Rising Equity Glide Path vs Annual Rebalancing of a retirement portfolio?

GazzaBloom

Anyone looked into using a rising equity glide path at start or retirement to counter sequence of returns risk?

In the Timeline retirement planning app I modelled a portfolio shift to 55% equities and 45% MMF at start of retirement and set the drawdown to consume the MMF first vs a 80/20 equities/MMF portfolio that is rebalanced annually and the results surprised me a little. Consuming the MMF first, for the first years of retirement and leaving the equities until the cash/MMF was depleted creates a rising equity percentage that reaches 100% around state pension age in this plan.

Both show 100% success rate when historically back tested, based on the same annual drawdown amounts with 5% adjustment amount Guyton's guardrails set for first 12 years, the same state pensions and other fixed income amounts in each plan. However, the worst case scenario with the rising equity glide path has a significantly higher forecast end balance than the annually rebalanced portfolio and only a modest reduction in forecast end of life balances for the median and best case scenarios.

This suggests that the rising equity glide path will fare better in a poor market and counter any early years sequence of returns risk giving some valuable peace of mind through those early retirement years allowing the reduced amount of starting equities to compound through any early retirement volatility but sacrificing some potential end of life legacy.

The recent market volatility has been a reminder of what choppy markets are like after a bumper couple of years and I am seriously looking at this approach, especially as high US equity valuations are predicted to return lower average returns over the next decade by some forecasts.

Even a diversified global equities tracker will be impacted should this happen due to its high US and Mag 7 concentration and lofty valuations and could underperform should there be another lost decade or reversion to the mean for the US stocks.

Rather than try and be “clever” (you can substitute the word clever as you see fit) and try to actively manage shifting an equities portfolio around trying to guess where the value will be by under weighting this or over weighting that, a rising equity glide path may be a better set and forget approach to managing your growth equities via a global tracker and any potential reversion to the mean for US equity returns over the next decade for an imminent retiree relying on equities for long term growth

OldScientist

Two papers on rising equity glidepaths that might be of interest

Pfau, W. D., and Kitces M. E. (2014). “Reducing Retirement Risk with a Rising Equity Glide Path.” Journal of Financial Planning, 27, 38-48.

and

Estrada, J. (2016). “The Retirement Glidepath: An International Perspective.” The Journal of Investing, 25 (2) 28-54; DOI: https://doi.org/10.3905/joi.2016.25.2.028

A quote from the second paper is probably relevant

The financial world is becoming increasingly complex, often for all the wrong reasons; and yet simple strategies, however underrated, are sometimes hard to beat. This certainly applies to the many and varied recommendations that retirees have received from financial planners over the years. And yet a simple, static all‐equity portfolio or a 60‐40 stock‐bond allocation are not only easy for retirees to implement but also supported by the comprehensive evidence discussed here. 

GazzaBloom

OldScientist said:

Two papers on rising equity glidepaths that might be of interest

Pfau, W. D., and Kitces M. E. (2014). “Reducing Retirement Risk with a Rising Equity Glide Path.” Journal of Financial Planning, 27, 38-48.

and

Estrada, J. (2016). “The Retirement Glidepath: An International Perspective.” The Journal of Investing, 25 (2) 28-54; DOI: https://doi.org/10.3905/joi.2016.25.2.028

A quote from the second paper is probably relevant

The financial world is becoming increasingly complex, often for all the wrong reasons; and yet simple strategies, however underrated, are sometimes hard to beat. This certainly applies to the many and varied recommendations that retirees have received from financial planners over the years. And yet a simple, static all‐equity portfolio or a 60‐40 stock‐bond allocation are not only easy for retirees to implement but also supported by the comprehensive evidence discussed here. 

Back testing against 60/40 stocks/bonds gives lower end balances in worst/median and best scenarios in Timeline vs the rising equity glide path using stocks/MMF (cash), 2022 would have been a worrying year to retire into with a 60/40 stocks and bonds portfolio. 

There are many ways to Jericho I guess and the right, most economic path will not be reveal itself until after fact in 30-40 years time.

Bostonerimus1

After reading the Pfau paper and doing a few simulations I decided to do a rising equity glide path in retirement. I  first secured enough income from sources other than my DC and GIA funds and then just stopped rebalancing. At retirement I had about 70% equities and last time I looked I was at almost 90% equities...it's probably a little less today. Still I don't trade or rebalance and I expect that my equity allocation will tend towards 100% as I age.

It's also important to realize that Pfau did his studies into rising equity paths while advocating for annuities and various other insurance products to provide a base of income that could be supplemented from equity heavy drawdowns.

GazzaBloom

Bostonerimus1 said:

After reading the Pfau paper and doing a few simulations I decided to do a rising equity glide path in retirement. I  first secured enough income from sources other than my DC and GIA funds and then just stopped rebalancing. At retirement I had about 70% equities and last time I looked I was at almost 90% equities...it's probably a little less today. Still I don't trade or rebalance and I expect that my equity allocation will tend towards 100% as I age.

It's also important to realize that Pfau did his studies into rising equity paths while advocating for annuities and various other insurance products to provide a base of income that could be supplemented from equity heavy drawdowns.

Sounds good. 

We have 30% fixed income covering base living costs at start of retirement rising to probably 90+% once both wife & my state pensions start paying out.

We would hardly need to draw much from a potential 100% equities portfolio at tat point so the volatility would not be an issue that far down the road.

If things went well leading up to that point it would be easy enough to ladle off 5-6 years worth of cash from the equities growth at an opportune time and be able to start a rising glide path again.  

Bostonerimus1

GazzaBloom said:

Bostonerimus1 said:

After reading the Pfau paper and doing a few simulations I decided to do a rising equity glide path in retirement. I  first secured enough income from sources other than my DC and GIA funds and then just stopped rebalancing. At retirement I had about 70% equities and last time I looked I was at almost 90% equities...it's probably a little less today. Still I don't trade or rebalance and I expect that my equity allocation will tend towards 100% as I age.

It's also important to realize that Pfau did his studies into rising equity paths while advocating for annuities and various other insurance products to provide a base of income that could be supplemented from equity heavy drawdowns.

Sounds good. 

We have 30% fixed income covering base living costs at start of retirement rising to probably 90+% once both wife & my state pensions start paying out.

We would hardly need to draw much from a potential 100% equities portfolio at tat point so the volatility would not be an issue that far down the road.

If things went well leading up to that point it would be easy enough to ladle off 5-6 years worth of cash from the equities growth at an opportune time and be able to start a rising glide path again.  

I think the take away from the Pfau Kitches research is to start conservatively so you can survive SORR scenarios and then you take more risk with equities as the number of years of income you need to fund decreases. It's important to look at the assumptions they've made for withdrawals, growth of various assets and also their success probability. If you are doing 4% drawdown the success rate is actually quite insensitive to your equity starting and finishing percentages, so take all this with a grain of salt.

My adoption of an rising equity glide path was mostly influenced by laziness and wanting to leave a legacy for my heirs. So I started with a high equity percentage as SORR was irrelevant to me as I have a DB pension and rental income and I just stopped rebalancing. The greater return of equities relative to bonds over the past decade has naturally skewed my portfolio further towards equities.

OldScientist

GazzaBloom said:

OldScientist said:

Two papers on rising equity glidepaths that might be of interest

Pfau, W. D., and Kitces M. E. (2014). “Reducing Retirement Risk with a Rising Equity Glide Path.” Journal of Financial Planning, 27, 38-48.

and

Estrada, J. (2016). “The Retirement Glidepath: An International Perspective.” The Journal of Investing, 25 (2) 28-54; DOI: https://doi.org/10.3905/joi.2016.25.2.028

A quote from the second paper is probably relevant

The financial world is becoming increasingly complex, often for all the wrong reasons; and yet simple strategies, however underrated, are sometimes hard to beat. This certainly applies to the many and varied recommendations that retirees have received from financial planners over the years. And yet a simple, static all‐equity portfolio or a 60‐40 stock‐bond allocation are not only easy for retirees to implement but also supported by the comprehensive evidence discussed here. 

Back testing against 60/40 stocks/bonds gives lower end balances in worst/median and best scenarios in Timeline vs the rising equity glide path using stocks/MMF (cash), 2022 would have been a worrying year to retire into with a 60/40 stocks and bonds portfolio. 

There are many ways to Jericho I guess and the right, most economic path will not be reveal itself until after fact in 30-40 years time.

The effect of bonds in 2022 depended on what duration you went in with. Overall, the duration of my fixed income (including cash) was about 2 years.

Couldn't agree more with your last sentence. I hope I live long enough to see!

Hoenir

GazzaBloom said:

OldScientist said:

Two papers on rising equity glidepaths that might be of interest

Pfau, W. D., and Kitces M. E. (2014). “Reducing Retirement Risk with a Rising Equity Glide Path.” Journal of Financial Planning, 27, 38-48.

and

Estrada, J. (2016). “The Retirement Glidepath: An International Perspective.” The Journal of Investing, 25 (2) 28-54; DOI: https://doi.org/10.3905/joi.2016.25.2.028

A quote from the second paper is probably relevant

The financial world is becoming increasingly complex, often for all the wrong reasons; and yet simple strategies, however underrated, are sometimes hard to beat. This certainly applies to the many and varied recommendations that retirees have received from financial planners over the years. And yet a simple, static all‐equity portfolio or a 60‐40 stock‐bond allocation are not only easy for retirees to implement but also supported by the comprehensive evidence discussed here. 

Back testing against 60/40 stocks/bonds gives lower end balances in worst/median and best scenarios in Timeline vs the rising equity glide path using stocks/MMF (cash), 2022 would have been a worrying year to retire into with a 60/40 stocks and bonds portfolio. 

In a decades time there'll be a reflective look back at the post GFC Quantative Easing era with a far better understanding.  I can recall back as far as 2015 and the discussed death of the 60/40 portfolio. As  it was, there was a boom in both Infrastructure and Real Estate Investment Trusts. With investors piling in to secure high yields. 

Origins of 60/40 go back many decades. The status quo is returning.  There are many variable components to a 60/40 portfolio. Not simply an annual (or quarterly) mechanical rebalancing. There's also a constant income stream that's being reinvested. 

GazzaBloom

Hoenir said:

GazzaBloom said:

OldScientist said:

Two papers on rising equity glidepaths that might be of interest

Pfau, W. D., and Kitces M. E. (2014). “Reducing Retirement Risk with a Rising Equity Glide Path.” Journal of Financial Planning, 27, 38-48.

and

Estrada, J. (2016). “The Retirement Glidepath: An International Perspective.” The Journal of Investing, 25 (2) 28-54; DOI: https://doi.org/10.3905/joi.2016.25.2.028

A quote from the second paper is probably relevant

The financial world is becoming increasingly complex, often for all the wrong reasons; and yet simple strategies, however underrated, are sometimes hard to beat. This certainly applies to the many and varied recommendations that retirees have received from financial planners over the years. And yet a simple, static all‐equity portfolio or a 60‐40 stock‐bond allocation are not only easy for retirees to implement but also supported by the comprehensive evidence discussed here. 

Back testing against 60/40 stocks/bonds gives lower end balances in worst/median and best scenarios in Timeline vs the rising equity glide path using stocks/MMF (cash), 2022 would have been a worrying year to retire into with a 60/40 stocks and bonds portfolio. 

In a decades time there'll be a reflective look back at the post GFC Quantative Easing era with a far better understanding.  I can recall back as far as 2015 and the discussed death of the 60/40 portfolio. As  it was, there was a boom in both Infrastructure and Real Estate Investment Trusts. With investors piling in to secure high yields. 

Origins of 60/40 go back many decades. The status quo is returning.  There are many variable components to a 60/40 portfolio. Not simply an annual (or quarterly) mechanical rebalancing. There's also a constant income stream that's being reinvested. 

This is back tested using over 100 years of historical data in the modelling so covers the periods before GFC.

I'm not against a 60/40 portfolio, not at all, it's just that with 2 full state pensions coming online after the first 9 years of retirement, as many UK retirees will have, plus a starting DB pension covering off some living expenses, the 60/40 isn't optimal in my personal circumstances. It works and gives the same 100% success rate but with lower worst case, median and best case end balances when back tested.

Regardless of any fixed income streams coming online down the road then I'm sure a 60/40 will see you through for life no problem but the research was originally conducted without any additional income streams as far as I'm aware.

Bostonerimus1

So under this model people's lifetime allocation to equities might look like a "U", starting off high when they are young, going to a minimum as they switch to more bonds and cash as they approach retirement to avoid SORR and then increasing as they age. The steepness and depth of that "U" is the question. Indeed many people will just stick with a large fixed income allocation because they fear the  perceived risk of a retirement funded by equities.

SVaz

Mine will become a U shape I imagine,  once I’ve used up my liquid funds over the next 7 years,  everything will be in equities / mixed assets once again and I’ll only draw off the 1.8% ish  that will be from dividend income at State pension age. 

We intend to have more in the pot at 80 than at 70 to use for any elderly care needs and for that we’ll need a high equities percentage,  probably 80/20 or 70/30.