There is much disagreement about how investors should allocate their portfolios heading into and once in retirement. Strategies range from maintaining a high allocation to equities to annuitizing all estimated amounts needed to cover living expenses in retirement.

While retirement savings allocation strategies all start with a significant allocation to equities for investors who are in their 20s or 30s, they end in very different places. It is the difference in ending places—and how they get there—that is the source of debate.

There are areas of consensus I want to point out before starting the comparison. First, if your wealth is both high enough and accessible enough to provide cash flow as needed, then you can take as much risk in terms of volatility as you want.

Second, sequence of returns risk is an important consideration for everyone. Also referred to as sequence risk, it is a period of bad market returns at an inopportune time. Sequence of returns risk is particularly significant during the years just before and right after retirement because wealth is high and withdrawals are starting. All the strategies discussed here include some components to avoid withdrawing entirely from stocks when their prices are depressed.

Glide Path Strategies

The most widely known retirement allocation strategy is 100 minus your age. This uses an investor’s age to determine how much of their portfolio should be in stocks. A 25-year-old investor following this approach would allocate 75% of their portfolio to stocks (100 minus 25). A 50-year-old investor would allocate 50% of their portfolio to stocks (100 minus 50), and so on. The remaining amount would be allocated to bonds and cash equivalents.

Some suggest using 110 or 120 minus your age to increase the overall level of equity exposure.

Regardless of what the base number is, this allocation approach gets more conservative over time. This is why it is called a glide path. The percentage amount allocated to equities “glides” downward as you age.

Target-date funds follow glide paths. These funds are designed to evolve their portfolios over the course of a worker’s career. Target-date funds designated for those planning to retire in or close to the year 2060 currently have high allocations to stocks. Target-date funds designated for those planning to retire in or close to 2025 have a much lower allocation to equities.

To Versus Thru Glide Paths

Traditional glide paths are “thru” glide paths. They continue to get more conservative in retirement. A 100 minus your age allocation, for example, will eventually rotate you out of stocks should you live to be 100.

An alternative is a “to” glide path. A to glide path gradually becomes more conservative during a person’s career before reaching their final allocation at or shortly after retirement. Some BlackRock target-date funds as well as the Thrift Savings Plan “L” funds (available to federal government employees) shift to a final retirement allocation once the target (retirement) date is reached.

V-Shaped and U-Shaped Glide Paths

Financial planner Michael Kitces and retirement researcher Wade Pfau are credited with bringing the notion of a V-shaped glide path to the forefront. A V-shaped glide path reduces equity exposure and then increases it.

The term “V-shaped” refers to the shape of how equity allocations evolve before and after retirement. During an investor’s working years, exposure to equities starts high and then is gradually reduced over time as retirement nears. The equity exposure bottoms out as retirement occurs and then is aggressively raised once the investor is in retirement.

In the March 2022 AAII Journal (“A New Perspective on Withdrawal and Allocation Strategies for Retirees”), Pfau talked about a U-shaped glide path. It maintains a steady allocation to stocks up to 20 years prior to retirement before gradually reducing equity exposure. After retirement, it increases equity exposure at a more gradual pace than the V-shaped approach.

In the 2022 article, Pfau noted that “a rising equity glide path—having a lower stock allocation at retirement and then increasing that later—is going to work best for you when a bad market environment occurs early in retirement followed by a better market environment later on.”

The downside of such approaches is that the average exposure to equities can be lower than a fixed-allocation strategy such as 60% stocks/40% bonds. This can hurt overall returns for an investor who lives through generally favorable market conditions—particularly in the decade leading up to retirement and the decade after retirement when wealth is greater.

Fixed-Allocation Strategies

Fixed-allocation strategies keep the percentage of a portfolio invested in stocks relatively steady throughout an investor’s life. As shown in Figure 1, this allocation results in a straight line of equity exposure when plotted on a chart (the 60/40 line).

The most well-known fixed-allocation strategy is the 60%/40% approach. This allocates 60% of the portfolio to stocks and 40% to bonds. This allocation is maintained by periodic rebalancing. The rebalancing can be done based on set time intervals (e.g., once a year), a percentage band (e.g., a decline in equity exposure to 55% or less) or some combination of the two. Other versions of fixed-allocation approaches exist such as 50% stocks/50% bonds or 70% stocks/30% bonds.

The advantage of fixed-allocation strategies is their simplicity. They can easily be implemented by a do-it-yourself (DIY) investor or by purchasing a single allocation mutual fund or exchange-traded fund (ETF) designed to follow such strategies.

Fixed-allocation strategies can also easily be modified to account for sequence risk. For example, a 60%/40% allocation can be modified to 55% stocks, 40% bonds and 5% cash to protect against bear markets. The cash allocation would be used as a buffer to avoid selling stocks during down market conditions.

Level3 Withdrawal Strategy

AAII founder James Cloonan called for a much more aggressive retirement allocation in his book “Investing at Level3” (AAII, 2016). He believed individual investors would be served by maintaining a very high allocation to equities throughout their life-spans.

This stance stemmed from his view on investing. “Your overall approach to investing is based on the assumption that a diversified portfolio of equities may lose value temporarily, but will always return to new highs,” wrote Cloonan.

Since the stock market can be volatile over the short term, he suggested maintaining an allocation to safe assets. Safe assets are those that “are safe in the default sense and also safe from significant price volatility in the short term.” Examples of safe assets include short-term Treasurys and insured certificates of deposit (CDs). Money market accounts can also be used.

An allocation to safe assets equaling two to four years of living expenses should gradually be built up over the few years prior to retirement. Once in retirement, these safe assets are used to fund withdrawals when the stock market is more than 5% below its previous high. Otherwise, withdrawals are taken from the equity allocation. After safe assets have been tapped, Cloonan advised replenishing them once the stock market returns to setting new highs.

This concept of safe or “buffer” assets appears in other approaches to retirement allocations as well. Buffer assets can easily be incorporated into any allocation by either reducing the stock portion or having part of the bond portion of the portfolio placed in very conservative investments. Alternatively, reverse mortgages and/or life insurance policies can be tapped during stock market corrections and bear markets, though both sit outside the more traditional approaches to allocation discussed here.

Annuitize Living Expenses

While annuities are not generally popular among individual investors, there are retirement experts who believe many retirees would be well-served by using them. Experts in this camp suggest using plain-vanilla immediate annuities and/or deferred annuities as opposed to variable and other more complex annuity products.

The annuitization strategy is based on the concept of immunizing dollars needed to cover living expenses against market volatility. These expenses include shelter, food, utilities, etc.

To implement this retirement allocation approach, an investor estimates what their fixed expenses will be in retirement. They then subtract any expected income from guaranteed sources, like Social Security and pensions. Annuities are purchased to cover the remaining amount.

Proponents of this strategy point to two advantages. First, longevity risk—the risk of outliving one’s money—is eliminated, or at least greatly reduced. Secondly, any remaining retirement savings can be invested or spent as the investor chooses. This is because living expenses are covered.

Risks of this strategy include the restricted access to one’s wealth, the chance of less wealth being created, dying earlier than later, costs and having less money to pass on to heirs. Survivor benefits can be added to an annuity contract but come at an additional cost. State guaranty funds provide protection for annuity contract holders, but rules vary.

Ladders of investment-grade bonds can be used instead but do not prevent longevity risk. Bond ladders involve holding bonds with different maturity dates. Diversification across issuers is required to reduce the risk of default.

Bucket Strategies

Bucket strategies differ from the aforementioned retirement allocation strategies because they are time-segmented and incorporate more than one allocation approach. A typical bucket strategy involves having short-term, intermediate-term and long-term investments.

The short-term bucket covers periods of one year up to three or five years. It makes use of savings accounts, CDs, money market accounts and other safe assets. Each year, retirement withdrawals are taken from this bucket. The short-term bucket is then replenished with dollars from the intermediate-term bucket.

The intermediate-term bucket covers periods of approximately three to seven or 10 years. The goal of this bucket is to provide a combination of income and growth. A balanced allocation of bonds and high-quality, less volatile stocks is typically used. Each year in retirement, the intermediate-term bucket is replenished with dollars from the long-term bucket.

The long-term bucket is designated for growing wealth. It covers periods of seven years or more. Dollars in this bucket are not needed for the foreseeable future and are most typically fully allocated to stocks to maximize wealth creation.

There are variations on the bucket approach to retirement allocation. The Level3 withdrawal strategy is essentially a two-bucket strategy: one short-term bucket that is only tapped when the markets are down and one long-term bucket.

Retirees seeking to leave a financial legacy could have one bucket designated for covering their living expenses and another bucket designated for their heirs. The “heirs” bucket would use a much more aggressive allocation than the “retirement” bucket.

Consider Mixing the Strategies

While there are differing opinions on these strategies, retirees don’t have to limit themselves to one approach. You can mix and match depending on your needs, tolerance for risk and goals. An example would be to use a traditional glide path or a 60%/40% allocation and then add either a more aggressive asset category (e.g., small-cap value stocks) or defensive assets. 

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