What About A Reverse Glide Path Strategy?


Most investors are aware of the standard “age in bonds” asset allocation strategy. Naturally, as you get older you will reduce your exposure to risky stocks and increase your exposure to safer bonds. A 20-year old would have an 80/20 stock/bond split while a 70-year old would have a 30/70 stock bond split.

The reasoning behind this approach is simple. As an investor gets older they will need to rely on their investment portfolio for a steady income, which is where a higher allocation to bonds comes into play.

But what does the empirical research have to say about this approach? Actually, quite the opposite!

A white paper published by Wade Pfau and Michael Kitces entitled Reducing Retirement Risk with a Rising Equity Glide-Path examined Bill Bengen’s “4% withdrawal rule” under different glide path assumptions. What they found was that a rising glide path strategy in retirement actually increased the probability of retirement success. Further, in the bottom 5% of simulation outcomes, the rising equity glide path did the best in terms of longevity of the financial plan. 

How could this be the case?

Consistency of the Equity Premium

The gist of this type of strategy deals primarily with the consistency of the equity premium over time. The chart below compares the performance of IFA Index Portfolio 100 (all equity) versus IFA Index Portfolio 0 (all bonds) in monthly rolling returns. For this particular article we will use this difference as a rough estimation for the consistency of the equity premium.

Looking at rolling monthly returns over the last 50 plus years, we can see the percentage outperformance of IFA Index Portfolio 100 versus IFA Index Portfolio 0 over various time horizons. What should be very noticeable is that investors were rewarded by being invested in equities the vast majority of the time. Given this observation, it would make sense that having higher equity exposure overtime is likely going to provide more favorable results.


But this isn’t the entire story.

According to Pfau and Kitces’ research, a rising equity glide path did better in terms of percentage of outcomes versus a static asset allocation even though the rising equity glide path strategy had, on average, less equity exposure over the given time horizon.

For example, over a 30-year horizon, an investor who followed Mr. Bengen’s “4% withdrawal” rule and maintained a simple 60/40 stock/bond split had a 93.2% success rate based on 10,000 Monte Carlo simulations. In contrast, an investor who started with an equity exposure of 30% and ended with an equity exposure of 70% (i.e. rising equity glide path) had a 95.1% success rate even though it had an average equity exposure of 50% over the entire 30-year period.

Sequence Risk

Sequence risk, in financial planning terms, is the risk associated with the success or failure of a financial plan based on sequence of returns. Although we always talk about the “average” or “annualized return,” very rarely do investors actually experience the average in any given year. We have written about this before here. Further, there is the potential of beginning retirement right at the start of a big market contraction like we experienced in the early 1930s, early 2000s, or early 2008. This risk of beginning retirement and drawing down your assets when markets are down can potentially harm the longevity of your personal financial plan.

Let’s illustrate this point a bit further.

We have two different investors who have decided to retire at the age of 65 years old. Both investors are invested in IFA Index Portfolio 55 and have opted for IFA’s Glide Path risk reduction strategy, which reduces an investor’s equity exposure by 1% every year. Both investors have a 30-year time horizon. The difference is that one investor has decided to start retirement in June of 1987 (beginning of the worst 30-year period in the last 50 years) while the other started in January of 1974 (beginning of the best 30-year period in the last 50 years).

The maximum “withdrawal rule” that our June of 1987 investor could follow without running out of money is 6.4%. For our January of 1974 investor, it is 6.9%. Although time diversification drowns out most of the effects of market contractions on long-term safe withdrawal rates, the results are still substantial. If our June of 1987 investor decided to follow the same 6.9% withdrawal rule as our January 1974 investor, they would run out of money five years before the end of their time horizon. This illustrates how two investors with the exact same asset allocation and glide path strategy can have two vastly different outcomes just based on the sequence of the returns they experience.

Going back to Mr. Pfau’s and Mr. Kitces’ analysis, having a low equity allocation early in retirement effectively minimizes the simulations where market returns were poor to begin with. In a Monte Carlo Simulation, we would expect a certain number (250 or 2.5%) to have extremely poor returns just by random chance alone. The difference in the percentage of successful simulations (93.2% vs. 95.1%) is still very similar due to the drowning out of these market contractions based on time diversification.

There is One Big Problem: User Error

Although simulations may show that a rising equity glide path may actually increase the probability of a successful outcome, it doesn’t, in and of itself, consider the human ramifications of a rising equity glide path strategy.

The biggest determinant of whether or not an individual financial plan will be successful is the individual. Markets have rewarded the long-term investor, but that doesn’t mean that they didn’t test investor patience and perseverance along the way.  Most of us remember 2007 to 2009 when global markets were in a crisis we hadn’t experienced since the Great Depression. These bouts of market turmoil often lead investors to make emotional decisions about their wealth, like selling in a down market. While their mind may be at ease in the short-term, they have essentially thrown a giant wrench in their long-term financial plan. A risk reduction glide path strategy seeks to minimize this type of behavior as the investor gets closer to retirement and throughout retirement.

The table below compares two different asset allocations for an investor with an average risk tolerance. First, there is the asset allocation that IFA would advise to use which includes our glide path risk reduction strategy. Second, there is the asset allocation implied by the rising equity glide path strategy. We have also included the worst 1-year draw downs for each asset allocation over the last 50 years, assuming that each allocation is a globally diversified portfolio of index funds with tilts towards the dimensions of expected return. The worst 1-year drawdown for each portfolio was March 1, 2008 to February 28, 2009.

  65 75 85 95
IFA Index Portfolio 55 45 35 25
Largest 12-Month Drawdown -27.11% -21.87% -16.53% -11.08%
Rising Equity Glide Path 30 43 57 70
Largest 12-Month Drawdown -13.82% -20.81% -28.15% -34.78%
Difference -13.29 -1.06 11.62% 23.70%

As you can see, early on in retirement an investor who follows IFA’s Glide Path strategy is susceptible to more volatility. Later on in their life, a rising equity glide path exposes the investor to more volatility. Over the entire retirement time horizon, the average equity exposure for the IFA glide path strategy is 40% and 50% for the rising equity glide path strategy. What we want to mitigate is the potential for investors to panic in the later years and sell in a significantly volatile market. We don’t know when they are going to happen, but we want to be prepared through a strategic asset allocation when it does.

Mental Accounting and Investment “Buckets”

Following a rising equity glide path strategy has the potential to increase successful retirement outcomes, but it also exposes the investor to making emotional decisions during severe market downturns. Proponents of the rising equity glide path suggest framing an investor’s retirement portfolio in terms of “buckets.” The most popular bucket strategy consists of three buckets:

  • Bucket #1 consists of short-term high quality fixed income and cash to support an investor needs over the next 3 years
  • Bucket #2 consists of short term and intermediate term fixed income to support spending needs for 3-7 years 
  • Bucket #3 consists of stocks to cover long term spending needs

Investors will first draw from Bucket #1, then Bucket #2, and finally from Bucket #3. What should be obvious is that over time we would expect the overall asset allocation to slowly increase in terms of its equity exposure. As we sell bonds and cash from Bucket #1, the stocks in Bucket #3 will make up a larger portion of the overall portfolio. But framing an investor’s portfolio in terms of buckets is a mental accounting trick that gives investors comfort in knowing that they can weather any short term market contraction given that their short term needs are already supported via Buckets #1 and Buckets #2. 

Again, this strategy is highly contingent on an investor’s ability to keep their nerve during strong bouts of market volatility. The entire plan can fail as soon as the investor loses their nerve during large market contractions. After Buckets #1 and Buckets #2 have been liquidated, investors essentially have almost their entire assets in risky stocks. The hope is that the investor, at that time, has more than enough resources to draw from that a severe market contraction like we experienced in 2008 and 2009 would have little impact on their financial plan.

Are We Really Just Splitting Hairs?

The decision to follow a risk reduction or rising equity glide path and its impact on your ability to retire successfully really comes down to the investor’s ability to stick with their long term plan. Mr. Pfau and Mr. Kitces have provided reasons why a rising equity glide path strategy may be more successful, but the risk of not following it is relatively minor. Going back to their analysis, the difference in successful outcomes between a rising equity glide path strategy and a risk reduction glide path strategy similar to IFA’s is 1.5% (95.1% vs. 93.6%). The question we pose is, “is the extra 1.5% in potential successful outcomes worth the risk of facing a large market contraction with a high exposure to equity risk later on in the investor’s lifetime?” Through the lens of doing what is prudent, we would suggest that the risk is not worth it. This isn’t just in terms of financial outcomes, but also the emotional. Nobody wants to be worried about their ability to sustain their retirement when they are 85 years old. They should be enjoying their remaining years by doing what they enjoy doing and being surrounded by those they love.