The purpose of this study is to address this question. Arguably, for someone willing to pay careful attention to the evolving funding status of their retirement (the present value of their remaining assets divided by the present value of their remaining liabilities), asset allocation can be adjusted dynamically by matching assets to liabilities in coordination with the client’s risk capacity and risk aversion, rather than just on an arbitrary path.įor those unwilling to take such care, including users of target date or lifecycle asset allocation funds, or for those whose goals are somewhat more complex in the balancing of current and future income and legacy goals, what should be the default equity glide path in the postretirement period? Nonetheless, even with some equity exposure at the start of retirement, many advisers still justify the concept of a declining equity exposure throughout retirement on the basis that a retiree’s time horizon shortens with each passing year. However, because of the need to provide for an extended period of retirement income and generate growth necessary to maintain inflation-adjusted withdrawals, equity exposure typically does not fall all the way to zero.

Their equity exposure should decline accordingly.Īt retirement, human capital falls to zero. As their time horizon to retirement shortens and the buffer value of their human capital declines, so too does their capacity for financial risk. Their main asset will be the present value of lifetime future earnings, which gives them the capacity to take significant risks with their financial capital. When young, most clients have saved little. During the accumulation phase, this can be justified theoretically by considering a household’s entire balance sheet including human capital. A steady or rising glide path provides superior results compared to starting at 60 percent equities and declining to 30 percent over time.Ĭonventional wisdom suggests an “age in bonds” style asset allocation strategy over a person’s lifetime. For instance, a portfolio that starts at 30 percent in equities and finishes at 60 percent performs better than a portfolio that starts and finishes at 60 percent equities. Overall, the results show that rising equity glide paths from conservative starting points can achieve superior results, even with lower average lifetime equity exposure.Results show, 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.

This study explores the issue of what is an appropriate default equity glide path for client portfolios during the retirement phase of the lifecycle.Kitces, CFP ®, CLU ®, ChFC ®, RHU, REBC, is a partner and the director of research for Pinnacle Advisory Group and the publisher of The Kitces Report newsletter and the financial planning industry blog Nerd’s Eye View through his website. He hosts the Retirement Researcher blog at. Pfau, Ph.D., CFA, is a professor of retirement income at The American College and the 2011 recipient of the Journal’s Montgomery-Warschauer Award. Journal of Financial Planning: January 2014

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