The standard advice to retirees that their savings should be moved from stocks to less volatile investments as they age is backwards, according to a study detailed in the Journal of Financial Planning.
The best approach, the study said, is to start retirement with no more than 30 percent of savings in equities and gradually raise the percentage over the years. By raising the equity stake to 50 percent to 70 percent, retirees over 30 years would be able to withdraw 4 percent per year plus adjustments for inflation.
In fact, that approach when tested in 10,000 simulations beat two others that are typically used by retirees. Those included keeping 60 percent of savings in stocks throughout retirement or reducing reliance on stocks to 30 percent as they age.
The results of the simulations were consistent when tested for 20, 30 and 40 years. The authors used annual rates of return for stocks over 30 years of 6.5 percent and interest rates for bonds of 2.4 percent in the 30-year example.
The authors, Wade Pfau, a professor of retirement income at the American College of Financial Services in Bryn Mawr, Pa., and Michael Kitces, director of research at Pinnacle Advisory Group Inc. in Columbia, Md., said reducing reliance on stocks just before retirement and in its early stages offers protection at a time when losses can be disastrous.
They add that a bear market later in retirement does not hurt as much because savings have had a longer time to grow and initial spending has already occurred