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Should Asset Allocation Change with Age?

Conventional wisdom says that as you age, you should shift your asset allocation steadily toward bonds — perhaps via the “age in bonds” guideline or via a target date fund that steadily becomes more conservative as the named retirement date approaches.

But there’s at least some degree of evidence suggesting that this commonly-recommended shift might not be entirely necessary. For instance, Wade Pfau’s research (see charts here and here) shows that for retirement portfolios using withdrawal rates of 5% or less, there’s startlingly little difference in success rates for allocations anywhere from 30% stock to 70% stock.

In other words, from a U.S. historical data standpoint, a retirement portfolio with a typically-conservative allocation of just 30% in stocks isn’t convincingly better than a more aggressive allocation of 70% stocks (i.e., something you’d see more often in an accumulation stage portfolio).

Still, I think there’s a perfectly good, common sense reason for most people to want their asset allocation to become more conservative over time.

As we’ve discussed before, risk tolerance is a function of both:

  1. The degree of flexibility you have with regard to your financial goals, and
  2. Your personal comfort level with volatility in your portfolio.

From what I’ve seen, for many investors, that second factor really takes a nosedive as their portfolio grows and they approach and enter retirement.

Let’s Look at a Few Examples

Allison is 27 years old. Her retirement savings are currently equal to 6 months of her salary. She also has a good-sized emergency fund, so she knows she probably won’t have to touch her savings for many years.

Phil is 59 years old. His retirement savings are equal to 10 years of his income. He’s starting to think seriously about retirement sometime in the next year or so.

Dorris is 70 years old. Her portfolio is sizable (about 15 years-worth of expenses), but it’s significantly smaller than it was 8 years ago when she retired. Dorris has absolutely no desire to return to work — not to mention the fact that she’s worried she’d have a heck of a time finding a job if she did have to return to work.

It’s only natural that Allison would be the least concerned about volatility in her portfolio. For example, imagine that each of our three investors has the same asset allocation (70% stocks, 30% bonds) and that the stock market takes a 50% plunge.

  • Allison sees a small loss (when measuring the loss in dollars, as most people do), and her daily life isn’t really impacted in any way.
  • Phil sees a very large loss, and he may begin to worry about having to work for a few more years than he’d planned.
  • Dorris sees a large loss, and she may begin to worry about whether she needs to cut back on her spending.

There’s nothing terribly tricky going on here. And it’s got nothing to do with Monte Carlo simulations or academic studies. For many investors it makes sense to shift toward more conservative investments over time simply due to the fact that the bigger your portfolio and the closer you are to having to spend from that portfolio, the worse a loss of a given percentage feels.

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  1. Jonathan says

    Hi Mike

    Another point to make here is that your initial drawdown % is an important decision that will be made at retirement and is directly related the the value of your capital at retirement. Assume a client has $1m just before retirement and is planning an annual income of $50k (5% drawdown) and is very aggressively invested. The value of his capital could fall by 20% just before retiring and a 5% drawdown now only means a $40k income per year. This a good reason for someone wanting to move to a more conservative allocation when nearing retirement.

  2. Mike,

    Excellent discussion and thanks as always for the links.

    With your examples, you are right that Alison is less exposed to losses in absolute terms because her wealth is smaller. Also, she has more human capital… her long career still ahead gives her flexibility to save and work more in response to any market downturns. She has more capacity to endure volatility, and it is another reason she could have a higher stock allocation.

  3. Mike, so what do you recommend as you get older? I am 25 yo now, so I have a pretty aggressive 90/10 but I do plan on shifting more conservatively, not sure when or how much though 🙂

  4. Harry,

    Well, as stated above, I think it makes sense for most investors to shift to more conservative allocations over time. But, getting more specific than that is something I’m reluctant to do — reasons being that
    a) I do not think asset allocation is a precise science and
    b) every investor is different. (For example, some investors have nonexistent bequest motives and should therefore probably annuitize a good part of their portfolio upon retirement. Other investors care a great deal about leaving behind a heap of money, and should probably annuitize less of their portfolios.)

  5. Hi Mike, good post as usual.

    I wrote about asset allocation a few days ago and mentioned a few things that you might consider, such as:

    – Using one of the new on-line money managers that do goal and risk profiles and adjust the allocations automatically over time.
    – Using a glide path based on when you want to cash in your equities (to pay for college or whatever).
    – Your tolerance to market falls
    – and the current market’s valuation (which involves a bit of market timing which I’m sure you’d frown upon!).

    I thing asset allocation really depends on what you want the assets to actually do. But even then it’s not an exact science. Keep up the good work,


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