Avoid running out of money in retirement
Gradually hike up your stock exposure
Conventional wisdom states you should dial down your stock exposure as you advance in age. But an academic study turns that idea on its head: Rather than cutting down on stocks in your portfolio after retirement, you should hike it up.
According to Wade Pfau, professor of retirement income at the American College, and Michael Kitces, a partner with the Pinnacle Advisory Group in Columbia, Md., instead of going for a downward slope in terms of your equity exposure, you should actually go for a 'U'-shape approach, with the stock component of your portfolio gradually going up post-retirement.
This way, when market returns are not good in the early years of retirement, you will add more stock exposure to your portfolio and can benefit later in your retirement after the market rebounds. And in case the market returns are good early on, the higher stock exposure in your portfolio means that you are ahead of the game and prepared for the later stages of retirement.
Pfau says, "Starting with a lower stock allocation and then gradually increasing it helps to provide bigger downside protection. In the worst-case scenario, the damage toward retirement is going to be less than created with other asset allocation strategies."