Determining Your Allocation at Retirement
The articles on retirement allocation in this issue by Jerome Clark and Josh Cohen present different strategies for the amount of stocks and bonds an investor should hold at retirement. Specifically, they disagree on whether investors should immediately increase their fixed-income holdings at retirement (termed the “to” strategy) or gradually increase their fixed-income holdings throughout their retirement years (the “through” strategy).
The disagreement centers around the impact a bear market can have on one’s portfolio. As AAII’s John Markese pointed out last year in “Taking Aim at Your Retirement: A Look at Target Date Mutual Funds” (June 2009 AAII Journal), withdrawing money from a stock portfolio at the beginning of retirement when stock prices are depressed can have lasting negative implications on how long your money will last. This is particularly the case when the withdrawals are expected to be made over a shorter versus a longer time period.
Given this, it is important to be aware that Clark and Cohen used different time horizons for their studies. Clark assumed withdrawals will be made over a 30-year time horizon. Cohen opted for a shorter 20-year time horizon. However, it is not just Clark and Cohen who disagree on time horizons. As Markese pointed out last year, target date funds differ significantly on when, relative to the target date, the portfolio is moved to the final allocation.
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