Don’t Fear Stocks in Retirement

One of the more common beliefs about retirement finance — call it “conventional wisdom” — is that the older you are, the less exposure to equities you should have. In other words, with each passing year in retirement, you should cut back on your percentage of stocks in your portfolio. 

But I think that’s the wrong approach. In fact, you may want to do the exact opposite. 

To be clear: for someone who is approaching retirement, but isn’t there yet, it could actually be a very good idea to begin lowering their allocation to stocks. One way to do that might be to change your allocation in, say, your 401k to include a higher percentage of non-volatile assets, thus lowering your exposure to stocks as you get closer to your retirement date. By doing that, if the market happens to have a bad sequence of returns just as you start your retirement, you’re potentially more protected on the downside. But keep the new contributions going to the stocks. 

But once you do retire, and you start withdrawing money from your portfolio, it’s at this point where the “own fewer stocks” idea needs to change. Once you begin your distribution phase, retirement research suggests that you actually may be better off with an increasing exposure to stocks — what they call a “rising equity glidepath.”  According to Michael Kitces, the sweet spot to increase the probability of retirement success and minimize probability of failure seems to be 30% equities at the beginning of retirement, then drifting up to 70% as you get older. 

One way to raise the percentage of stocks is to spend down the non-volatile assets in your portfolio first, where you try to use a reserve of cash and bonds, or bond equivalents, to cover your spending needs for the first 10, 12, or even 15 years. By doing it this way, and leaving the stocks alone for that period of time, the percentage of equities you own goes up by default. This is a major component of our Bucket Strategy, where the goal is to take advantage of the long-term potential of stocks while taking a steady, predictable cash flow from non-volatile asset sources. 

And consider this: by slowly increasing your percentage of stocks at retirement, you may be able to take advantage of what the market gives you. Remember, when taking an income for retirement, outcomes for a retirement that lasts 30 years are driven heavily by the results you get over the first 15 years. So if those first 15 years are positive for the markets, your equities will have grown, potentially giving you enough money to get through the next 15 years. But if the first 15 years are negative, a rising exposure to equities is similar to systematically dollar cost averaging into the market, which may put you at a nice advantage for a potential recovery during the next 15 years. 

Of course, no one can predict the future, and nothing is ever guaranteed.  But intuition would tell you that you may be far better off having a strategy that aims to get you through the down times, while potentially growing through the good times with a predictable monthly income. That’s why we do Buckets. 

At Lucia Capital Group, we believe in looking at both conventional and unconventional wisdom to help our clients navigate through the retirement maze. How can we help you the most?  Just give us a call.