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
Transcript
- Lucas: Episode 100. I wanted to talk about something that still surprises a lot of early retirees: the idea that you might actually want to increase your stock allocation after you retire, not decrease it. Luna: That feels backwards. Every retirement calculator I've ever seen shifts you into more bonds as you get older. Lucas: Right — the classic 'age in bonds' rule or the target-date fund glidepath. But the problem is, those glidepaths are designed for someone retiring at 65 with a 30-year horizon. If you're retiring at 45 with a 50-year horizon, the math changes. Luna: And the main risk is still sequence of returns risk — getting hammered in the first few years. Lucas: Exactly. And the rising equity glidepath is a specific response to that. The idea, popularised by Wade Pfau and Michael Kitces, is to start retirement with a lower stock allocation — say 30% stocks, 70% bonds — and then gradually increase stocks over the first 10 to 15 years until you're at 60% or 70% stocks. Luna: So you're actually taking on more equity risk later, not less. Why would that help? Lucas: Because the worst thing that can happen is a big market crash in year one or two. By starting with a lower stock allocation, you dampen the damage if the market tanks right away. Then, if the market does well early, you've got a growing portfolio, and you can afford to increase stocks. If it crashes early, you haven't lost as much, and you increase stocks later when prices are lower — which gives you more upside during the recovery. Luna: So it's like a form of anti-dollar-cost-averaging. You're leaning into equities after they've fallen. Lucas: Exactly that. Pfau and Kitces ran Monte Carlo simulations on historical data — including the 1973 bear market and the 2000 dot-com crash — and found that a rising glidepath actually had a lower failure rate than a constant 50/50 or 60/40 portfolio for early retirees. Luna: What were the numbers? I remember reading a Kitces paper where he showed a 45-year-old with a 4% withdrawal rate and a constant 60/40 failed about 10% of the time in historical simulations. Lucas: Right. And with a rising glidepath starting at 30% stocks and ending at 60% over 10 years, the failure rate dropped to about 5% in those same simulations. That's a meaningful improvement — roughly halving the probability of running out of money. Luna: But that assumes you can actually stick with it. If stocks crash in year one and you're still increasing your allocation in year two or three, that takes nerve. Lucas: It absolutely does. The strategy works best on paper if you mechanically rebalance and increase stocks regardless of market conditions. But the psychological risk is real. Imagine retiring in 2000: the S&P 500 drops nearly 50% over three years, and you're supposed to be buying more stocks each year. Luna: That's the part that makes me wonder if the bond tent — where you go heavy on bonds right before and just after retirement, then revert to a higher stock allocation — is more practical. At least with a bond tent, you're not actively buying stocks while they're falling. Lucas: The bond tent is similar in spirit but the timing is different. With the bond tent, you start increasing stocks before retirement, so by the time you retire, you're already at a higher stock allocation. The rising glidepath does it after. Both aim to reduce sequence risk, but the rising glidepath is more aggressive about capturing the rebound. Luna: Before we dig deeper — and this relates to having the fortitude to stick with a plan — I want to mention something that makes these conversations possible. We deliberately don't run ads on this show. Lucas: Yeah, that's a choice we made from the start. And it's only sustainable because some listeners choose to support it. If that's something you value, the link is buy me a coffee dot com slash fexingo. No pressure, just an option if these episodes have helped you think about your own decisions differently. Luna: And we mean that — it's a small way to keep this ad-free and focused on the actual numbers. Now, back to the glidepath. Lucas: So let's get concrete. Say you're 45 with a $1.5 million portfolio, and you plan to withdraw 4% — $60,000 a year, adjusted for inflation. Under a constant 60/40, if the market drops 30% in year one, your portfolio falls to about $1.2 million after the withdrawal. Luna: That's a 20% hit in one year. With a rising glidepath starting at 30/70, the same crash hits you less because only 30% of your portfolio is in stocks. Lucas: Right. In that case, the stock portion drops 30%, but the bond portion might stay flat or even rise if rates drop. So your total portfolio drops from $1.5 million to roughly $1.35 million — a 10% loss instead of 20%. That smaller starting loss means you have more capital to recover, and as you gradually shift into stocks over the next few years, you're buying at lower prices. Luna: But what if the market doesn't crash? What if year one is a bull market? Then a 30/70 portfolio significantly underperforms a 60/40. Lucas: It does. And that's the trade-off. In good early years, you leave some returns on the table. But the risk you're insuring against — a catastrophic sequence early on — is the one that actually destroys portfolios. The rising glidepath is essentially paying an insurance premium in forgone upside to protect against tail risk. Luna: Is there a specific rule of thumb for how fast to increase stocks? I've seen recommendations to add 2 to 3 percentage points per year. Lucas: That's the typical range. Kitces has suggested starting at 30% stocks and adding 2.5% per year for 12 years, landing at 60%. Pfau's research often uses a 10-year ramp from 20% to 60%. The key is that the increase should be gradual and scheduled — not based on market timing. Luna: And what about the bond side? If you're holding 70% bonds early on, you're exposed to interest rate risk. That's been brutal in recent years. Lucas: That's a real concern. In 2022, bonds and stocks both fell, so a high bond allocation didn't provide the cushion it historically did. But the counterargument is that bond yields are now higher, so the income component is better. Also, the rising glidepath typically uses short-term or intermediate-term bonds, not long-duration, to reduce rate sensitivity. Luna: Let's talk about implementation. How does someone actually set this up? Do you need separate accounts? Lucas: No, you can do it with a single portfolio. You just decide on your starting allocation and your annual rebalancing schedule. Once a year, you rebalance to your target for that year. If you're adding 2.5% to stocks each year, you sell bonds and buy stocks. You can automate it with a target-date fund, but I'm not aware of any that use a rising glidepath after retirement. Most target-date funds stop decreasing stocks after retirement and then stay flat. Luna: So it's a DIY approach. You need to be comfortable managing your own allocation or using a robo-advisor that allows custom glidepaths. Lucas: Exactly. And you need tax efficiency. Ideally, you do the rebalancing in tax-deferred accounts like a 401 or IRA, where selling bonds and buying stocks doesn't trigger capital gains. If you have to do it in a taxable account, the tax drag can eat into the benefits. Luna: One more thing — how does the rising glidepath interact with the 4% rule? The rule assumes a constant real withdrawal, but if your portfolio is smaller because of a crash, you might need to cut spending. Lucas: Absolutely. The 4% rule is a planning tool, not a law. In practice, most early retirees adjust spending in bear markets. The rising glidepath doesn't eliminate the need for flexibility — it just reduces the probability that you'll need to cut deeply. The combination of a rising glidepath and a dynamic spending rule — like Guyton-Klinger guardrails — is even more robust. Luna: I think that's the real takeaway. No single strategy is a silver bullet. But the rising glidepath is a powerful tool that most people haven't heard of. Lucas: And it forces you to think about sequence risk in a more nuanced way. The conventional wisdom is 'stocks for growth, bonds for safety.' But the rising glidepath flips the timing: you take less risk when the stakes are highest, and more risk after you've survived the danger zone. Luna: It's counterintuitive, but the data backs it up. I think our listeners know that the best plan is the one they can actually follow. So if the idea of buying stocks after a crash feels impossible, maybe a bond tent or a constant 50/50 is better. Lucas: Right. And that's the final point. The rising glidepath is backed by solid research, but it requires discipline. If you know you'll panic and sell at the bottom, no allocation will save you. The best strategy is one that aligns with your temperament.