Tags: Equity | glidepath | retirement | income

Study: Retirees Should Increase Exposure to Stocks Over Time

By    |   Friday, 06 December 2013 08:41 AM

Retirees should increase their equity allocation over time in what's called the "rising glide" strategy, argues a new research paper published by the Social Science Research Network.

That approach contradicts the traditional advice that investors should shift their holdings from stocks to cash equivalents and supposedly safer bonds as they age.

The paper "Reducing Retirement Risk with a Rising Equity Glidepath" finds that retirees' portfolios that start out conservative and become more aggressive over time can "reduce both the probability of failure and the magnitude of failure for client portfolios," conclude authors Wade Pfau, a professor of retirement income at The American College, and Michael Kitces, a partner and research director at Pinnacle Advisory Group.

Editor’s Note:
5 Phases of a ‘Retirement Heist’ Exposed (See Video)

Portfolios will suffer, they say, if equities perform poorly in the first half of investors' retirement, and then retires reduce equity exposure only to see equities possibly later rebound.

"With a rising equity glide-path, the retiree is less exposed to losses when most vulnerable in early retirement and the equity exposure is greater by the time subsequent good returns finally show up."

The strategy helps sustain greater retirement income over the entire retirement. If equity returns are good early on, retirees will be so far ahead of the game they won't be hurt by asset allocation decisions, the authors say.

"Across all time horizons and withdrawal rates, when examining the approach which provides the highest sustainable withdrawal rates given a prospective 10 percent failure rate, the results consistently show support for rising equity glidepath portfolios."

Their findings have significant implications for financial planners, they assert, saying it suggests traditional advice is "far less than optimal."

The authors of the paper are not fast-talking marketers pushing stocks and telling people what they want to hear by predicting a continually booming stock market, writes John Rekenthaler, vice president of research for Morningstar.

Yet their data don't entirely support their conclusions, he notes. In a conservative scenario for stock returns, the traditional declining-glide approach of reducing stock exposure works best with a 4 percent withdrawal rate. With a 5 percent withdrawal rate, the traditional works better in three different scenarios for stock market performance.

"Some decisions would improve the relative showing of the rising glide path," Rekenthaler concludes. "None, however, would make the tactic anything like a universal rule. Rather, it is an approach that might make sense under some conditions, given certain assumptions."

Editor’s Note: 5 Phases of a ‘Retirement Heist’ Exposed (See Video)

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Retirees should increase their equity allocation over time in what's called the "rising glide" strategy, argues a new research paper.
Friday, 06 December 2013 08:41 AM
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