Why I won’t be using Vanguard wrappers

Vanguard has recently announced that in addition to the ETF’s and mutual funds (OEICs) currently offered, they will now offer a selection of wrappers to hold them in.  Given one of my mantras is to always minimise investment expenses and given Vanguard’s low cost reputation this should be a great thing.  Let’s take a look.

Firstly, let’s look at my SIPPs.  I have two – one from Hargreaves Lansdown and the other from YouInvest.  Over the years, despite pushing the actively managed variety through schemes like The Wealth 150, Hargreaves Lansdown have made it unattractive from an expense perspective to hold mutual funds in a SIPP wrapper.  The first £250,000 attracts a charge of 0.45%, the next £750,000 a charge of 0.25%, the next £1,000,000 a charge of 0.1% and above that level there is no charge.  In contrast shares, investment trusts, ETF’s, gilts and bonds attract a flat charge of 0.45% but importantly it’s capped at £200 per annum.  This meant that when I first started transferring my expensive employers insurance company based Group Personal Pension (GPPP) into Hargreaves Lansdown I went straight for direct shares (REIT’s such as Hansteen, Segro, British Land, etc) or ETF’s (VERX, ISXF, VFEM etc).  I currently have a little over £250,000 worth of wealth in my Hargreaves Lansdown SIPP meaning my annual wrapper expense is capped at £200 or 0.08%.

Predicting Retirement Financial Success

One of the negatives to using a Safe Withdrawal Rate (SWR) model, such as the 4% Rule, to predict when early retirement is possible and to guide spending in retirement is that if history repeats you could leave a lot of wealth on the table.  This is because if a conservative SWR is chosen it tends to have very few historic sequence of returns that fail meaning the withdrawal rate you choose is based on some of the worst sequence of returns rather than the best.

Let me demonstrate with an example.  Let’s enter retirement with $1,000,000, a portfolio that is 75% US Equities : 25% Bonds, expenses of 0.18% and a retirement period of 30 years.  Plug that into cFIREsim and you get the following historic sequence of returns:

Click to enlarge, 4% Rule Sequence of Returns for a 75% Equity : 25% Bond Portfolio

After 30 years that $1,000,000 has in Real (ie after inflation) terms become an average of $2,027,248 and a median of $1,531,784 while the highest wealth value is $5,957,932 and the lowest is -$370,926.  So in the one extreme you’re living under a railway arch begging for food and in the other you have nearly six times what you started with.  If history were to repeat could we potentially be more precise than that?