As clients age, stock up on stocks

Kitces noted that neither of these papers tested a rising equity glide path, so he conducted his own study. He tested 121 glide paths with a 4% and a 5% withdrawal rate to measure the probability and magnitude of failure.

Using historical average capital market expectations, Kitces found that a declining equity glide path performed the worst. A static glide path performed better and the rising glide path performed best of all. In fact, he found that the ideal glide path started at about 30% of the portfolio allocated to equities, rising to about 60%.

He noted that he's still researching how long the glide path should be, but that it should begin before retirement. If an advisor wants to adopt this strategy for a client who is already retired, Kitces said, "Do the same thing you would for a client who is over-risked."

Kitces recommended that advisors who adopt a rising equity glide path start with half the allocation a client is comfortable with and move up. That way, they never have more equities than they're comfortable with. It also means the equity allocation is smallest at the pivotal point—when the portfolio is largest and stands to lose the most.

Kitces tested the rising equity glide path against sequence risk, too, and found that a smaller allocation to equities earlier helped because if returns early on are bad, rising equities dollar-cost average into cheaper stocks; and if returns are good early on, it doesn't impact how much money they client has to live on, only how much he or she can leave on. "You only die with quintuple your wealth, rather than septuple," Kitces said.

He added that this strategy works best with clients who use a moderate withdrawal rate. He also warned that liquidating too much into cash can be too much of a drag on return.

Kitces continued, "Good results early on mean you're so far ahead, a bear market has no effect. You already do dollar-cost averaging in the accumulation phase. It works just as well in retirement."

This theory naturally brought up the question of target-date funds: Does this mean they're a time bomb waiting to go off? Kitces said that depends on whether they are "to" or "through" funds. "To" TDFs that go flat on equities before retirement might be "OK," he said: since they have already wound down their equity allocation to zero, you can still implement a suitable rising equity glide path.

"'Through' funds are more concerning," Kitces said, because clients enter retirement with a too-aggressive allocation that declines when it should start more conservatively and increase.