Determining Your Allocation at Retirement

by Charles Rotblut, CFA

Determining Your Allocation At Retirement Splash image

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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Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at


George from Texas posted over 2 years ago:

Do the retirement withdrawal strategies that assume a 4% annual withdrawal assume taxes are paid before calculating the 4% amount, or do the taxes also need to be paid from the 4% annual allocation?

Richard from Illinois posted over 2 years ago:

Are dividends that you receive in cash counted as part of the 4% withdrawal rate, or is only the redemptions that you withdraw from funds/etfs/stocks count as part of the 4%?? In other words, is only the money taken from your capital( invasion of principal) counted towards the 4% withdrawal rate?

Tom from Georgia posted over 2 years ago:

Withdraw to me is the amount needed to live and enjoy minus current incomes ie. pension social security, interst and dividend income. If you planned correctly withdraw from your nest egg will only be needed in time of large purchase or income shortfall . my nest egg continues to grow as well as my savings even in retirement. and my yearly income is larger than my living expenses. I live very very well. I tell people to always live well under your means during your working life, so you can truly enjoy and live above your means during your retirement. Don't keep up with the Jones, most of the Jones will never retire.

John from Colorado posted over 2 years ago:

Whatever the required necessary income no. is, the overall total can include dividends, social security, pension, etc. It is my preference to use this as income rather than disturb the principal. The end result is you need 'X" number of dollars to live on. Whether you want to withdraw 4% plus dividends , etc. or withdraw a certain percentage, is just a matter of semantics.

Don from Virginia posted over 2 years ago:

I think a safe strategy is to withdraw a fraction of your principle each year. For example, if you plan to live another 30 years (and who doesn't) then withdraw 1/30th of the total asset value the first year. And then 1/29th the second year. And 1/28th the third year. And so on. This means you will run out of principal the 30th year which is when you plan to die. (Well you plan to die sometime don't you?) This means your withdrawals will be "adjusted" by performance and you will have to live within your means. Any surprises here?

Live good and donate to charity or relatives in the good years and cut back in the down years. The main advantage of this approach is to not worry about what the future brings. It adjusts your life style and spending to your situation. Just like you have done all your life. Simple but elegant.

Ken from California posted over 2 years ago:

Can you direct me to an article on fixed annuities. I'm talking basic information.

Thank You

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