Two well-respected financial planning researchers, Michael Kitces and Wade Pfau, dropped a bombshell on the retirement planning community a few years ago.
In a paper titled “Reducing Retirement Risk with a Rising Equity Glide-Path,” they suggested that it may be time to rethink the conventional approach of reducing stock holdings later in life (a standard method for reducing portfolio risk).
The conventional model for later-life asset allocation calls for cutting back on the proportion of stock holdings in the years leading up to retirement, and then continuing to reduce the stock portion through retirement, as shown in the first graph below. (Target-date funds, widely available in employer-sponsored plans, use declining glide-path models.)
However, Kitces and Pfau presented evidence that supports a “U-shaped glide-path.” Such a plan calls for reducing stock holdings to their lowest levels in the years immediately surrounding one’s retirement date, but then gradually increasing the proportion of stock holdings as the retirement years unfold (see bottom graph). The Kitces/Pfau research concluded that such an approach would lead to better outcomes.
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