
50:50 at age 68 seems a bit rich for me. If the market goes down 50% you’ve potentially lost a quarter of your portfolio’s value without the time to make it up.
I’m sticking to owning my age in bonds.
Good article, food for thought.
I can see the benefits of lifestyling as a way of managing the glide path to retirement but only see it as appropriate if you want a “lump sum” on a (reasonably) fixed date – to buy an annuity with for example.
If you plan on taking income via drawdown then a higher equity proportion would be sensible as you will want to generate above inflation returns for anything up to 40/50 years.
Correction to comment 8 :-
Outside of this fund, how can the average investor get exposure to the largest fund allocation for retirees of Global Bonds Funds ex UK Hedged?
Nearest ETF found so far is GHYS, Global High Yield Bonds GBP hedged (4 year duration). Not an ideal allocation!
previously omitted the word ‘Bonds’!
All suggestions welcome.
“Bonds and gilts aren’t risk-free. On the contrary …”: I agree. But what to do about it? At the moment cash in high interest accounts might do some people pretty well, but then it’s back to managing your money yourself.
“Given the rate at which longevity is rising …”: I gather that there’s some recent data to suggest that the effect may be tailing off. “I believe British men in particular are gaining an additional year of expected lifespan every half-decade …”: if that’s because of the ending of the epidemic of middle-aged heart attack deaths, then it would make sense that longevity increases would tail off; an epidemic can’t end twice.
“I wonder whether the assumption that drawdown equates to being in fixed income still holds”: hear, hear. It’s a sod: DB pensions are wonderful until they go phut; DC pensions leave you wondering how on earth to invest the money.
Just pick a retirement fund 5/ 10 years earlier
@magneto – thanks, I’ll do some googling!
When you’re starting off, this is a great product for the novice investor. If you start at age 20 and target a retirement age of 70 you’d have 50 years to grow your ‘pot’ for a (hopefully) comfortable retirement. But, I would like to ask what people think about having ‘all your eggs in one basket’. Do any readers have any views on the maximum amount you should hold on one platform?
A very good and comprehensive review of these funds – thanks for the effort Mr A. The ‘massive pro’ mentioned at the end of your article is probably their main selling point, and I can see the appeal of feeling one may never have to worry about your personal finances ever again, but I suspect this may turn out to be be an illusion of security, especially with the most distant horizons. On the other hand, for many people unmotivated to manage their finances themselves closely, this approach may provide a large part of what closer attention might provide with little effort and reduced worry.
On the basic strategy of these funds the main discussion point I’d advance is whether deceasing equity in a retirement portfolio is actually correct. Recent results by Pfau and Kitces suggest rising equity ‘glide paths’ may actually be a better strategy for managing retirement portfolios.
PS @DIY Investor(UK) – I just checked ii and Vanguard Target funds don’t show up in the main fund search screen, but do show up when the name is searched globally as being offered in the UKOF market – I’ve no idea what that means though… I presume UK Offshore, but no details were provided e.g. if these can be included in ISAs or SIPPS.
@ Dearime:
The principal income-generating assets classes for those deterred by the low interest rates payable on bonds and cash are property and equities.
I’d argue that London/inner South East residential property is overvalued but there may be opportunities in the rest of the UK – particularly cities that will benefit from investment in the Northern Powerhouse – and in some overseas markets, particularly Germany, when the Pound recovers following the expected Remain vote next month.
While US big-caps are looking toppy, I’d argue that the equities that most British income-hunters invest in are otherwise fairly or undervalued. Yes, income can fall in any given year, but a combination of diversification and holding some cash in reserve should mitigate any risk of being left temporarily berefit of sufficient income.
For the risk-averse, holding a mix of investment trusts represents diversification squared, and since the funds themselves possess cash reserves, provides a further margin for safety on the cashflow front.
While I think you may be right that the rate at which longevity is rising in the UK may have slowed lately, I’m more optimistic (or, from a financial planning viewpoint, pessimistic) than you about the future. Tackling heart disease among middle-aged men is an incremental, rather than binary, win; every day, this horseman claims victims; they’re just slightly fewer and older than previously, a trend which is likely to continue. Similarly, while cancer and strokes are more survivable than before and tend to strike later in life, they still claim lives, and the battle against them is ongoing. And that’s before I get going on the plague that is dementia – a condition that clouds then claims more lives as we get better at surviving other conditions.
Robert Colville’s recent book, The Great Acceleration, argues that the pace of pretty much everything in life is increasing, thanks to a number of factors. In the case of medical discoveries, the more people there are on this planet, the higher the proportion of them that are well educated and the better able they are to pool information and thinking, the more likely we are to score breakthroughs.
I agree that the era of the DC pension is almost entirely behind us, at least in the private sector. The number of government workers has fallen substantially in recent years, a trend that may continue, and in some cases their retirement plans have been paired back, at least for new joiners.
In principle, growth equity investing in the accumulation phase followed by the purchase of an annuity in later life should work well for most of the rest of us. As we know, increasing longevity, abnormally low interest rates and cautious regulation (requiring providers to load up on bonds) have kiboshed the latter. In two decades’ time – I’m 47 – the situation may have changed. If not, financial services firms and their regulators may by then have developed an alternative, probably based around pooled funds.
“they’re just slightly fewer and older than previously”: oh no, they’re massively fewer. As you say, they are older. There is no sign at all that the fall is anything to do with medics or their purported discoveries: the epidemic peaked around 1970 and fell away long before statins and so forth could have mattered. Probably the fall started too early to have much to do with the cessation of smoking either. It gives every impression of having been an epidemic that’s ending under its own steam. (I have an explanation of sorts but it’s pure conjecture so I won’t bother you with it here.)
While there’s still lots of money to be made from a continuing heart attack scare it’s unlikely the facts will be publicised enough to make much impression on everyman.
I’m still interested in the tax efficiency point. As I understand it, and no one has yet told me different, in a taxable account the yield from a mixed fund is taxed either wholly as dividend or wholly as income depending on the weight of asset allocation in the fund. Thus a 60% equities 40% bonds would be taxed wholly as dividends, effectively allowing your 40% bond allocation to be taxed as if they were equities. For a basic rate taxpayer that is one big tax difference. In fact the Vanguard lifestrategy funds information sheet says that the 40% equities 60% bonds fund is paid as dividends as well, but the 80% bonds 20% equities lifestrategy is treated as income. Is this correct or not? If it is correct, then the implications for the target retirement funds in a taxable account which change their asset allocation over time are obvious.
@ Dearieme:
Thanks, I wasn’t aware that deaths from heart attacks peaked as early as they did. I’d have guessed it was in the mid-1980s or later, rather than 1970. Perhaps diet-related? While people back then might not have eaten s much as we do today, I suspect the mix was rather worse: lots of saturated fats, for a start.
Good article and in my opinion an excellent product that would suit most savers. Precise allocations could be tailored to a degree by adding just one other fund. For example a global bond fund for those wanting less equity risk or the 100% equity Life Strategy fund for those wanting more. I will not be buying, but I am considering how to reflect some of the ideas into our own portfolio, which costs much less that 0.24%. I dislike the idea of home bias for equities, but I do now see the logic to it from the currency risk perspective.
I just had a look at the iWeb platorm and the target dated funds are not available there yet, although I would be surprised if they were not added soon as all the Life Strategy funds are listed. They are available through Hargreaves Lansdown, not a great place to hold them because of the 0.45% platform charge.
For anyone wanting to invest in global bonds, hedged to GBP, Vanguard have a fund that does this called the Global Bond Index Fund (GBP hedged), with a TER of 0.15%. For some reason it is domiciled in Ireland, but is certainly available through iWeb, which is based on the Halifax platform. It’s a shame there is no ETF version as I would quite like it in my SIPP (I am not prepared to pay HL an additional 0.45%).
On this statement, there is a lot I disagree with:
“Bonds and gilts aren’t risk-free. On the contrary, in the current environment I’d argue they’re riskier than a globally diversified portfolio of solid dividend-payers;”
This could have come straight from the mouth of an equity fund manager, or from the financial pages of a popular newspaper.
To start with it does not make a lot of sense to talk this way about “bonds and gilts”. Gilts are bonds, but not all bonds are gilts. Some bonds carry enormous risk, such as those of distressed mining and oil companies at present. Gilts carry no (ok negligible) credit risk, but do have interest rate risk which rises with duration. To say that a 2 year gilt is more risky than a portfolio of equities is simply untrue, but compared with some of the highly distressed debt out there, then yes a globally diversified portfolio of blue-chip equities probably is less risky.
On the “solid dividend-payer” bit, then if you know in advance what companies are going to be solid dividend payers, then you can form a very low risk portfolio out of them, but you do not know in advance which companies will be solid dividend payers. You might as well say that a portfolio of successful companies is a safe investment. Companies cut dividends and some fail completely, many failures would previously have been “solid dividend payers”.
@ Naeclue:
First, apologies for the imprecise term ‘bonds and gilts’; I believe I was quoting from an earlier post. I might more accurately have written ‘corporate and government bonds’.
Second, only the passage of time will tell which is safer, out of the above and the counterfactual equity portfolio, in terms of both capital and income accounts. But for now I’m sticking with my view that equities are more likely to preserve capital and deliver stable or growing income than a comparably diversified fixed income portfolio.
Vanguard Target Retirement (2015) up to (2055) are available with HL, TER 0.24% and can be purchased like any other fund.
“But for now I’m sticking with my view that equities are more likely to preserve capital and deliver stable or growing income than a comparably diversified fixed income portfolio.”
That is a different matter. Over a prolonged, multi-decade period I would agree with you, but you have to be prepared to accept substantial fluctuations in equity values along the way which can be a real pain for anyone living off their investments, or intending to within a few years.
Over the next year it is anyone’s guess whether equities, gilts or investment grade bonds will perform better. I am fairly certain my gilts will not be down 40%, but would not be totally surprised to see my equities 40% down as I have seen that happen a few times already.
Over the last 12 months, my gilts portfolio has outperformed my global equities portfolio (mostly ETFs/tracker funds), although not by much, but the unhedged US Treasuries ETF I hold in my SIPP is up about 15% in sterling terms over the last year, not including the income. I have not the faintest idea what will be delivered by next May, but as I am living off my investments I am not prepared to bet the farm on equities.
@ Naeclue:
I agree that the values (and, more so, the distributions) of bonds tends to fluctuate less than those of equities over the short run.
In the long run, the value of bonds is an inverse, rough proxy for interest rates. And while the income generated by new bonds (once old ones have been redeemed, at face value rather than the price at which they were purchased) partly reflects prevailing interest rate expectations, it is also affected by the capital performance of the previous bonds. So in the long run, buying bonds at a time when interest rates are low is not a plan likely to result in a secure, ideally growing, income stream.
My question is when will Fidelity/Funds network start marketing this, I have asked and got a glib response. I a loathed to go with HL unless anyone else can suggest a platform where I can buy into this cheaply
@ Nick
From The Telegraph 1 April 2016:
Investors can buy the funds through Alliance Trust Savings, Fidelity Personal Investing, Hargreaves Lansdown and Aviva Investment Account, each of which will make a charge for their service.
http://www.telegraph.co.uk/investing/funds/new-funds-offer-cheap-route-for-buy-and-forget-investors/
Update – AJ Bell Youinvest have got back to confirm they can arrange a purchase and just need confirmation of the appropriate SEDOL code.
@Mark, I don’t buy bonds because I want them to give me a “Secure, ideally growing, income stream”. If I wanted that, I would buy an inflation linked annuity, or ladder of indexed linked gilts. In fact I don’t pay the slightest attention to the income stream when I buy a gilt. Whether the coupon is 8%, 4% or even if it was 0% is of no consequence as I invest for total return. I buy gilts (and US Treasuries) as part of overall portfolio construction. I take income from cash deposits, bond interest, equity dividends and once per year when I re-balance, capital withdrawal.
These target dated funds are constructed with this same strategy in mind. They invest globally, focusing on total return. Not only do they ignore distribution income in making investments, they pay no income! At present, Vanguard are only offering accumulation units, no income units.
@ Naeclue:
Apologies, I assumed, based on the context, that you saw bonds as a source of income.
How do you find the total return from bonds compares with equities?
I have asked iWeb Share Dealing whether the funds will be offered and will post a comment when I hear back. From previous experience, that may take a few days!
For larger accounts iWeb would be a good platform for the funds as iWeb do not charge a platform fee, just charging £5 for each buy/sell deal. Off putting £200 account setup fee though if you are not already a customer.
@Mark, comparing the total returns of bonds and equities really depends on what bonds and when you pick the start and end dates. For gilts I have been running a 5-13 year ladder for over 20 years and have been very lucky both with returns and their negative correlation with equities when equity markets have crashed. For that period they have delivered excellent returns, but I find it hard to judge exactly the returns and how the returns have compared to equities as until recently I was still accumulating and have been re-balancing each year in/out of equities. From memory, it has mostly been selling equities to buy gilts (or more accurately, topping up gilts more than equities), but on the few occasions when I have sold gilts to buy equities, such as Jan 2008, these were large movements.
It is hard to see how gilts could deliver the same real returns over the next 20 years as they have over the last, but as I said, that was not why I invested in them anyway. This January when I re-balanced, I decided to reduce my gilt holdings and hold more cash instead. So far that has been a mistake, so what do I know?
US Treasuries I have only held for around 10 years, but they are more volatile than gilts because of the long duration (about 18 years) and currency fluctuations. Again though returns have been good and were brilliant when the financial crisis hit. I tend to think of US Treasuries in a different way to gilts. Treasuries and the US dollar are frequently the safe haven during periods of worldwide market carnage. The same is true of gold, probably more so, but I really cannot bring myself to invest in that.
It strikes me that the one thing missing from this ultra-easy retirement investment is decent broker/platform support during retirement. What is needed is low cost (ideally free) automatic selling of units each month or quarter to provide an income and no obscene percentage platform fee just for holding units.
Do any brokers offer that? Both Hargreaves Lansdown and Youinvest levy a charge for selling investments if you do not have sufficient cash in your account to cover monthly fees.
What is the justification for such high platform fees anyway? They are clearly not required for ETFs, ITs, directly held shares or bonds, so why are platform fees needed for funds? The entire platform must surely be STP automated these days. Some brokers, such as iWeb and Halifax do not charge a platform fee either, so is this just an unjustified rip-off by certain brokers? It should not cost a broker more to offer a fund than an ETF.
A very timely post to read. At the risk of sounding morbid, I have attempted over the last few months in trying to get my wife more involved in our finances and our investment portfolio. Aside from the fact it belongs to her as well, and so she needs to be happy with how I invest our hard-earned, but I also want to make sure she would know what to do to carry on the (hopefully) good work I’ve started in the last couple of years if I’m not around to reap the rewards one day.
However she just does not have a head for investment, or interest for that matter. I was thinking today on my drive home that I would just leave a piece of paper attached to my will saying 1. Dont pay for financial advice or expensive fund managers, 2. Slowly move it all into Vanguard Life strategy fund where you wont need to do much, 3. read Monevator.
This sounds like an investment that might be suitable for her if her current financial advisor pops his clogs.
enjoyed reading the post and all the comments.
food for thought as always.
I still don’t understand this bit:
‘the index-linked gilts are short-dated’
Vanguards ‘U.K. Inflation-Linked Gilt Index Fund’ has average maturity of 23.3 years and average duration of 21.7 years; not 0-5 years…
@green_as grass, I share your interest in avoiding tax. We’ve always held gilts in PEPs/ISAs: no tax to pay on the coupons. I resent the idea of buying bonds within a collective investment such that I pay tax on the income from them.
We shall be parting from our last gilt soon, transferring the cash to a “Flexible” Cash ISA, and then withdrawing it to put into high interest accounts until March, when it can be squirrelled away in the Cash ISA again. This way we’ll exploit our savings allowances. I can’t say that I enjoy this sort of tedious money-shuffling but it does mean that we can get a far higher return on cash than an investment manager could. So we’ll be viewing cash as equivalent to gilts of very short maturity but paying a markedly superior interest rate.
@green_as_grass – interesting comment about the income/dividend stuff, I noticed that IWEB has now put together my tax certificate for year end 2016. Thats for an unwrapped holding of just VLS60% and the only thing it reports is ‘net dividend payable’ – I’m glad I don’t have to try and calculate it myself as I remember going round the houses with TA on how to do that and never being able to generate the right no. (by right no. I mean a no. that agreed with that on the broker produced tax cert)
@algernond. If you look at the factsheets for the near-dated target funds that have inflation -linked bonds, instead of listing the “Vanguard UK Inflation-Linked Gilt Index Fund” as part of the constituents it simply lists “United Kingdom Inflation-linked Gilts” . So one is to assume they will hold these gilts directly – however I can’t find any direct confirmation that they are short-dated.
Dimensional do a short-dated inflation-linked fund – but you have to pay someone 1% in order to access it.
@ Dave / Magneto / Algernond – Helford is spot on. See factsheet for 2015 or 2020 target date funds and read page 11 of this doc for Vanguard’s discussion of their use of short-dated linkers:
https://www.vanguard.co.uk/documents/adv/literature/trf-research-paper.pdf
I think you’re looking at the Vanguard UK inflation-linked gilt index fund which is not the same thing.
@ Green – yes, any vehicle with over 60% fixed income is taxed as interest income not dividend income. This piece may help too: http://monevator.com/tax-efficient-investing-uk-order-isa-sipp/
@ IanH – Pfau and Kitces have been challenged on the notion of increasing equity glidepaths vs declining paths. The debate is ongoing, the difference may well be marginal and it seems to rely heavily on assumptions made. A big question is whether you want to be exposed to additional volatility of rising glide path in your dotage. Also Pfau and Kitces advocate U shaped path i.e. it declines to retirement before rising again. So you could always shift a couple of % a year into a 100% equity LifeStrategy fund after you retire, if you’re won over by the rising equity argument.
For anyone who is interested, I have contacted Charles Stanley Direct to see whether they intend to offer these. I am currently lifestyling with the Life Strategy funds as part of my FI/retirement portfolio, but this appeals as it would reduce my need to tinker.
@The Accumulator
Point taken re. fees and discount for self management, but it will be relatively tricky to rebalance/create a clone of most of these funds as they have quite a few holdings (unless you have a very large pot). CSD only allow £100+ purchases, so it may be difficult to invest the correct amount to keep things in sync?
Update 2 – My broker AJ Bell now confirm they cannot offer these funds for my sipp so looks like I stick with my LifeStrategy fund.
For any interested parties, Charles Stanley Direct expect to be offering these by mid June (although that’s an estimated date).
I received a typically poor answer from iWeb along the lines of these not currently available on their list. Clearly something I already knew and not the question I asked. I have responded, but don’t hold much hope of progress.
@ L – Managing your own set of funds and mimicking Vanguard’s approach would only mean handling 5 funds which is very doable. In fact, Vanguard’s approach is really mimicking what DIY investors or IFAs would have (could have) done before target date funds existed.
Apart from the linkers, all the component funds used also exist in Vanguard’s range as separates. Equivalents exist in the ranges of other providers too.
The real genius of a Target Date fund and where they earn their keep is that they do the right thing for you. You don’t have to rely on your own willpower and discipline (systems subject to failure) to keep you on track when your tempted to do something dumb.
Secondly, managing your own half dozen fund portfolio is something best done by someone who enjoys the process of investing as I do, along with many other Monevator readers.
If you couldn’t give a toss about investing and just want it sorted already then a Target Date fund is the way to go in my opinion. At least for retirement investing.
Re: Charles Stanley – to the best of my knowledge you can use their monthly investing scheme to invest £50 a time. Then just cancel the next regular trade.
@ Sharpespur – Missed your comment first time around. I wholeheartedly agree. I have written that piece of paper for Mrs Accumulator and it says (I’m paraphrasing here):
1. Move everything into LifeStrategy 60
2. Ring The Investor
The Investor doesn’t know this, so I hope he doesn’t mind, but he’s an old friend of Mrs Accumulator and mine and the best person I can think of to advise if the time comes. He’s also a touch younger so hopefully his brain cells will still be in full working order if called upon.
@ Mark / Naeclue and Dearime – thoroughly enjoyed your debate of the advantages of income investing. I’d add that the main advantage of a Target Date fund is its simplicity. Mark, you’re obviously a highly engaged investor who enjoys having your hand on the tiller so it’s not the right product for you.
Income investing may or may not be superior over the next X years, but without knowing the future, it does:
1. Require more capital to live off than you would otherwise need for retirement i.e. unnecessarily draws out your accumulation years.
2. Leaves a lot of money on the table when you die i.e. you will have underspent.
3. Is likely to be less diversified and more costly than a total return strategy.
4. A 100% equity portfolio needs a strong stomach even if you only intend to live off the income.
5. A growth strategy in the accumulation phase is also less diversified than total return and – in my view – an unnecessary bet on one portion of the market.
6. As Naeclue says: hi-grade bonds are a source of stability rather than growth. Bonds are not ‘risk-free’ but the risks of a rising interest environment are oft over-stated. If interest rates don’t rise too quickly then you’ll make up capital losses through higher income yields within half a dozen years. If you hold a lot of equities the best diversifier you can have is a slug of bonds.
I get why income investing is so appealing and it works for lots of people. My research leads me to conclude that it’s a luxury vehicle that doesn’t quite get you as many miles to the gallon as the total return model.
Hi all, regarding the index linked part of the target retirement fund it got me thinking of the holy grail of the bond part of a portfolio. A fund that was short duration to cover interest rate risk, index linked to cover inflation risk and govt bond to cover credit risk. There is a fund that might just do that if you could access it, Pimco global investors series plc,global low duration real return fund GB hedged. The duration is 2.5 yrs and is index linked global govt bonds.
I found these funds via the search function on Interactive Investor, but they are not currently tradable. I wonder if they have plans to introduce in the near future?
In some places there appears to be a minimum investment level of £100,000 which would be a bit of a barrier to entry!
Hi Emma – it certainly would. However the £100K minimum only applies to direct investment through Vanguard itself. Your usual broker’s minimums will apply once the fund is part of their range i.e. around £50. I expect within a few months to a year most of the brokers will stock these funds. It’s quite normal for them to gauge the level of demand before taking the plunge.
I have received a semi-sensible answer from iWeb at last. The Target funds are not currently available, but I was informed that iWeb use the Cofunds platform, something I did not know previously, so I assume the Target funds will be available when Cofunds add them.
Just an update to my comment above – Interactive Investor replied to me to confirm that they ‘expect this [fund] to be available for trading no later than next week’ i.e. beginning of June 2016.
The Target Dated funds aren’t yet available on Alliance Trust Savings. But they informed me they are in the queue to be added. No specific date but it will probably be in the next few months.
I really like the idea of the Target Retirement Funds and have even recommended them to others.
The problem as mentioned in the comments is, if you invest with Hargreaves like I do, then the platform fees are quite prohibitive.
So I’ve ended with mainly ETFs because, acting as shares not funds, they circumvent the hefty fees – for now at least.
I like the Hargreaves in many ways, such as the website and customer service, so it’s trade offs as nearly always.
I am thinking of selling all my 7 SIPP ETFs and ITs and just buying VT – which is very cheap, $US denominated, diversified with some small companies and emerging markets, a lowish 5% return a year but 3.31% div – and holding for 15 years. I don’t do bonds, just have NS&I index-linked bonds for reduced risk.
I would love to hear all your views on that?
Hi D, what does VT stand for in this case?
Also, why not invest with another broker if you’re convinced by Target Date fund? Otherwise it’s tail wagging dog.
Hi Acc,
VT is Vanguard Intl Equity Index Fund Inc Total World Stock ETF (VT). It has around 7,000 stocks so I will just forget about it.
http://www.hl.co.uk/shares/shares-search-results/v/vanguard-intl-equity-index-fund-inc-total
So far I have my ETF/IT holdings as per below for around 6 years so not a fiddler. Average TER is around .60%. CYN is an outlier at 1.20% (and just 5% of portfolio).
db x-trackers – FTSE All-World Ex UK (£) – XWXU
SPDR S&P International Small Cap ETF (£) – GWX
db x-trackers MSCI Emerg Mrkts TRN Index (£) – XMEM
Edinburgh Investment Trust plc – EDIN
ishares FTSE EPRA/NAREIT GBL Property (£) – IWDP
City Natural Resources High Yield Trust plc – CYN
ETF Securities Gold Bullion Securities – Secured Undated Zero Cpn
Notes (£) – GBSS
Really looking forward to your opinion on this for 100% SIPP. :):)
Correction: I recommended the Lifestrategy funds not Target funds to others.
I have ISAs with Hargreaves as well. When I move jobs I like to move all my pensions into one place and Hargreaves, through their stability and keeping funds in separate trusts, offer strong security. Price is important but not all.
Aha. VT is a NYSE listed fund so HL would charge for currency conversion.
The LSE listed equivalent is VWRL – Vanguard FTSE All-World ETF.
If you’re after income then you could look at VHYL – Vanguard FTSE All World High Dividend Yield.
Basically it’s the ETF answer to LifeStrategy particularly as you don’t want bonds.
Why international small caps rather than broad international tracker? Or conversely, why no UK / emerging market small caps?
So…… Interactive Investor now have all the Vanguard Target retirement funds available EXCEPT the 2030 one (why ?!) which, of course, is the one I’m interested in….
VWRL is indeed listed in the UK, but it is overwhelmingly large equities with around 2,000 stocks. VT is more global with midcaps, smallcaps and emerging markets. I prefer the allocation as the global economy shifts Eastwards with growth over income for the long term.
I was hoping you may be able to correct any bloopers over at Bogleheads and offer some wisdom. 🙂
https://www.bogleheads.org/forum/viewtopic.php?t=184381
For instance: “This wiki page tells us VWRL has about 10% in withholding taxes paid, while for a US domiciled world-ETF like VT the withholding taxes paid would be about 3-4%. With a dividend yield of 2%, you would expect VT to perform better with 2x(0.10-0.04)=0.12%. Add to that the 0.08% lower TER for VT and you would already explain about two-thirds of the difference in returns.”
What to make of tax advantages of VT vs VWRL if resident in the UK? I will carry on using W-8BEN to claim back 30% of tax on divs. Does it really matter in the scheme of things?
On diversification….
https://www.bogleheads.org/forum/viewtopic.php?t=108114
Thanks again.
So yes, we’re getting into the weeds here but there can be advantages to US ETFs re: withholding tax in particular circumstances:
http://monevator.com/etfs-and-the-peculiar-effects-of-withholding-tax/
Again, you also need to factor in the foreign exchange charges that Hargreaves Lansdown levy on trading US securities.
I looked into this a few years ago and found the fx charges made it a wash for me personally. That’s not to say you will come to the same conclusion and I wasn’t looking at HL.
Also, you may become liable for US estate taxes on US securities even if not a US citizen.
Finally, over time I’d expect a fund with more small caps / mid caps to outperform a large cap fund over time but it’s not a slam dunk and comes with an increase in risk.
@ Emma – classic!
That’s really interesting Acc.
I admit that although I’ve learnt a lot (£525/£150,000 on 0.35% spread for overseas trade with HL)
I am still not clear if it is wise or not to choose VT. For example, being liable or not for US estate taxes is not conclusive. It seems prudent not to entertain that surprise. I already have GWX (as above) and I am wondering about that now.
Thanks again.
CSD now have a full range of these (although I’d be tempted to clone them as per TA’s advice) 🙂
Just a thought, target retirement funds (vanguard) eventually shift your portfolio to bond heavy allocation on your retirement, thus income (yay!). Say, I have invested into accumulation units during the early years, does this mean it will automatically convert to income units for it to be income generating fund? Or will it just continue to balloon into bigger pot?
PS. I am looking at regular income from this fund in my later years, not lump sum from liquidating the whole pot.
hi Botoman, it will balloon and you just sell the number of units you need to create income. You might do this at the start of the year for example, selling enough units to provide a year’s worth of cash.
I have been looking into target date funds as one way of simplifying saving for retirement – but also out of interest to see what their asset allocation by age is. After all, a lot of people seem to say that the equities/fixed income distinction is the most important thing.
But there does seem to be quite a lot of disagreement about where the dividing line falls. I’m 39. I’d originally thought that 60% equities/40% fixed income would do for me – as a boring, average person in terms of risk tolerance etc. The internet is full of chatter about how that is no good as we are all living longer. Vanguard’s US funds keep 90% equities up to about age 43, and only gradually reduce. Vanguard’s UK target dates funds start at 80% – the lower figure apparently due to lower risk tolerance in the UK. One Austrian fund manager (I was looking at a pension there) suggested to me that I should be in 80% fixed income! Apparently there are cultural differences…
Looking at Vanguard, I think they may assume that people in retirement will be going into drawdown, rather than buying an annuity. And I wonder whether, for would-be annuity buyers, the downards curve should be a bit sharper and perhaps earlier. And perhaps it needs to be clear, too, that if people are upping their equities exposure, for longer, because of rising life expectancy, they need to expect to retire later. The fact that we are living longer does not in itself make markets less volatile!
So there it is. I’m at 60/40. But I wonder if I am being too cautious when I see all these target date allocations.
Hi! There is no right answer to this (except to ignore internet chatter). It’s very much a personal decision based upon your need, capacity and ability to take risk. There’s a piece here that sums up some of the issues: http://monevator.com/what-you-need-to-know-about-risk-tolerance/
The truth is that precision is a myth in this field, you can only be in the right ballpark and ‘right’ depends on your circumstances. Rules of thumb offer some rough guidance and at least tell you enough to probably steer away from your Austrian acquaintance. You’re obviously giving the topic a lot of thought and that’s ultimately what will guide you to a place that’s comfortable for you.
Thanks! All useful links. If the final outcome having balanced out (estimated) risk tolerance, age etc. can be a “muddy compromise”, I’m there.
No compromise is muddier! Sounds like you’ve cracked it
I like the idea of the Target Retirement Funds,but I also like to know exactly what my asset allocation is in a given year.How will I be able to calculate the percentage split each year when the fund merely mentions a ‘glide slope’ ? Will Vanguard publish this information for each fund?
Yes, they published a detailed allocation for each fund. Here’s the latest for the 2055 model: https://www.vanguard.co.uk/uk/portal/detail/mf/overview?portId=9673&assetCode=BALANCED##overview
Many thanks for the link.
Thanks to this site I started investing is Vanguard LS 80 a little over 2 yrs ago and it has increased in value by around 22%!
I’ve recently put a little in LS100 as well just for fun.
I always planned to move more towards 60:40 over time,but with the retirement target funds is it less hassle to just move everything into one of those?
Side note: I had planned to Start investing in a world fund as well
Hi Spooner, yes, a target date fund is even more automated than LifeStrategy as you don’t even need to lifestyle it. Not sure why you’d invest in a world fund. LifeStrategy is already globally diversified.
Thanks TA, I may look into moving it at an appropriate time.
For the world fund I felt that I wanted to put some funds into more emerging markets ……But as you can tell I am very new to this and just finding my feet by reading most of your website bit by bit!
Hello
I’m considering opening a SIPP with Cavendish with a single fund. I only have a small pot currently of 10k and picked Cavendish for the low platform fee. I’m 32 and on the bench with choosing 2050 target retirement fund or use LS80 and lower the equatity every decade. I plan to put in around £300 a month.
Thanks
My daughter is 32 and she has the Vanguard Lifestrategy 80% Equity 20% Bond fund.
What platform did she go with? I might go with LS80 as it’s basically the same as 2050 TRF for 11 years. I’m new to Sipps and this seems a good option for beginners. Thanks
From memory I think she also uses Cavendish. As this is is a fixed asset allocation,you might consider swapping it to a 60/40 allocation when you get into your 40’s I have always used the old rule of thumb for my allocation i.e. ‘Own your age in bonds’ and the balance in equities. Its worked for me. Good luck.
Quick question: presumably if one chooses the managed fund (lifestrategy/target retirement) route, you could still choose to invest further in individual index funds of your own choosing? (Assuming you didn’t exceed the £20k ISA limit in the current year?
You could,but why risk duplicating what you might already own in the LifeStrategy/Target Retirement Funds? Keep it simple has always been my motto.
Thank you for your comments AtlanticSpan 🙂
Do you keep cash in your sipp to pay the fees or does it not matter if they sell to pay fees? Thanks
Depends on whether they charge you every time they sell a fund to pay your fees. If they do that then I’d rather have the cash in there. I just use some of my dividend payouts to cover it.
I don’t have dividend payouts with LS 80 fund on my fidelity SIPP. I’m new to this so just finding my way around. Thanks for your advice
Mmm this is great, I appreciate TA breakdown of the target funds, not given it attention before.
I agree its abit low in Emerg’Markets though but i could keep a seperate EM tracker to run along side it as bit of a wild card!
seriously thinking about selling my ETFs and putting all in a target retirement fund. im with I web [ isa ], they have it, just checked, and they dont charge for holding funds.
got me thinking. As TA states it stops you meddling !!!
Hi ACC and All,
Just had a quick peak at the Vanguard site and saw these retirement funds all the way to 2065… I was a bit late starting my pension and didn’t want to have this happen to my son, so I opened a SIPP for him when he was 9mths old and since then a JISA too. He is 9 now and has 20k in his SIPP split 16k on a V LS80 and 4k on a V LS100, his JISA has 6k of a BlackRock Natural Resources Gr & Inc D Acc as I just fancied a play on a resources super cycle at some point in his lifetime (I missed the last one) and when I set it up, this fund was really cheap as resource companies had the crap kicked out of them by the 2008-2010 downturn…its all with AJ Bell Youinvest.
My question… is getting peoples insights into whether to diversify some more or something different altogether… there is simply so much time ahead of him, its hard to pin down a strategy, even the Vanguard Retirement 2065 is not far enough away to accommodate the time in front of him, he’ll only be 56 by then, but I want to help him and set the strategy out before I shuffle off the mortal coil so he doesn’t really need to think about pensions etc. as he grows up, comments/suggestions welcome…
Cheers
Paul
Wow. Well done Paul on your incredible far-sightedness. I don’t think any other readers have mentioned setting up a SIPP at such a tender age for their children.
Global REITS are the obvious diversifier as Vanguard don’t run a commercial property fund.
Other possibilities are Global Small-Cap and other factor funds e.g. Value. Especially as your son has a super-long time horizon so can afford to wait out volatility and hopefully enjoy stronger returns in the long run.
You could make an argument for 5% in gold as a good diversifier – although I’d argue against it as compounding will become a huge factor for your son later in life and gold doesn’t pay dividends.
Hi Acc,
thanks, you make a good point, I was just thinking of 80-100% global equities because there is so much time to recover from any big drops….but actually you make a fair point that there should be no harm in trying to turbo charge returns now (Value) and in diversifying a bit, again now… I have my own iShares Global Property Securities Equity Index (UK) D Acc, which used to be blackrock global property, I’m minded to add some of thee in his plans and seek some value options. Cheers!
A lot has happened since 2016… would love to see an update and current views on these Target Retirement Funds! Thx