Retirement Experts Recommend Startling New Approach: Increase Equity Exposure After Retiring Hot

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Conventional wisdom on retirement glidepaths is to reduce exposure to risk continuously, starting with high risk at a young age and giving way to lower risk as retirement approaches and even lower risk post-retirement.
The provocatively titled study, “Reducing Retirement Risk with a Rising Equity Glidepath,” was published by Wade Pfau and Michael Kitces. Pfau is a professor of retirement income in the new Ph.D. program for financial and retirement planning at The American College in Bryn Mawr, Penn., and Kitces is an author and speaker.
“We find, surprisingly, that rising equity glide-paths in retirement – where the portfolio starts out conservative and becomes more aggressive through the retirement time horizon – have the potential to actually reduce both the probability of failure and the magnitude of failure for client portfolios,” the study’s synopsis reads. “This result may appear counter-intuitive from the traditional perspective, which is that equity exposure should decrease throughout retirement as the retiree’s time horizon (and life expectancy) shrinks and mortality looms. Yet the conclusion is actually entirely logical when viewed from the perspective of what scenarios cause a client’s retirement to ‘fail’ in the first place.”
Pfau and Kitces point out that an extended period of poor returns in the first half of retirement will lead a retiree to hold few stocks if and when higher returns come back. Conversely, when equity returns are good in the first half of retirement, the retiree gets ahead of their income goals so that later asset allocation choices have little impact, even if returns fall off.
I agree with this advice up to a point. However, I believe that retirement years are too complex to offer a generalized, one-size-fits-all solution. For example, academics recommend a “pockets of money” approach in retirement, while others advocate a mix of annuities and self-insurance (personal investing). And now we have Pfau and Kitces recommending a pattern of increasing risk.
My research and experience shows that investors are best served by a glidepath that actually reaches the point of transition from the accumulation phase
to the distribution phase with all of the investor’s accumulated savings intact, plus reasonable growth in those savings. Only then, at entry into retirement, should investors plan how they will secure the remainder of their lifetimes with dignity. It is only at this point of transition that enough information is available (e.g., amount of accumulated savings, health status, amount of debt) to properly construct an investment plan for the third stage of the U-shape.
For a more detailed explanation, see my 2012 article, “The 3 Stages of Individual Investing are like a Journey into Space.”
You can be the judge of the best course of action for you and your clients.

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