Most retirees may have it backward when it comes to making a nest egg last through their retirement. Here’s why: Common wisdom says that to protect your retirement assets you should slowly scale back your exposure to stocks throughout your retirement years.

But the truth is, it may be safer and smarter to slash your stock holdings as you near retirement or in early retirement, then slowly increase the allocation to stocks over time during retirement.

That’s the startling conclusion of top financial planner Michael Kitces, CFP, who says this counterintuitive strategy reduces the possibility of running out of money.

Bottom Line/Personal asked Kitces why this approach may be more effective and how our readers could use it in their own retirement planning…


Before the 2008 stock market crash, many investors were heavily overweighted in stocks on the eve of their retirement or relatively early in retirement. When the market crash came, many suffered devastating losses.

Fearful of further losses, they became more conservative, selling their stocks at terribly low prices and missing out on much of the stock market’s enormous five-year rebound. They also tended to cut way back on their spending—scrimping at a time when they probably wished they could have been enjoying their first few years of retirement.

This was more than just bad luck and unfortunate timing. Many ­prospective retirees were overlooking something fundamental—how you fare in trying to preserve and extend your money over a typical 30-year or longer retirement is heavily driven by the “sequence” of investment returns you get, especially in the years right before and after you stop working. As a result, strategies with a heavy stock allocation early in retirement may leave you too vulnerable to a stock market crash. Even if there’s no dramatic crash, if you retire at the start of a prolonged period of mediocre returns, you may face severe constraints on your spending in your later years.


A recent research study that Wade D. Pfau and I published provides an alternative. We used computer simulations to see how various mixes of stocks and bonds that change throughout retirement could help determine how long a retiree’s money would last.

What we found is that if you maintain a 60% stock/40% bond allocation throughout retirement—the sort of strategy recommended by many advisers—you have a 93% chance of never running out of money. That doesn’t sound too bad. If you trim your stocks during retirement as you get older—for instance, cutting 1% per year and finishing at 30%—the situation is the same, also with a 93% chance of success.

However, reversing the pattern—starting with a 30% stock/70% bond split and finishing with a 60% stock/40% bond split—produced a better outcome, a 95% probability of never running out of money. Although this may not seem like a huge difference, it is a very significant one when it comes to helping most people prolong their assets, especially since it involves allocating less to stocks for most of your retirement, including when your portfolio may be largest and most prone to disaster (at the start of your retirement).


In addition, when we looked at some of the worst-case scenarios from the simulations, this “increasing-stock-allocation” portfolio still would produce enough money to last an average of more than two years longer than the traditional “decreasing-stock-allocation” portfolio.

This also may not sound like a monumental difference when you are middle-aged and in good health. But imagine that you are in your late 80s, and you realize that you’re almost out of money. It’s especially frightening at an advanced age when you have far fewer options for generating income. To put it mildly, in retirement planning, it pays to skew the odds in your favor as much as possible.

Our strategy can be useful even if you are already retired, as long as you might live for another 20 years or more. It also was a superior strategy using a higher initial spending rate (5% instead of 4%) and when the assumed average returns were much lower (3.4% for stocks and 1.5% for bonds).

However, if your spending rises too high relative to your returns, your only choice becomes owning a lot of stocks throughout retirement and praying things go well. (At that point, the only way to reduce risk and prolong retirement is to spend less!)

Why it works: If there is a big stock market crash and/or bear market around the year in which you retire, owning much less in stocks means that you take much less of an immediate hit. In the ensuing years, as you gradually raise your stock allocation, you essentially are loading up on stocks when they are cheap. If, on the other hand, the stock market soars around your retirement year, owning much less in stocks may mean that you don’t leave quite as large of an inheritance, but you still will be on track to make your money last until age 95.


To make this strategy work, you need to carry it out in the following way…

Decrease your stock allocation when you retire (or in the years leading up to retirement). Our research suggests that you need only about 30% of your portfolio in stocks the day you retire (as long as you’re ready to gradually increase later).

Note: Many investors are nervous about increasing their bond exposure right now, given the potential for bond values to decline as interest rates rise, as they are likely to do in the next several years. But the key here is that the bonds we used—US Treasuries with maturities from three to 10 years—still aren’t nearly as risky as the stock component of the portfolio. Owning less in bonds and more in stocks still is the greater retirement risk. Bond risks can be further managed by using individual bonds in a bond ladder, rather than bond funds, or buying shorter-term bonds (which lose less when rates rise) and waiting to reinvest at higher rates in the future.

Upon retirement, start increasing your stock allocation by one percentage point a year. If you enter retirement with a 30% stock/70% bond portfolio, after the first year, rebalance to 31% stocks/69% bonds…the second year, 32% stocks/68% bonds…and so on.

You also can help manage year-to-year volatility by keeping one year’s worth of living expenses in cash, perhaps in a high-yield online savings account, and using money from whichever investment has fared best to replenish it.

You may want to reassess your need for an increasing-stock-allocation strategy once you reach what you estimate to be the latter half of your retirement. If your portfolio is much larger than you expected at this point, you can do one of the following—decide to become more conservative and dial back on stocks…continue increasing your stock allocation annually but start withdrawing more each year…or plan on leaving a bigger inheritance for your heirs.

Important: No retirement strategy is foolproof. Retirement strategies of all sorts still are subject to the risk that investment returns in the future are even worse than any disasters we have ever seen in history, so there always is a possibility that a few further adjustments will be necessary. If one of those true economic disaster scenarios unfolds, you can either tighten your belt and draw down less annually for a period of time, especially in down years for the stock market…or try to further diversify your portfolio, for instance, with foreign and small-cap stocks.


Here’s how financial planner Michael Kitces describes his groundbreaking retirement investment study…

To do our analysis, we started by using two simple asset classes—large-capitalization stocks (the kind of big companies found in the Standard & Poor’s 500 stock index) and ­intermediate-term US Treasuries that mature in three to 10 years. We tested a number of situations, including average returns consistent with history and lower-return environments where stocks alone or both stocks and bonds are less rewarding.

We ran these criteria through computer simulations to consider thousands of possible market-­performance scenarios for a 30-year period, allowing us to evaluate the risk to a retirement plan and the implications of good and bad markets and various sequences of returns. We assumed that retirees would start out spending either 4% or 5% of their initial portfolio and would adjust that dollar amount each subsequent year for inflation (so “real” spending remained consistent for life).

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