Latest / The Financial Freedom Podcast with Fexingo: Quitting Your Job, Living Off Investments, Independence / How Early Retirees Handle Sequence Risk With a Rising Equity Glidepath
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- Lucas: If you're early retired and the market drops 30 percent in your first year, that's not just a bad year — that's a potential portfolio killer. sequence of returns risk is the single biggest threat to a 30-plus-year retirement, and most people try to solve it with a static bond tent or a cash buffer. But there's another strategy that's more dynamic and, I think, more elegant. Luna: You're talking about the rising equity glidepath. Lucas: Exactly. The idea comes from a 2013 paper by Wade Pfau and Michael Kitces. Instead of starting retirement with a high stock allocation and staying there, you actually start with a lower equity allocation — say 30 to 40 percent stocks — and then gradually increase it over the first ten to fifteen years. By year ten, you might be at 70 or 80 percent stocks. Luna: That seems counterintuitive. Most of us think you should take less risk as you get older, not more. Lucas: Right, and that's the traditional age-based glidepath — stocks as a percent of income you'll never need again. But early retirement is different. You have a fixed withdrawal rate, typically around 4 percent, and you're extremely sensitive to what the market does in the first decade. If you get a bad sequence — a crash in years one through five — you're forced to sell assets at the worst possible time. By starting with less equity, your portfolio is more resilient to that early shock. Luna: So you trade some upside in the early years for downside protection. But doesn't that mean you miss out on gains if the market goes up right after you retire? Lucas: It does — but the key insight is that missing out on early gains is far less damaging than suffering early losses, because of the sequence effect. Pfau and Kitces showed that a rising glidepath — say from 30/70 stocks to 70/30 over ten years — actually had a higher success rate than a static 60/40 portfolio for a 30-year retirement with a 4 percent withdrawal rate. The reason: the portfolio is protected early, and by the time you increase stocks, the sequence risk has mostly passed. Luna: Let's make this concrete. I'm retiring tomorrow with a million dollars. How would I implement a rising glidepath? Lucas: Great example. Let's say you decide to start at 30 percent stocks, 70 percent bonds and cash. You set a rule: each year, you increase your stock allocation by four percentage points. So year one is 30/70, year two is 34/66, and so on, until you reach 70/30 in year ten. After that, you might stay at 70/30, or let it drift. The glidepath isn't about market timing — it's a predetermined schedule, rebalanced annually or semi-annually. Luna: And you're rebalancing by buying stocks as they go up or down? Lucas: Ideally, you rebalance back to the target allocation for that year. If stocks have a great year and you're supposed to be at 34 percent stocks, you might sell some bonds and buy stocks to get there. But if stocks crash, your equity allocation could drop below target, so you'd sell bonds and buy stocks — effectively buying low. That's actually a feature, not a bug. Luna: So you're systematically buying into dips early on. That's the opposite of what most retirees do — they panic and sell. Lucas: Exactly. The glidepath forces discipline. Now, there's a practical question: how do you actually set this up? If you're using a target-date fund or a robo-advisor, they typically have a static or declining glidepath. You'd need to manage this yourself, or use a financial advisor who can implement a rising schedule. Luna: But isn't it risky to increase stock exposure when you're older and might have less human capital to recover from a crash? Lucas: That's the trade-off. The rising glidepath assumes that sequence risk is front-loaded. After ten years, your portfolio has survived the danger zone — if it's still intact, you can afford to take more risk to capture growth for the remaining decades. And remember, in early retirement, you might have 40 or 50 years ahead of you. A static 60/40 might be too conservative for that time horizon. Luna: But what about today's environment? We're in July 2026, and bond yields are still relatively low after the rate hikes of the last few years. Does a rising glidepath still make sense when bonds don't offer much yield? Lucas: That's a fair question. The glidepath's success historically assumed bonds provided a decent cushion. In a low-yield world, bonds may not offer as much protection. But the key role of bonds in the early years is not yield — it's volatility reduction. Even if bonds yield 2 or 3 percent, they still dampen portfolio swings. And if stocks crash, bonds tend to appreciate or at least hold value, giving you dry powder to rebalance. So I'd say yes, it still works, but you might need to adjust your withdrawal rate or be more flexible with spending. Luna: Are there any downsides or criticisms? Lucas: Sure. One is that the rising glidepath can lead to a higher terminal portfolio value on average, but also a wider range of outcomes. If the market crashes in year eleven, after you've already increased your stock allocation, you could take a big hit. But the probability of that is lower because the sequence risk window has passed. Another criticism is that it requires a lot of discipline — you have to stick with the plan through gut-wrenching volatility. Luna: And taxes. If you're rebalancing in a taxable account, you could trigger capital gains. Lucas: Great point. Ideally, you'd implement the glidepath inside tax-advantaged accounts like an IRA or 401k. If you have to use taxable accounts, you can use new cash flows — dividends, interest, or withdrawals — to rebalance gradually, or use a total-return approach. You might also use tax-loss harvesting strategically. But yes, taxes are a real consideration. Luna: So for someone retiring early, how do they decide between a rising glidepath, a bond tent, or a cash buffer? Lucas: They're not mutually exclusive. A rising glidepath is a long-term allocation strategy. A cash buffer is a short-term liquidity tool — you hold one to two years of expenses in cash to avoid selling stocks in a downturn. And a bond tent is a temporary increase in bonds around retirement, which then declines. The rising glidepath is like a permanent bond tent that slowly unwinds over a decade. Some people combine them: start with a cash buffer, use a rising glidepath for the rest of the portfolio. Luna: I want to go back to the Pfau and Kitces research. What exactly did they find about success rates? Lucas: In their historical simulations, a rising glidepath from 30/70 to 70/30 over ten years had a success rate of about 98 to 99 percent for a 30-year retirement with a 4 percent withdrawal rate, compared to roughly 95 percent for a static 60/40. For longer retirements — say 40 years — the gap widened. And the median ending portfolio value was actually higher with the rising glidepath because of the later equity exposure. Luna: But that's based on historical data from the U.S. stock market. What about global diversification? Lucas: You can absolutely apply the same concept to a globally diversified portfolio. The glidepath is an allocation schedule, not a bet on U.S. stocks. You could start with a 30 percent global equity allocation and increase it over time. The key is that the strategy relies on mean reversion and the fact that stocks outperform bonds over long periods — which has held in most developed markets. Luna: And what about the withdrawal rate? Does the rising glidepath allow you to safely withdraw more than 4 percent? Lucas: The research suggests it might allow a slightly higher withdrawal rate — maybe 4.2 or 4.3 percent — with the same success rate as a 4 percent withdrawal from a static portfolio. But I'd be cautious. The future could be worse than the past. I think the bigger benefit is not a higher withdrawal rate, but a higher probability of not running out of money. Luna: Makes sense. Let's talk about implementation for the DIY investor. How do you actually set up a rising glidepath in a brokerage account? Lucas: You need a spreadsheet or a simple calculator. Decide your starting allocation, your ending allocation, and the number of years to transition. Let's say you start at 40/60 and want to reach 80/20 in eight years. That's a 5-percentage-point increase per year. Each January, you calculate your current allocation, compare it to your target for that year, and rebalance by buying or selling. You can do it manually once a year, or use automatic rebalancing features if available. Luna: And what about the bond side? What kind of bonds should you hold in the early years? Lucas: I'd recommend a mix of short- and intermediate-term Treasuries or a total bond market index. Avoid long-term bonds because they're more volatile and might not provide the stability you need. Some people use TIPS or a bond ladder, but a simple bond ETF is fine. Luna: One last question: what if the market soars in the first few years? Your glidepath might keep you underweight stocks during a bull market. Lucas: That's the price of insurance. You might miss some gains, but you're protected against the catastrophe scenario. And remember, if stocks soar, your rising glidepath will actually have you buying bonds to stay at the lower equity target — which could feel painful. But discipline is key. The strategy works because it forces you to lock in those early gains by shifting to bonds. Luna: So it's really about risk management, not maximizing returns. Lucas: Exactly. Early retirement is all about managing the sequence risk. The rising glidepath is one of the most robust tools for that, and it's surprisingly underused. If you're retiring in your 40s or 50s, it's worth serious consideration. Luna: I think what I like about it is that it's a rule-based approach that takes emotion out of the equation. Lucas: Absolutely. And you know, if this conversation helped clarify that for you, we do this show ad-free and listener-supported. If you found value, you can show it with a coffee — literally. That's buy me a coffee dot com slash fexingo. No obligation, just a way to keep these episodes coming. Luna: Yeah, we love hearing that the episodes help people think about their own plans. Lucas: So back to the rising glidepath — I'd encourage anyone interested to read the original Kitces article or the Pfau paper. They go into deeper detail on the math. But for a quick start, just remember: start low, go slow, and stay disciplined. Luna: And maybe pair it with a cash buffer for the first couple of years. Lucas: Good point. A one- to two-year cash reserve can smooth out the early years even further. Thanks, Luna. That's all for today. If you have a specific question about your own glidepath, we'd love to hear from you.