Stock allocation strategies when approaching and entering retirement
How should investors think about their stock allocation as they approach and then enter retirement?
Other highlights from this webcast
Emily Farrell: So thinking about that glide path, you talked about Target Retirement Funds or targeted funds in general, and kind of how we think about it, Joel from Delray Beach, Florida, asked us, “Do you subscribe to the approach where you use a rising glide path for equity allocation?”
Kimberly Stockton: Short answer is no.
Emily Farrell: Right to it. Sorry, Joel.
Kimberly Stockton: Yes. Yes, that can be thought of as a U-shaped glide path, right? So the idea is you decrease equity allocation up until you get to retirement. And then at that point, you start to increase your equity allocation and take on more risk. And the rationale is that if there is a downturn in the market right when you retire, if you have a small allocation to equity, you’ll have time to recover from that.
But what that also means, if you think about it, is you’re increasing the equity allocation. So for investors late in retirement, you’re going to end up with a very large equity allocation, a lot of volatility, which we think most investors would not be comfortable with that level of volatility late in retirement. We just don’t think that’s an appropriate risk to take.
Emily Farrell: “Has Vanguard changed its view of the appropriate mix of stocks and bonds given that people are living much longer and spending significantly more years in retirement?” Okay, so, again, maybe kind of related to that idea should you be upping your equity allocation.
Kimberly Stockton: Yes, yes. So when we’re building the retirement portfolio, I mentioned it’s important to think about different types of risk, not just market risk. Longevity risk is an important consideration. And that’s just the risk of outliving your retirement assets, your financial resources. And definitely that risk has increased as life expectancy has increased in developed countries all around the world. And that is a factor that we think investors who are developing their own asset allocation should consider. We think you should plan beyond your median, your expected life expectancy, definitely. It’s something we think about when we build our Target Retirement Funds and the asset allocation there. We look at various simulations of the probability of meeting retirement income needs.
And in our model, an important factor is life expectancy. So longer life expectancy, that is a longer time horizon that would definitely indicate potentially more risk could be taken and maybe needs to be taken because you’ll be spending longer. And that’s one of the reasons why we have that 30% equity allocation in retirement and we maintain that for what can be a long time horizon.