! Reduce Stock Exposure in Retirement, or Gradually Increase It?
Michael Kitces , CFP, CLU, ChFC, RHU, REBC, is a partner and the director of research for Pinnacle Advisory Group and the publisher of The Kitces Report newsletter and the financial planning industry blog Nerd’s Eye View through his website www.kitces.com.
Wade Pfau , Ph.D., CFA, is a professor of retirement income in the Ph.D. program in financial services and retirement planning at The American College in Bryn Mawr, Pennsylvania. He is also a principal and director at McLean Asset Management and the chief planning scientist for inStream Solutions. He actively blogs at RetirementResearcher.com .


Robert Sadofsky from NY posted over 3 years ago:

This approach resembles dollar cost averaging with a cushion/bucket of 30% to 50% depending on the assumed bond returns...since we are in a probable rising rate environment, I would stick closer to last table for allocation criteria. This analysis makes a lot of sense to me.

G Flowers from AZ posted over 3 years ago:

The analysis makes sense on paper but there is one factor not mentioned at all in this article. Assuming the 20 - 30 year retirement mentioned, the retiree would be 85 to 95 years old. The amount of analysis and management of the stock portfolio suggested, would be beyond the mental capability of most retiree's of that age. Having lived in a retirement (55+) community for over 18 years, I see that decline on a daily basis. In addition, passing on a stock portfolio of that magnitude to the widow, would be problematic.

Charles S from TX posted over 3 years ago:

I agree with an emphasis on longevity risk. But I think a better approach is using (increasing) annuities to balance long lives with early deaths. Financial firms are at small risk of changing mortality, but they can invest at a higher level of equities vs bonds with knowledge of future likely disbursements. A big problem is convincing retirees to relinquish assets when some will die early, but their payoff is overcoming longevity risk.

Tim Fenning from PA posted over 3 years ago:

It seems that this approach assumes an extremely large cash balance to begin retirement. Otherwise the early year withdrawals will significantly exceed any growth potential of the portfolio, thus resulting in declining balances in the early years.

John Eterno from TX posted over 3 years ago:

I like the article, but think the pre-retirement speculation (2nd-to-last paragraph)is wrong (U-shaped curve). I suspect the trend just-before should be similar to the trend just-after: set the near-term buckets aside, and leave the equity buckets to earn more over time.

If the pre-retirement market is down, there's more time to recover; if it's up, you're ahead of the game.

Roberto Plaja from Switzerland posted over 3 years ago:

A great piece, very well thought-out and with solid structural considerations.

Richard Thomas from FL posted over 3 years ago:

A better solution is to put 100% the portfolio into strong dividend paying stocks. Those that have a long history of paying increasing dividends for decades. Then live off the dividends. It is not hard to build a portfolio of 20 or so quality stocks averaging 4% in dividend payments. Then let the market fluctuate all it wants and just keep raking in the dividend checks. If you need to spend more than 4% of your portfolio each year then you might seriously consider reducing your expenses during retirement.

G Fischer from VA posted over 3 years ago:

Having managed client money since 1987. Using the article distribution rate of 4% is not realistic for most people because it requires an additional 25% more capital in the beginning than a 5% distribution let alone 6%.

The second part I disagree with is the idea that you need your investments to generate in free cash flow 100% of the income you spend. Portfolio management is about total return not just yield. Portfolio withdrawal rates are circumstance dependent and have nothing to do with bond or stock yields.

The third point that is hard for me to accept why would you orient an portfolio to towards defending against a 1% or 5% possibility of occurrence. If the black swan event you are worried about occurs with a 5% frequency it could be 19 years before we see that disaster happen. You can already be dead.

In the last four decades I have been doing this only one thing has been true. At some point every year the stock market will be in net negative territory for the year and this year will not behave like last year.

Keep an open mind in your investing there is always opportunity. For starters look where everyone is selling. Top performing assets class last year was Greek Bonds up 110%. If you are patient that is where you find opportunity. Remember to "Buy when there is blood in the streets." It was as true in 1780's as it is today. People have not changed.

Vern Andrews from CA posted over 3 years ago:

After 20 years in retirement and working at the same company for 44 years prior to retirement,I believe the U approach to retirement would be a great approach. Using a high equities Mix prior to retirement, moving some of the equities dollars to fixed or dividend paying securities that provide about 80% of your retirement distribution monthly activity and living expenses at a Mix of 70/30, and as retirement continues depending on the market situation using a flexible Mix strategy will provide a less risking Portfolio. My experience for an IRA Portfolio valued at year end 1999 of 1.15 M$ with Distribution starting at age 70-1/2 over the following 13-1/3 distribution years since year 2000 to 3/2013 provided 2.4 M$ or a gain of about 108.7%. The S/P 500 Index over this same period only gained 6.8%. Unfortunate my kids had numerous financial problems in this time period and I provided no interest loans to them for their achievement of financial independence of over 1/2 of that return that was not planned during the development of the retirement plan in the years prior to 1994. Details are available @ website lifetimestrategies2009.com, if interested.

Donald Griffith from CA posted over 3 years ago:

The one thing missing, it seems to me, is the absence of fixed income consideration. EG: social security, pensions, real estate income, & pre-purchased annuities. This income, if applied to the program would skew the Fixed Income Bucket and allow more equity investment. This has worked out good for us. During the early days of retirement (1958) the interest rates were much higher and we chose the certain return instead of the "maybe" return accordingly. We own untouched I bonds paying 4-5% as a result. How's that for a great Bucket? Living in wonderful San Diego, and walking the beach most evenings - but we have devoted a lot of of our free time to charity work, when not traveling.

Donald Griffith from CA posted over 3 years ago:

Oops, the 58 was age. The year was 78. Sorry!

Harry Rich from OH posted over 3 years ago:

Thought provoking article.

I'd like more of the thinking on applying buckets to the rising glide path. At a
1.75% bond return I see the un-replenished cash + bond bucket emptying at around two decades, with 70% stock allocation coming at about 1.5 decades based on a 5.5% stock return. Perhaps with volatility incorporated the expectation is different.

But using average returns more seems necessary to match the 30 year target. Is that going to be easier than just increasing the stock allocation percentage annually?


FinancialDave from WA posted over 3 years ago:

G.Fischer >In the last four decades I have been doing this only one thing has been true. At some point every year the stock market will be in net negative territory for the year and this year will not behave like last year.>

One thing I know is that history applies to all years and not just selective ones.

Unfortunately, your market history was shattered in 2013 when the market was up big on Jan 2nd and NEVER looked back from there!

Dave Gilmer from WA posted over 3 years ago:

Very interesting article.

What I found most interesting is the fact that if you stay with a 4% withdrawal rate and stay away from 0% equities, your asset allocation has very little to do with your results.

I did not understand why until I read some research by Jim Otar, which he explained in a post on another site - "asset allocation is very effective in reducing the fluctuations of the vertical component (the dollar amount of the total portfolio) but it has (almost) no impact on the horizontal axes (the longevity of the portfolio)."

thanks Jim!

Ruben Rosales from MA posted over 3 years ago:

It is difficult to try and justify a new approach to retirement investments after so many years of a set formula in which bonds took the substantial lead. With the improved life span of our generation I am so glad we are being exposed to more realistic investment programs. In his annual shareholders letter, Warren Buffett indicates that what he will leave his wife will follow the following ratio: 90% invested on the Vanguard 500 Index Fund and 10% in short term bonds to be accessed during bear stock cycles. He phrased it slightly differently, but the general idea is correct. I think he has a bold but meaningful approach.
We should be assuming living 35+ years after retirement, if not ourselves for sure for our wives.
Would like to hear your comments.

Michael Henry from OR posted over 3 years ago:

Sooooo complicated.....
We would like an annual 4% withdrawal adjusted for inflation over a 30 year retirement.

But, available evidence leads us to believe that stock and bond returns over the next 20 years or so will be below average, so we are advised to only take 3.4% annually.

But, that is only if we are paying no fees. If, for instance, we are paying a 1% expense ratio on our mutual funds, then we can only take 3.4% - 1% = 2.4%.

But, if we have turned all this over to an investment adviser who is taking 1% of assets annually, then we only get to take 1.4% a year.

But, if all that is true, we have to jump off a bridge.

Steve Rawlinson from California posted 11 months ago:

Christine Benz of Morningstar has written an article describing "Static Asset Allocation" that offers and excellent bucket strategy.

Scott Sarratt from VA posted 11 months ago:

The whole idea of a rising equity glide path in retirement a nice academic exercise. Rising stock allocation flies in the face of common sense.

If a retiree has enough money to support himself from bonds/cash, there is zero reason to take risk and invest in stocks. Just stay in bonds/cash. Why take the chance of a fifty percent haircut like we have seen twice in the last twenty years?

Generally as one gets older, one gets more (not less) conservative with their money. A fifty-five year old investor has a job and a paycheck. A normal eighty-five year old has nothing but his savings (and SS/pension) to live on.

I just hit 64 (unfortunately) and am still working. I am slowly raising cash and increasing bonds to prepare for retirement in a couple years. When I retire I plan to use the bucket strategy to live on. SS won't cut it, but it will be nice. At least a year of cash readily available. Two if possible. Transfer all my bond dividends/gains to cash. Transfer all stock dividends to cash. Selectively sell stocks/stock funds to replenish cash bucket. If market crash, don't take Africa safari or Amazon river cruise.

Have very little use for ivory tower academics who don't live in the real world.

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