More Stocks as You Near Retirement?

It has been accepted as common wisdom that as you near retirement one should decrease their equity exposure and increase their fixed income exposure. However, more and more research is beginning to challenge this notion and it pays to carefully examine this widely held retirement assumption.

According to the World Bank, the average life expectancy is 79 so the goal is to ensure your retirement funds do not run out in your lifetime. For example, if you have a $500,000 portfolio allocated 60 percent to stocks (equity) and 40 percent bonds (fixed income) your nest egg will likely last forever if you withdraw only 4% annually, based on research from Informa Financial Intelligence’s Zephyr business.

However, the above scenario may not make sense for a growing number of near-retirees. Academics like Wade Pfau of the American College state that both stock market valuations have never been this high while at the same time interest rates being at historic lows. Coupled with industry thinkers like Michael Kitces who have proffered ideas such as 70/30 or even 80% to equities in certain situations, the nearly cemented theory of decreasing equity exposure is weakening under examination.

When looking at both asset classes, the idea is that stocks offer better returns over periods of time, so when corrections come if you are more in equities you get to dollar cost average back into stocks at low prices. When the market comes back, your portfolio is larger versus being more in fixed income, thus at retirement and drawing down comes, you have a larger value in total.

The new variables to consider when thinking about how to allocate a portfolio include the potential for low interest rates for extended periods of time, longer expected longevity, and of course how much you want or need to spend in retirement.

Your spending in retirement factor quite highly in the calculation, especially if your lifespan is far greater than the 79-year average. There have been recent studies showing that new retirees actually spend more in their early years because they have more time on their hands to travel, see family, pursue hobbies and these activities all cost money, which means either tapping into savings or reducing reinvestments back into equities. Having a conversation with your financial advisor about these issues is important, notably having a candid dialog on a spending plan is vital.

The central point here is to not lock into your mind that your allocation between stock and bond investments is fixed, but rather be open to the research and discussion of other options in order to have the potential for a less risky and more enjoyable retirement. is the premier matchmaker between investors and advisors using personalized data, proprietary algorithms, and deep industry experience.