Conventional wisdom says that your retirement portfolio should consist of about 60% stocks and 40% bonds when you reach retirement age, and that this allocation should gradually shift more and more toward bonds as you age. The reason for this recommendation is that as you get older, your investment time horizon shortens, leaving you less time to ride out any downturns in the stock market.

But a 2014 study published in the Journal of Financial Planning seems to turn the conventional wisdom on its head. It says that an asset allocation of 30% stocks is ideal in early retirement and that this allocation should gradually shift more and more toward stocks as you age. This shift is called a “rising equity glide path.” The study’s recommendation is based on the idea that retirees can’t afford to experience poor stock market returns early in retirement so they should limit their exposure then, but increase it later to try to earn more on their assets.

Could rising equity be a better approach for your retirement portfolio?

How a Rising Equity Glide Path Could Work

In the Journal of Financial Planning article “Reducing Retirement Risk With a Rising Equity Glide Path,” authors Wade Pfau, a professor of retirement income at the American College, and Michael Kitces, a partner and the director of research for Pinnacle Advisory Group, look at an alternative to the conventional recommendation. Their research shows that “rising equity glide paths in retirement – where the portfolio starts out conservative and becomes more aggressive through the retirement time horizon – have the potential to actually reduce both the probability of failure and the magnitude of failure for client portfolios.” In other words it might be a better idea to increase, not decrease, the percentage of stocks in your retirement portfolio as you age, to reduce your likelihood of running out of money.

They found that a portfolio that starts with a 30% allocation to stocks and increases to 60% outperformed one that started with a 60% allocation to stocks and decreases to 30%. They say this strategy can be especially helpful for a portfolio that experiences poor returns early in an individual’s retirement.

This strategy works particularly well, Pfau and Kitces write, when stock market returns are poor in the first half of an individual’s retirement, because the strategy gradually increases the percentage of stocks in the portfolio during flat or declining markets and stock holdings are greatest when stocks are performing well again.

By contrast, using the conventional strategy of a declining equity glide path in a down market, this individual would have the most in stocks when returns were the worst and the least in stocks when returns were the best.

Alexander E. Parker, chairman and CEO of the Buxton Helmsley Group in New York City, said his firm does not agree with the philosophy that conservatism should increase as you age. “Investors should be seeking value where maximum potential value can be found,” he advises. “At times that is in fixed income, and at times that is in stocks.”

He says that throughout their entire lives investors should favor the assets that will provide the maximum potential return. It would be riskier to accumulate so-called low-risk fixed-income securities when they are not priced at more appropriate or more attractive levels than equities, he says, adding that his firm is not keen on fixed-income investments except for parking capital short term. He emphasizes the importance of an asset’s long-term intrinsic value, not short-term price.

Why It Might Be Unwise

“The goal of the strategy is interesting, in that it intends to protect against the risk of losses in the years when a retiree starts drawing down her portfolio,” says certified financial planner Russell Robertson, founder of Alidade Wealth Partners, a financial planning and investment management firm in Atlanta. But he notes some feasibility issues with implementing this strategy: “It is unlikely that a portfolio with such a reduced equity exposure would produce the kind of returns assumed in the retiree’s financial plan.” And increasing exposure to fixed-income investments in today’s market might not reduce risk the way a retiree intends.

Further, according to Robertson, selling lots of stocks to reduce equity exposure at the onset of retirement could trigger negative tax consequences. These consequences could come into play if you’re drawing on a taxable investment account, which you might do in order to let any money in a traditional IRA or 401(k) continue to grow tax deferred for as long as possible. Robertson says that with the S&P 500 currently near all-time highs, you could incur significant capital gains taxes if you sold 30% of your portfolio to change your allocation from 60% stocks and 40% bonds to 30% stocks and 70% bonds.

Another problem lies in the theory’s newness. When you’re dealing with someone’s life savings, you don’t want to apply new theories and increase the level of risk, warns financial advisor Xavier Epps, owner of XNE Financial Advising in Alexandria, Va. “A total adoption of the new strategy sounds riskier than a professional like myself would offer up as advice,” he says.

A better approach is to help clients understand their investments using a bucket concept, says Jakob C. Loescher, a certified financial planner with Savant Capital Management in Rockford, Ill. Coaching clients to understand that both stocks and bonds have a role in creating cash flow through various markets sets the tone for remaining patient and disciplined in down markets.

The idea, in those situations, Loescher says, is to sell the winners to provide some cash and not unload stocks at a low point. When stocks are down, hold on to them and allow them to recover; sell better-performing bonds to create cash flow.

A Hybrid Approach?

A 2015 report from Prudential Financial, an insurance and retirement services company, also examined how returns just before and immediately after retirement affect a portfolio’s long-term viability. It says that “the greatest risk for those nearing retirement is an overly aggressive allocation with an abundance of equity in their portfolio…. A few years of below-average returns right before or after an investor begins to take distributions in retirement can quickly erode their retirement savings to the point that they’ll be unable to generate enough income to last a lifetime.”

The Prudential report recommends “drastically reducing equity exposure and allocating more to fixed income during the 10 years before and after retirement,” because bonds are less volatile than stocks. The report’s recommended asset allocation is 45% stocks/55% bonds at retirement, not unlike the rising equity glide path strategists. However, Prudential does not then recommend increasing stocks later in retirement – suggesting instead that investors shift even lower toward 35% stocks/65% bonds 10 years into retirement.

The Bottom Line

A client’s financial planner or investment advisor needs to design a retirement plan to meet the client’s risk tolerance, says investment advisor Jason Stock, a senior associate with the investment firm CalChoice Financial in Scottsdale, Ariz. It’s important to design a plan that offers comfortable risk exposure for the client.

“The key thing to remember is that there is not a one-size-fits-all plan when putting retirement strategies together,” says Stock. People are different, and their plans should be too.