Why Your Allocation Should Change in Retirement
Your risk capacity (your portfolio's ability to weather a market decline) is not constant. It changes as you move through retirement.
Early retirement: Your ability to weather a market decline may be quite constrained. A major downturn forces you to withdraw from a depressed portfolio, locking in losses. Your risk capacity could be limited, even if your risk tolerance is high.
Mid-retirement: The sequence risk window may have passed. Your portfolio may have grown or stabilized through several years of withdrawals. Your ability to weather volatility may have increased.
Later retirement: For some retirees, a longer time horizon may provide more opportunity to recover from market declines. A portfolio that is overly conservative for a long retirement may increase the risk that portfolio growth fails to keep pace with spending needs and inflation. However, the appropriate allocation still depends on individual spending flexibility, guaranteed income, and time horizon.
The insight: Your circumstances change in retirement. Your allocation approach may benefit from adapting accordingly.
Understanding the Glide Path Framework
A glide path defines your target allocation at different stages of retirement. Rather than rigid year markers, think of stages tied to your changing circumstances.
Stage 1: Critical Early Period
Objective: Downside protection, stability
Allocation consideration: Higher fixed income, lower equities
Reasoning: Sequence-of-returns risk can be particularly important during the early retirement period because portfolio withdrawals occur while the portfolio is exposed to market volatility. A higher allocation to fixed income and other defensive holdings can provide flexibility to meet spending needs without forced selling during downturns.
Stage 2: Mid-Retirement
Objective: Balanced growth and stability
Allocation consideration: Moderately higher equities, adequate fixed income
Reasoning: The portfolio's vulnerability to sequence-of-returns risk may decline over time, particularly if the portfolio has successfully navigated the early retirement years. However, sequence risk does not disappear at a predetermined point and can remain relevant depending on withdrawals, portfolio size, market returns, and remaining time horizon.
Stage 3: Later Retirement
Objective: Long-term growth to guard against extended retirements
Allocation consideration: Moderate-to-higher equities, stable fixed income foundation
Reasoning: Some retirees may still have a meaningful remaining investment horizon, particularly if they live longer than initially expected. Maintaining too little growth exposure for an extended retirement can increase the risk that portfolio growth fails to keep pace with spending and inflation. However, a shorter remaining horizon can also reduce the capacity to tolerate investment volatility. The balance between sequence risk and longevity risk depends on individual circumstances including portfolio size, spending needs, and guaranteed income.
Transition mechanism: Rather than sudden jumps in allocation, a glide path typically involves gradual shifts. On a regular schedule, you review and adjust your target allocation.
Flexibility: A glide path is not rigid. Major changes in circumstances, such as a windfall, inheritance, material change in spending needs, or a significant change in expected longevity, may warrant reconsidering the glide path. But the glide path provides a baseline: a direction of travel.
Designing Your Glide Path: Key Decisions
Decision 1: What's your total return target? Your portfolio withdrawal rate is one factor in determining an appropriate allocation. Higher withdrawal rates generally increase portfolio sustainability risk. Higher equity exposure can increase expected returns, but also increases volatility and sequence risk. A retiree with higher withdrawal needs might instead address this through lower spending, additional income sources, or other strategies.
Decision 2: What's your time horizon? A retiree age 65 with a life expectancy of 90+ may have a 25-year horizon. A retiree age 80 may have a 10-year horizon. A longer horizon can provide more time for a portfolio to recover from market declines, but it does not automatically mean that a retiree should take more investment risk. Risk capacity also depends on withdrawal rate, portfolio size, and spending flexibility.
Decision 3: Do you have other income sources? A substantial source of reliable income from pensions or Social Security may increase a retiree's capacity to tolerate portfolio volatility, since less of the required spending depends directly on portfolio withdrawals. This does not automatically mean higher equity allocation is appropriate, as the decision depends on your overall financial situation, risk tolerance, time horizon, spending flexibility, and other assets. When considering household-level resources, guaranteed income acts as part of the household's fixed-income base.
If pension or Social Security covers some but not all expenses, the remaining spending needs must be funded by some combination of portfolio withdrawals and other available resources (rental income, part-time work, cash reserves, etc.).
If you have limited guaranteed income, a larger portion of your spending may depend on portfolio assets. This can make withdrawal rate, portfolio size, asset allocation, and spending flexibility particularly important.
Decision 4: What triggers a glide path adjustment? Some retirees adjust regularly. Others adjust only when significant life events occur. Define your rules upfront to avoid emotion-driven decisions.
Decision 5: How granular do you want to be? A simple glide path: Broad targets with general flexibility. A detailed glide path: Specific allocation percentages, duration targets, rebalancing rules. A moderate approach: Clear targets with flexibility for life circumstances.
Implementing Your Glide Path: Rebalancing Discipline
On a regular schedule, review your current allocation against your glide path target. If you've drifted significantly, rebalance.
Rebalancing in Down Markets
This is the hardest part of rebalancing discipline. When equities decline and fall below their target allocation, rebalancing may require moving some assets from fixed income or other holdings into equities. This can result in buying equities after a decline. Psychologically, this feels wrong. But consistent rebalancing is an important part of maintaining a predetermined allocation strategy.
Rebalancing in Up Markets
When equities are up, rebalancing may involve trimming equities and increasing fixed income. This also feels counterintuitive and is an important part of maintaining a predetermined allocation strategy.
When to Adjust (Not Abandon) Your Glide Path
Certain events warrant re-examination:
- Major windfall or inheritance: Your spending needs change.
- Material change in expected longevity or life circumstances: Time horizon or goals may shift.
- Tax law or regulatory change: Your planning assumptions change.
- Spending needs materially increase or decrease: Your return target changes.
The key is maintaining a predetermined strategy. The potential benefits of a glide path depend in part on implementing it consistently rather than abandoning it in response to short-term market movements. Adjust your glide path only after careful reflection on whether your circumstances have fundamentally shifted.
Total Returns vs. Income-Focused Approaches
Some retirees focus on yield: they want a portfolio that generates cash from dividends and interest, with the goal of "living off the income."
This can backfire. Yield-seeking often means overweighting fixed income and certain dividend stocks, which might lock you into a conservative allocation regardless of your time horizon. Some higher-yield investments carry different risk characteristics than their yields might suggest.
The total return approach is different:
Instead of focusing on where your returns come from (dividend, interest, capital appreciation), a total-return approach focuses on total portfolio growth. Under this approach, withdrawals are funded from the portfolio as a whole rather than being limited to dividends and interest. Withdrawals still need to account for taxes, account location, and portfolio sustainability.
Example: A portfolio with a higher fixed-income allocation and a lower equity allocation may generate returns from interest, dividends, and price movements across both asset classes. You withdraw what your plan requires regardless of which portion generates the return.
Why this matters for your glide path: Your glide path targets allocation, not income. As the allocation changes over time, the portfolio's expected risk and return characteristics also change. That may affect the portfolio's ability to support spending over a long retirement, depending on market conditions and your spending needs.
Different Approaches to Retirement Allocation
Different strategies can address sequence-of-returns risk and longevity risk, and research supports multiple approaches depending on individual circumstances:
Static allocation (maintaining the same mix throughout retirement):
- Pros: Simple, easy to implement and monitor, consistent exposure, less decision-making
- Cons: Does not explicitly adjust the target allocation as circumstances change, may not align with every retiree's changing risk capacity or spending needs
Rising-equity glide path (increasing equity exposure over time):
- Pros: Can reduce equity exposure during the early retirement period, can increase growth exposure later, provides a predetermined framework
- Cons: Requires becoming more aggressive later in retirement, may not be appropriate for every retiree, requires discipline and monitoring
Declining-equity glide path (decreasing equity exposure over time):
- Pros: Can provide increasing stability as remaining lifespan shortens, may align with some retirees' goals
- Cons: May reduce growth potential late in retirement for those with long horizons
Other approaches: Some retirees use dynamic approaches, hybrid strategies, or combine asset allocation with other techniques such as spending flexibility or guaranteed income. The appropriate strategy depends on individual goals, risk tolerance, time horizon, and circumstances.
Monitoring Your Glide Path Over Time
Regular check-ins: Review your allocation quarterly or annually against your glide path targets. Rebalance if you've drifted significantly.
Periodic deep-dive reviews: Beyond rebalancing, ask bigger questions:
- Are your spending needs changing?
- Has your time horizon shifted?
- Have market conditions materially changed your asset base?
- Do you still believe in your glide path, or do circumstances warrant a reset?
Avoiding reactive changes: Resist the urge to overhaul your glide path based on headlines or short-term market moves. A glide path is a multi-year commitment. The discipline only works if you follow it.
Deeper Dives: Related Topics
For related strategies beyond glide path mechanics, explore:
→ Related strategyTax-Efficient Asset Location →The Bottom Line
A rising-equity glide path is one approach to managing retirement portfolio allocation over time. It can be a useful strategy for retirees concerned about early-retirement sequence-of-returns risk, and research supports it as a legitimate approach in certain circumstances.
However, a rising-equity glide path is not universally appropriate for all retirees. Other strategies, including static allocations and declining-equity glide paths, may be equally valid depending on your individual circumstances, objectives, risk tolerance, spending needs, guaranteed income, and time horizon.
Any allocation strategy requires disciplined execution. Whether you use a glide path, static allocation, or another approach, maintaining a predetermined plan and avoiding reactive changes based on short-term market movements can help reduce emotional decision-making.
For advice tailored to your specific situation, consult with a financial advisor who can evaluate your personal circumstances and help you select an approach aligned with your goals.
Educational Disclosure
This article presents educational information about rising-equity glide path strategies and other retirement allocation approaches. The information provided is illustrative and for explanatory purposes only, and does not constitute investment advice or recommendations for any particular investor.
Research supports multiple retirement allocation strategies. The appropriate strategy for your situation depends on your individual circumstances, risk tolerance, spending needs, guaranteed income, time horizon, and financial capacity. A rising-equity glide path is one approach among several legitimate alternatives, and may not be appropriate for every retiree.
Before making investment decisions, consult with a qualified financial advisor who can evaluate your specific situation and help you develop a strategy aligned with your goals and circumstances.