Most of us have heard that we should gradually reduce our exposure to stocks as we get closer to retirement. This concept makes a lot of sense – reduce risky stocks and shift into safer bonds.

Surprisingly, new research shows that this may not be the best way to achieve your retirement goals. Researchers recently looked at 141 years of stock and bond market returns from 1871 through 2011. They compared several different allocation scenarios and career time frames. What they found was a shock to the conventional wisdom within the financial planning community.

The scenario with the worst results was the one that’s recommended the most – starting with 80% stocks and 20% bonds, and gradually shifting to 20% stocks and 80% bonds as you approach retirement. The best performer turned out to be the exact opposite – starting with 20% stocks and 80% bonds, and gradually adjusting to 80% stocks and 20% bonds. This latter scenario resulted in 22% more assets at retirement. 

These results are important since they’re dramatically different from what most investment publications and financial advisors recommend. And the impact on target-date mutual funds, which automatically make the shift from stocks to bonds for you, is substantial since 42% of all 401(k) contributions are made to this type of fund. 

It would be an overreaction to make drastic changes to a retirement plan based on this study, but it is very well researched and should certainly be carefully evaluated when designing a retirement portfolio.

If you would like to learn more about the latest ideas to optimize your retirement plan, please contact me.

*Information for this blog was obtained from “The Glidepath Illusion. . .and Potential Solutions” by Robert D. Arnott, Katrina F. Sherred and Lillian Wu.