Invest Less in Stocks Now and More Later?

The customary approach to asset allocation is to start with a relatively high allotment to stocks when you retire—say, 60%—and to pare back as you get older. But Michael Kitces, of Pinnacle Advisory Group, a money management firm in Columbia, Md., says you may be better off turning that advice on its head if you retire when the stock market is richly valued, as many experts believe it is today.

Kitces suggests having just 40% of your assets in stocks at retirement and building the allocation to 60% as you age. The rest of your money should be in supersafe investments, such as money market funds and short-term bonds.

He bases this counterintuitive advice on research he conducted in 2014 with Wade Pfau, professor of retirement income at the American College of Financial Services. Their study found that having a stock-heavy portfolio on the eve of retirement can increase your risk of running out of money too soon. That’s because the ability of your investments to recover is lost forever if you must pull money from savings during a bear market. So Kitces suggests that you stockpile safe assets that won’t decline in value before you retire and spend them down as you age, increasing your stock allocation by default.

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With interest rates scraping bottom, following this strategy means that you’ll earn almost nothing on the bulk of your savings, Kitces acknowledges. And that can also hurt your long-term finances. Today’s retirees have drawn a tough hand, which may mean they’ll have less to spend no matter whose advice they follow, Kitces says. Still, he adds, if on the eve of retirement “your choices are low bond yields or stocks that could drop 40% in value, your better choice is low yields.”