Robert Powell’s Retirement Portfolio: Loading up on stocks — after you retire

Should you invest more in stocks as you age?

Conventional wisdom would have you reduce the percentage of your nest egg you invest in stocks over the course of your retirement. The old rule of thumb went something like this: Subtract your age from 100 and that’s what percent to invest in stocks.

So, if you’re age 65, you’d invest 35% (100 minus 65) of your nest egg in stocks. And if you’re 80, you’d invest 20% (100 minus 80) of your nest egg in stocks. The us of this formula is widespread. In fact, investment advisers essentially use this rule to manage target-date mutual funds, the ever-increasingly popular 401(k) investment option.

But at least one panelist at a recent MarketWatch Retirement Adviser event in New York City said new research is challenging conventional wisdom.

According to Wade Pfau, a professor of retirement income at The American College, co-author of the early research on the subject, and one of three panelists, the new research suggests that what’s best for retirees is to use what’s called a rising equity “glide path” (instead of using the more traditional approach, a declining equity glide path). Read Reducing Retirement Risk with a Rising Equity Glide-Path.

Retirement Adviser: Have you saved enough?

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A declining equity glide path works well when you’re saving for retirement, said Pfau. “But then the question is: What do you do post-retirement?” he said during the discussion. “Existing target-date funds then either just put you in some sort of retirement-income fund that keeps the same asset allocation after that, or it might continue to decrease your stock allocation throughout retirement.” But as Pfau went on to explain, he and co-author Michael Kitces believe that for many savers “as a default…the rising equity glide path can help you in retirement.”

With this strategy, you end up having “U-shaped lifetime asset allocation,” said Pfau. “You have the lowest stock allocation right around your retirement date when you’re the most vulnerable to losses in wealth,” he said. “You have higher stock allocations when you’re younger or older.”

Defending against ‘worst cases’

The rationale for this strategy is based on what Pfau’s research has exposed as “the worst cases for retirees.” According to Pfau, a “really terrible” worst case is if you have a 30-year retirement, during which the market steadily declines for the entire 30 years. “Then there’s not really much you can do,” he said. “No matter how you invest your assets, you’re going to run out.”

In practice, however, Pfau said the worst-case retirement is usually as follows: “There’s a big market decline early in your retirement, and the markets eventually recover,” he said. “And this is what the rising equity glide path helps you with.”

In other words, if the market declines early in your retirement you’ll be fine because you’ll have a lower stock allocation. Having a lower stock allocation at retirement also helps you manage “sequence of return risk,” the risk that you’ll have to withdraw money from a portfolio that’s declining in value at the start of your retirement — which in turn might result in you running out of money later in retirement or having to reduce your standard of living.

According to Pfau, the rising equity glide path approach not only helps you during the early years of your retirement, when you are most vulnerable to market declines, but it also helps you later in retirement as the percent you invest in stocks rises.

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