Increase stocks with age

[Onward]

Very interesting.

Portfolios that started with about 20 to 40 percent in stocks at retirement, and then gradually increased to about 50 or 60 percent, lasted longer than those with static mixes or those that shed stocks over time, according to the study.

An Adage Adjustment for Investors at Retirement

In case you can't get the NYT story, here is the paper it summarizes:

Reducing Retirement Risk with a Rising Equity Glide-Path by Wade D. Pfau, Michael E. Kitces :: SSRN

 

[siamond]

Thanks for sharing. This is certainly thought-provoking, although maybe not entirely surprising.

 

[SunGuy]

Why you should always look to re-balance your portfolio, and have an investment plan.

Stick to the plan!

 

[Ken11]

Interesting in concept.

However, assuming historic market averages for returns this strategy could improve my 30 year success rate by at most 3 points.
In exchange for this the price paid is some upside wealth associated with good early year return scenarios.
IOW- A "richer" success path isn't represented in the success rate figures.

All in all this seems like a second order effect that is unlikely to cause me to change my AA strategy.

I also note that if bad returns happen early - that's when folks typically still have some human capital that can be monetized ( back to work).

my .02

 

[Onward]

I also note that if bad returns happen early - that's when folks typically still have some human capital that can be monetized ( back to work).

That is a good point.

I'm concerned purely with portfolio survival (not residual wealth), so this paper is causing me to rethink my AA strategy completely.

 

[MichaelB]

From the abstract

We find, surprisingly, that rising equity glide-paths in retirement – where the portfolio starts out conservative and becomes more aggressive through the retirement time horizon – have the potential to actually reduce both the probability of failure and the magnitude of failure for client portfolios

Start the retirement period with a low equity allocation, increase the allocation by 1% per year. Over 30 years go from 40% (or less) to 60% (or more).

It makes sense conceptually to lower the impact of catastrophic equity loss in the early years when it has the greatest portfolio destructive effect, and increase it in the later years when the remaining lifespan is shorter. Will people act this way? That is to say, as we age are we going to assume fewer remaining years, hence greater capability to take on equity risk? I've not seen any older retired people think or act like this. Even as they age they see their final years in the distant future and don't make financial or portfolio changes that would reflect a much shorter lifespan.

 

[sengsational]

Can anyone comment on whether this aligns with what Kotlifoff says in spend till the end? I sounds at least similar.

 

[jerome len]

This appears to be close to my philosophy. I went into retirement with 75% muni bonds and 25% dividend equities. I'm able to live off of bonds and SS so my dividends and stock price increases have increased my stock allocation to over 30% in the last few years. I get inflation protection from SS and once I need more I'll start taking my stock dividends. I believe I'll move on someday and leave about 60% bonds and 40% stocks to my kids and grandkids. My parents left me a little when they passed and I'd like to do the same for my family. And, I don't worry.......my portfolio is about as safe as you can get......when you look at monthly/yearly income instead of cash value. I drove the folks at Fidelity nuts a few years ago when I planned this instead of paying them 1% off the top. But.......most of my money is at Vanguard......much cheaper, more low cost etf/fund choices than Fidelity.

 

[foxfirev5]

Not a big fan of declining equity as one ages, I had planned on a fixed 45% equity position through retirement. However as I approach early retirement I have considerable amount in cash to bridge the gap to SS. Once I'm collecting SS and the cash position is reduced I may let the equity position slide up to 50% or so. 50/40/10 cash depending on where interest rates have gone by then. All in all pretty much sticking to my orginal plan with a little flexibility.

 

[Animorph]

The time period just after retirement was known to be the most critical to success and a good time to be conservative. This quantifies that for the post-retirement period, hopefully replacing the 100 - age scheme for bonds during that period.

If you are withdrawing close to the maximum sustainable amount, stay conservative. If you are spending much less than that you can raise equities, creating a better buffer for possible future disasters.

 

[Willers]

I had a friend (in the investment industry) recently tell me that his plan was to be fully invested in equities until his retirement date and then drop it significantly on the day he retired. I consider him to be someone who makes educated decisions I asked him to explain.

His reasoning was very similar to the results of this study. He said that he could get the greatest potential $ return now and that he could continue working if the market really didn't cooperate (he said that 2008 was painful, but that he didn't pull back at all). He explained at the likelihood of going back to work once retired is much lower than people think so he considered his retirement date to be his definite last day of work and was going to drop his equity exposure way down to avoid the sequence of return risk.

Although I'm not sure I'd be OK with a 100% equity AA this close to my planned end date, his general point made sense. Pfau's research seems to confirm his approach. Just one more reason to question "rules of thumb" and tune out the marketing messages. I can see why the average investor is so confused...

 

[haha]

Have at it guys, in 20 years let me know how well it worked out.

Ha

 

[Willers]

Have at it guys, in 20 years let me know how well it worked out.

Ha

It sounds like you are highly skeptical. Just curious, is that due to questions about methodology, likelihood of retiree behavior, other?

I'm intrigued...

 

[haha]

It sounds like you are highly skeptical. Just curious, is that due to questions about methodology, likelihood of retiree behavior, other?

I'm intrigued...

Well, I didn't really want to get into a long explanation, but in essence I think the methodology is indirect and unlikely to be anywhere near optimal toward the goal.

But I have more than one minority opinion about things market related, so I wouldn't concern yourself. Maybe I am just a crank.

Ha

 

[Animorph]

I had a friend (in the investment industry) recently tell me that his plan was to be fully invested in equities until his retirement date and then drop it significantly on the day he retired. I consider him to be someone who makes educated decisions I asked him to explain.

His reasoning was very similar to the results of this study. He said that he could get the greatest potential $ return now and that he could continue working if the market really didn't cooperate (he said that 2008 was painful, but that he didn't pull back at all). He explained at the likelihood of going back to work once retired is much lower than people think so he considered his retirement date to be his definite last day of work and was going to drop his equity exposure way down to avoid the sequence of return risk.

Although I'm not sure I'd be OK with a 100% equity AA this close to my planned end date, his general point made sense. Pfau's research seems to confirm his approach. Just one more reason to question "rules of thumb" and tune out the marketing messages. I can see why the average investor is so confused...

That's the approach I was following. Once I decided on a date to retire, about a year in the future, I went conservative with the portfolio. If you time retirement by the size of your portfolio then there's no need to get conservative until you give notice. If you have a target retirement date then you might want to be conservative a little early in order to preserve it.

 

[ClockWatcher]

Can anyone comment on whether this aligns with what Kotlifoff says in spend till the end? I sounds at least similar.

On pages 248 to 249, Laurence J. Kotlikoff and Scott Burns express:

Uncertainty about benefits is greatest in our late forties and fifties, when the benefits are close enough to smell and big enough to matter, but not yet available to touch. Once we hit our golden years and start collecting these benefits, it’s not likely that the government will snatch them away. This pattern of benefit uncertainty with age suggests reducing your stock holdings as you approach retirement but increasing them thereafter.

They later restate their recommendations:

...Where do these new considerations leave us? They leave us with the following roller-coaster portfolio prescription for asset allocation with age: When young, invest a small to moderate share of your financial assets in stock. Increase this share dramatically in middle age. Reduce this share as you approach retirement. Increase the share modestly in early retirement, and reduce this share dramatically in late retirement.

The new study rhymes with Kotlikoff and Burns, but provides more of the numerical details and a somewhat different reasoning with regard to why it is recommended. I look forward to more studies like this.

__________________

 

[Lsbcal]

If this sort of idea takes hold, I can see things being carried to extremes by some. Then we will be treated to news stories of an old guy who started loosing his marbles and swinging for the fences in equities at the same time.

Doesn't cogitative function decrease with age? Perhaps this is another reason to go more conservative as one gets very old.

Just a Sunday afternoon thought.

 

[walkinwood]

Interesting study, but I'm sticking with my fixed 60/40 allocation.

For me, it is a good compromise between an optimal strategy and simplicity. I think I have enough headroom in our plan (and a willingness to be flexible) so that I don't need to get the absolutely optimal result from my investments.

 

[Dwhit]

I would worry about inflation taking a large chunk of net worth of my portfolio if I am too heavy in bonds and fixed income type investments at the beginning of retirement. I am thinking I will stick with my current plan of 60/40 plan along with walkinwood.

 

[ERD50]

...

If you are withdrawing close to the maximum sustainable amount, stay conservative. If you are spending much less than that you can raise equities, creating a better buffer for possible future disasters.

I'm curious why you say this. It seems right on the surface, but I did some FIRECalc runs over 35 year time-frames, and as I went from 4% to 5% to 6% WRs, the 'Investigate Asset Allocation' tab kept moving me towards equities.

For a 6% WR, a 100% stock allocation had the highest success rate.

-ERD50

 

[48Fire]

I will take a better look at this study later, but I like it in concept, and I used it as I neared ER, and now 2 months into ER. Seems similar to the way my 529 automatically changed AA to less stocks as our daughter hit graduation from high school in 2007. At the time, I thought that was conservative, but after the 2008 crash, it turned out to be a great move.

 

[GrayHare]

Extrapolating from past results, over long periods equities have always delivered more return than bonds. That's not going to change after retirement since, after all, stocks have no idea how old their owner is. The relevant matter is risk tolerance. Since "you can't take it with you", at some point in age, increasing risk is increasingly tolerable for the owner. Heirs and beneficiaries may have an entirely different concern.

 

[Meadbh]

My interpretation of the results of the study, combined with modern portfolio theory, is that there are two times when it is optimal to be heavily weighted in equities: first, the accumulation phase up to shortly before retirement, and second, in retirement, after the initial years. I visualize it like a bowtie, cinched in the middle, the width of the bowtie representing volatility. The cinch is a strategy to reduce volatility during what Milevsky calls the "retirement risk period" when a portfolio is most vulnerable to a bad sequence of returns. Once the portfolio has survived the first few retirement years, it is safe, and even preferable, to be a bit more adventurous with equities again.

Just my $0.02.

 

[Animorph]

I'm curious why you say this. It seems right on the surface, but I did some FIRECalc runs over 35 year time-frames, and as I went from 4% to 5% to 6% WRs, the 'Investigate Asset Allocation' tab kept moving me towards equities.

For a 6% WR, a 100% stock allocation had the highest success rate.

-ERD50

That's because I qualified it by "sustainable". If you go with a 5% or 6% WR you have no choice but to up your equities and cross your fingers.

Try this: $1M portfolio with $40k/year WR for 30 years in FIRECalc gives 6 failures. If I entered this correctly, a $800k portfolio with $20k/year withdrawals for 10 years (plus $20k/year from $200k initially held as cash for a $40k total) and $40k withdrawals thereafter all from the portfolio has only 5 failures. Not a fantastic recommendation, but a step in the right direction.

 

[ERD50]

That's because I qualified it by "sustainable". If you go with a 5% or 6% WR you have no choice but to up your equities and cross your fingers.

Try this: $1M portfolio with $40k/year WR for 30 years in FIRECalc gives 6 failures. If I entered this correctly, a $800k portfolio with $20k/year withdrawals for 10 years (plus $20k/year from $200k initially held as cash for a $40k total) and $40k withdrawals thereafter all from the portfolio has only 5 failures. Not a fantastic recommendation, but a step in the right direction.

If I understand how you modeled it, that calculation appears to have a flaw, in that your cash allocation ignores inflation for ten years. You can't count on getting an inflation adjusted $20k per year for ten years from $200,000 of fixed assets. I ran that scenario in FIRECalc, with every combo of fixed assets that they provide, and success rate was around 50% for ten years.

I'm assuming you figured the $20k/$200k was used the first ten years, then entered $40k/$800K for the next 20 years? What AA? Or did you do something else?

-ERD50