This got me thinking. We are supposedly seven to eight years away from early retirement, making us the financial equivalent of a typical fifty-eight year old. In retirement years, we're flipping old! Is our asset allocation appropriate for our retirement age? More importantly, with the especially short acquisition time frame & correspondingly longer period of retirement, does the typical glide path asset allocation logic apply? That is, can we afford to get conservative if we are planning to live off our nest egg for sixty years, instead of the typical thirty?
I have no good answers to these questions. At Bryce's suggestion, I read the Bogleheads Wiki on glide paths, which gives a good overview of different popular strategies. The general sense with glide paths is to reduce the percentage of risky equities & increase the percentage of less risky assets (fixed income & money markets) as you approach retirement, & even further as you move through it. The variation in the strategies is in how you move from risky assets to safer ones: straight line, steps down, or in waves that, when graphed, conjure memories of old calculus classes. But the Boglehead wiki, while informative, doesn't specifically talk about early retirees, and whether any specific model (or modification) should be considered.
I poked around on Google and, just to confuse me, the best article I found tells the complete opposite story. Michael Kitces' excellent blog, Nerd's Eye View, argues that instead of decreasing equity exposure in retirement, the prudent strategy is to do the opposite & increase equity exposure in retirement: a "rising glide path." The idea is that the primary risk to a retiree is a bad market in the first fifteen years of retirement. This can mean a once-in-a-generation crash, but the more dire risk is a prolonged period of very meager gains: a long flat market. If a traditional retiree with a downward glide path is unlucky enough to start at the wrong time and starts to liquidate equities then, when the market recovers, he or she doesn't have enough stock exposure to benefit from it. He or she has started retirement with fewer stocks & has been further reducing that percentage over time. The better strategy is counter-intuitive to most retirees: to avoid the risk of a down stock market during the first part of retirement, increase your stock exposure over time during retirement. Kitces goes through an excellent review of the strategy & details it with math & charts that make my brain hurt. Smart people should definitely click the link at the beginning of this paragraph and check it out. Average minded people like me can take his summary at face value:
In this context, the problem with the "traditional" approach of decreasing equity exposure through retirement becomes clear. If the retiree started in an environment like the late 1920s or late 1960s and decreases equity exposure systematically (e.g., by 1% to 2% per year), then by the time the good returns finally show up (about 15 years later) equity exposure will have been decreased so much that there simply won't be enough in equities to benefit when the good returns do show up. In other words, even if spending was conservative enough to survive the time period, selling equities throughout flat or declining markets amounts to liquidating while the market is down and not being able to participate in the recovery and the next big bull market whenever it finally arrives. Conversely, when the equity glidepath is rising and the retiree adds to equities throughout retirement (and/or especially in the first half of retirement), then by the time the market reaches a bottom and the next big bull market finally begins, equity exposure is greater and the retiree can participate even more!As usual, my attempt to gain knowledge & find a plan has just resulted in confusion. So I'll take the lazy way out and ask you, the smart people who read this blog, to help. Do you think it's better for a retiree to have a declining glide path in retirement or a rising one (or, for a third option, a static asset allocation with annual rebalancing)? While these sources provide contrary strategies, neither of them talks about the wrinkle of early retirement, which involves a much longer retirement period (or, at least we hope it does). Even if one strategy is better for a traditional retiree, maybe the answer is different when you consider a sixty or seventy year draw down period.
And does the short accumulation phase for early retirees (typically five to twenty years) have any impact? That is, should early retirees have a more aggressive or more conservative asset allocation while building their nest egg, given that their plan only accounts for a decade or two of saving?
Questions to the readers:
What sort of glide path are you hoping to employ in retirement? And if you're willing to share, what plans do you have for your asset allocation during your years leading up to an early retirement?
As always, thanks for stopping by and reading.
Photo is from oldandsolo at Flickr Creative Commons.