What the numbers suggest.
More Stocks, Please
Yesterday's column asked whether retirees should own more stocks over time. That is, perhaps mutual funds that are built for retirees should increase their equity allocations each year, thereby using a rising glide path, rather than follow either a flat glide path or the declining glide path used by most target-date funds. My source was "Reducing Retirement Risk with a Rising Equity Glidepath," a paper by Wade Pfau and Michael Kitces that evaluates income-withdrawal strategies across a variety of asset allocations and glide-path decisions.
The column evaluated two asset allocations, one with an average of 25% equities during retirement and the other with an average of 45% equities. I selected those two allocations because they typified the stock allocations found in the largest retirement-income funds. If the proposal is to change institutional investment habits, then the 25% and 45% portfolios are the appropriate ones to evaluate.
The findings did not fully support the authors' contention.
For the 25% portfolio, the traditional approach of reducing stock exposure over time looked better than the flat path, which in turn looked somewhat better than the proposal of increasing stock exposure. For the 45% portfolio, however, one could make the reverse argument. Not with great conviction, to be sure, as the results were similar for all three strategies, but there were advantages in some situations to adopting a rising glide path.
Today, we'll look at the results for higher stock allocations. In a sense, this analysis is mostly theoretical, as few fund companies are offering in-retirement funds that consist of mostly stocks. However, investors can certainly construct such a tactic on their own. In addition, the findings may stimulate fund companies to re-evaluate their current practices.
The results for a 55% average stock allocation, across each of the paper's three market-forecast scenarios (see yesterday's column for more details):