A common retirement strategy is to gradually increase your portfolio’s bond allocation as you get older (or at least maintain it at a conservative level). But new research puts a twist on how to manage your asset allocation “glide path.”
A recent article by academic Wade Pfau and financial planner Michael Kitces in The Journal of Financial Planning suggests you can increase the odds of sustaining your nest egg by starting with an unusually high fixed-income allocation when you retire, and then gradually lowering it as you get through the danger zone.
The suggestion that you should increase your equity allocation as you age—and therefore increase your risk of major losses—has stirred controversy in financial planning circles. But Pfau provides a commonsense interpretation: “You can get more downside protection starting at 30% stocks and then working your way back to 60% stocks, rather than staying at 60% stocks and 40% bonds the whole time,” says the professor of retirement income at the American College in Bryn Mawr, Pa. You never have a higher equity allocation than you would otherwise have had, Pfau says. But you get very conservative in the first several years of retirement, “and you work your way back up from a lower level.”
Moshe Milevsky, professor of finance at York University’s Schulich School of Business, says this research is provocative, though it shouldn’t be considered conclusive. Note that you would need to be prepared to put up with the lower expected return during those years, and you may find it emotionally unappealing to increase your equity exposure later in retirement.