Start low and increase your equities during retirement?

[donheff]

Michael Kitces and Wade Pfau are out with a study arguing that retirees can do better starting out with about 20-40% equities and gradually raising that allocation to about 50-60% over time during retirement. NYT has a brief article on it. I get the idea - lower volatility during the critical early years preventing panic, supplemented by greater growth later when a dip won't be as alarming. Since this strategy leaves you with a substantial potential for buying in the early years I would like to see a study that evaluates it with a little market timing. Since you plan to gradually buy equities over time anyway, how would it work out to make your buys only on significant dips (e,g. >5%) rather than on a fixed annual or other basis?

 

[MichaelB]

Recently discussed here http://www.early-retirement.org/forums/f28/increase-stocks-with-age-68365.html
Not sure you could model it easily, but the "buy on a big dip" would really make a difference in terms of portfolio survivability.

 

[jerome len]

I totally agree......I've done it and it really worked the past 10 years, especially with the big dips. I was in Vanguard LT muni bonds....earning over 4%.....no taxes and I am still in a strong tax situation.....and .12% expenses. If I had invested it through one of the "big" financial firms I would have had to average over 7% to equal what I earned. Even if the market would have been fairly good, I still would have done ok.

Now, I'm a little older and I'm headed into more dividend ETF investments.....still through Vanguard.....still low expenses.....but taxes are taking a little bigger bite.

Everybody is different but this sure worked for me. All my friends at work thought I was nuts......now they want me to review their portfolios.....but looking ahead, I have no idea what will happen.....I'm not an investment advisor and don't want to be. Good luck to all!

 

[bo_knows]

I read the actual study, and tried modelling it off of historical data with my own methods. I found that tinkering with the glide path toward higher equities can change the default FireCalc scenario of $750k Portfolio and $30k spending from 6 failures to 2 failures, but reduces the "average ending portfolio" quite a bit.

I guess that was the whole point of the study... to reduce risk, but not necessarily increase the ending portfolio.

 

[Animorph]

If you buy on dips and manage to decrease your share costs by 5% over buying on a schedule, you will be ahead by 5% on the added money you used for the new purchases. No compounding or anything, so at the end of many years you have still saved yourself 5%. A small gain, and you risk the chance that you miss gains while waiting for your dip.

Something similar used to be an example for getting into the market. What happens if you bought at the highest price each year? It's not that bad compared to missing out on, say, just a couple of years of average growth compounding. It's a one time loss, not a yearly growth rate compounding loss.