Source
r/personalfinance•
Data_Male

Should I shift my 401K/IRA gradually from equities to bonds/low risk assets or shift all at once when I approach retirement age?

Retirement

The standard recommendation for passive investing in one's 401K/IRA is to start out with most of your money (typically 80-100%) in broad market stock funds and then gradually shift to bond funds or other less risky investments over time, eventually ending with 50-70% in bonds. Obviously, the exact allocation depends on one's risk tolerance, but that is the standard advice I've heard and seen practiced in many target-date funds.

My question is this: Why not go all-in on equities or at least a higher equity allocation until you're about 10 years out from retirement? If you don't need the money for at least a decade, why not capitalize on the higher potential returns?

I back-tested this assertion starting in 1990 and ending in 2020 (assuming starting in 2020 the allocation would be the same risk-averse portfolio in either scenario). When contributing $500 a month in 2020 dollars consistently over that time, I ended 2020 with $770 K in the more equity-aggressive scenario (90% in a Vanguard fund) vs. $590 k when I gradually shifted over time (moving 6.7% more over to a bond fund every 5 years). The more bond-heavy scenario only outperformed in 2010, but even then it was only by about 5-10%.

Am I missing something here? Are these results just a product of the time frame I picked? Or is it better to stay aggressive until you're a decade or so out from retirement?

Posted Feb 21, 2023, 5:33 PM UTC

68
Mysunsai​•

I mean, you did pick the period in history most stacked in favor of asset prices and against fixed income then any other.

But yes, that is a relatively common sentiment, though to what extent that has been driven by said recency bias is something I’ve never looked much into. And who knows, maybe said recency bias is just the way the world works now.

6
Data_MaleOP​•

That may be it. However, I did try 1985 to 2015 and still came out on top with a more aggressive equity mix. The only time where I didn't was when I ended in 2010 and 2005, but even then I was only down 10% and 2% vs. a more aggressive portfolio.

Meanwhile the the more aggressive portfolio was as much as 30% higher.

Unfortunately the back tester I was using only goes back to the 1980's so I couldn't test many other scenarios

2
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1
Stock-Freedom​•

You’re basically describing the idea behind Target Retirement date funds. You reduce risk at the level you are comfortable with as you near retirement.

1
Data_MaleOP​•

I guess that's really my question - Should I go with the retirement date fund and let them gradually shift my assets, or should I choose to maintain a high equity allocation until I'm 10 years out and then shift it all at once.

For example, let's say I keep it 90-10 equities until I'm ten years out. Then I shift to 50-50 for the last 10 years of my career?

1
animecardude​•

Question to your question is: will you for sure shift 10 years out or will you wait and see what the market does at that time (emotions). Emotions always throw a wrench in plans.

For what it is worth: I'm using a TDF 2060 fund in my Roth IRA and just letting it ride. Have been happy for the past 8 years. I'll reassess in 10 years and see if I want to extend it even further to 2065 or 2070 fund at that time.

3
bx10455​•

I was 100% equities until two months (Nov 2019) before I decided to pull the trigger (Jan 2020). In hindsight, this might not have been the best idea, although it did work out for me. I was still hesitant in doing it. As all I could see was all the potential growth I would be missing out on.

I am definitely glad it was done then and I gave notice in Jan 2020. If I had just waited three more months. the pandemic and subsequent market plunge would have guaranteed that I would still be working today.

1
nolesrule​•

You should de-risk when you've saved enough so you don't risk losing what you've accumulated when you no longer need to take as much risk or when you no longer have the ability to take the risk. Remember that the purpose of asset allocation into fixed income is about recuing the downside risk. It's not about timing to optimize the upside. If you don't have enough accumulated then that's a separate kind of risk.

1