You've likely heard this advice many times: Start your
retirement with 50% to 55% of your portfolio invested in stocks.
Then gradually taper off over 30 years until 80% of your holdings
are in safer bonds and cash. That's also a typical "glide path" of
many target-date retirement funds.
But hold on to your hat: A new study by two well-regarded
retirement researchers concludes that such an approach is the
opposite of what most retirees should be doing. The researchers
found that nest eggs last longer when investors begin their
retirement with as little as 20% in stocks--and then slowly shift
more money into equities during the next decades.
This is particularly true for investors who retire at the start
of a stock-market downturn, the authors say. Typically, their stock
portfolios become depleted in the early retirement years by poor
returns, withdrawals and often panicked selloffs. "By the time good
market returns arrive, they have no equities," says Michael Kitces,
director of research with Pinnacle Advisory Group, in Columbia, Md.
Kitces is co-author of the study with Wade Pfau, professor of
retirement income at the American College, in Bryn Mawr, Pa.
A Rising Glide Path Lifts All Retirement Boats
Investors who begin retirement with relatively low allocations
in stocks won't lose as much money if a bear market hits early.
While prices are cheap, retirees can begin to dial up their stock
holdings, perhaps by 1% a year. When the market rebounds, the
retirees will have a good portion of their holdings in stocks--and
their portfolios will recover. Despite the rising stock
allocations, the researchers found, investors will likely end up
with less average stock exposure over their lifetimes.
Investors who leave the workforce during a strong market should
follow the same strategy, the authors say. "If the market does well
in the first half of retirement and then turns bad, a rising glide
path won't hurt your retirement," Pfau says. "You've won the game
no matter what you do."
Employing this strategy worked with all combinations of stock
and bond allocations, several market-return assumptions, and 4% and
5% annual withdrawal rates, according to the research. The authors
tested the outcomes of different allocations using 10,000 possible
Even in the worst scenarios, portfolios lasted longer when new
retirees increased stock allocations. Assuming historic
inflation-adjusted returns of 6.5% for stocks and 2.4% for bonds,
investors could withdraw 4% a year for 30 years if they began with
30% in stocks and gradually increased the allocation to between 60%
Nest eggs were depleted two years sooner when new retirees began
with 60% in stocks and ended with 20% in equities. While that
difference is not large, Pfau says, "retirees would appreciate
those extra two years."
Although all portfolios with rising stock allocations performed
better than those that didn't follow that pattern, many nest eggs
did not last 30 years. Assuming inflation-adjusted returns of 3.8%
for stocks and 1.5% for bonds, a portfolio had just a 74% chance of
lasting 30 years if the investor started with 20% to 40% in stocks
and ended with 60% to 80% in bonds.
In such a case, Kitces says, a retiree will need to withdraw
less. "A rising glide path can only do so much in the face of
dismal returns," he says.
The researchers suggest that investors who are heading toward
retirement should gradually trim stocks until they're just 20% to
40% of the portfolio. At retirement, they should start building up
Of course, older investors may be uncomfortable with the idea of
increasing stocks during retirement. But Pfau and Kitces say this
strategy is actually a key part of the popular "bucket" withdrawal
Investors typically fill the first bucket with the safest
investments, such as cash. The second bucket is invested in
intermediate-term bonds. The third holds stocks. Investors are more
likely to tolerate market volatility if they can live off the first
two buckets for the first ten years or so.
Pfau and Kitces recommend that retirees keep the stock holdings
intact until the middle to later years of retirement. That gives
the stocks time to grow--and offers investors the full benefit of
the rising equity glide path.