What is lifestyling?
‘Lifestyling’ is an investment approach that gradually – and automatically – reduces exposure to growth assets as retirement nears. It’s typically done through investment into ‘target retirement’ or ‘target date’ funds which are chosen by the investor based on when they wish to retire.
Early on, these funds aim to maximise return by investing mainly in growth assets. As the target retirement date nears, however, the fund gradually switches out of equities and into other investments like bonds and cash.
This is a popular default option across many invested pension plans, especially those set up by employers. If you’re a member of such a plan and haven’t made a choice about where your pension is invested, it’s reasonably likely that you’ll be invested in a fund that follows this approach.
Lifestyle funds were introduced when it was a requirement for all retirees to purchase an annuity with their pension at retirement. The idea was to reduce the likelihood that the fund would suddenly fall in value just before it was needed to purchase an income for life through an annuity.
However, since 2015, retirees have been able to flexibly access their pension – drawing what they want, when they want. Annuity purchase is no longer the only option.
This leads to a significant change in the importance placed on the value of the pension at the point of retirement. On that day, a person in drawdown may only draw a small amount from the plan, leaving the vast majority invested for future years. As a result, a temporary market decline in the months leading up to retirement matters far less.
This brings into question the suitability of lifestyling for those who plan to draw assets from their pension slowly over time. A 60-year-old retiree has a need for their investments to deliver returns in excess of inflation for 30 or more years, an approach that requires a healthy allocation to growth assets. Just the opposite of that provided by target date funds.
What does this mean for you?
If your pension is not being professionally managed, or you haven’t made an active choice about where your pension is invested, it’s worth taking the time to ensure that your investment strategy aligns with your planned approach to funding your retirement. It’s no longer one-size-fits-all. Reviewing your options and making an informed choice can help you plan your future with clarity and purpose.
Please feel free to pass this article on to anyone you know who might benefit from understanding more about this topic. If you have any questions, contact your Financial Planner.
