The debate over the appropriate allocation of a retirement portfolio has been going on for years.
While rules-of-thumb such as "100 minus your age in equities" were once the standard guidance, the popularity of target date funds has animated the discussion in recent years.
The lack of a precise allocation formula among funds has led to debate over the glide path, i.e., how the equity versus fixed income allocation should be adjusted as the targeted retirement date approaches. Funds with steep glide paths shift to more conservative fixed income holdings quickly as the target date nears while other funds take a smoother approach.
The glide path discussion continues to generate interesting research. Here is a summary of several recent articles that are worth reading in full. I provide the articles' titles and authors' names; a Web search will provide the papers' online locations.
Glide Path Caution! A Steep Slope Could Derail Retirement Income Success
Authors: E. Iantchev, M. Jensen, S. O'Toole (Fidelity Investments)
Key findings:
The probability of recovering from a major cyclical equity market decline during the pre-retirement years is higher for gradual sloped glide paths—which typically hold higher equity exposure—than for steep-sloped glide paths.
In a glide path comparison of steeper "To" and more gradual "Through" slopes during the five-year period before retirement, our analysis showed an investor's wealth being greater in a more gradual- sloped "Through" glide path in a significant majority of simulated market environments.
Reducing Retirement Risk with a Rising Equity Glide Path
Authors: W. Pfau, M. Kitces (Journal of Financial Planning)
Key findings:
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.
Overall, the results show that rising equity glide paths from conservative starting points can achieve superior results, even with lower average lifetime equity exposure. 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. A steady or rising glide path provides superior results compared to starting at 60 percent equities and declining to 30 percent over time.
Retirement Risk, Rising Equity Glide Paths, and Valuation-Based Asset Allocation
Authors: M. Kitces, W. Pfau (Journal of Financial Planning)
Key findings:
Based on U.S. historical data, it is difficult to beat a strategy that maintains a consistently high allocation to stocks to the extent that a retiree's risk tolerance allows for this, and subject to the caveat that high stock allocations cannot always be expected to do as well in the future.
