My Personal Approach – How to Actually Keep Retirement Money Safer

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When Approaching Retirement, Should We Reduce Stock Exposure Gradually, Suddenly, or Perhaps Not At All?

In the first piece of this 3-part mini-series, I covered the importance of good retirement planning, and offered a practical approach to it.

In the second piece, I covered the 4 critical questions you need to consider, some “conventional wisdom” formulas, and unconventional insights from Wade Pfau, professor of retirement income at the American College of Financial Services.

In the following, I detail my own approach, which differs wildly from the conventional wisdom, and while I share some of Pfau’s ideas, I have some of my own that I follow as I approach retirement.

My General Approach to Asset Allocation

I’ve always been what I’d call a “rationally aggressive” investor, with >90% of my portfolio in stocks (until recently, see below).

I never tried to time the market. Instead, I bought stocks when I had money I didn’t expect to spend within a few years, and sold shares when I needed money beyond my then-current income.

This is because I have a very high risk tolerance.

Most investors diversify their investments with bonds, to reduce volatility, and the impact of bear markets on their net worth.

I don’t like the idea of diversifying with bonds because it has you buy down volatility (risk) by giving up far higher stock returns. Instead, I prefer to diversify my stock position with other high-return assets like rental real estate, or even within my stock position across different stock factors (e.g., value vs. growth, large-cap vs. small-cap, international vs. domestic, etc.).


Having such a high exposure to stocks can and likely will crater your long-term investment goals if you can’t stomach the volatility. If seeing your net worth plummet when the market goes down (as it will every few years) will cost you sleep and make you sell, locking in your losses, you need to do something different.

I can stomach the volatility, and have, repeatedly.

The latest example was when the market dropped >30% in a few short weeks in early 2020. Not only did I not panic-sell. Instead, I continued adding to my 401(k) stock investments.

Why Last Year I Increased My Cash Position to 30%

As I’ve written elsewhere, after a spectacular 2020, where my portfolio more than doubled the S&P 500’s already impressive total return, I moved all my excess returns into cash, raising my cash position to 30%.

After my portfolio returned 5.7x more than the 7% my projections assumed for the year, I didn’t need as much growth, so taking just those “excess chips” off the table didn’t impact my long-term plans.

In fact, this large (for me) cash position is my “dry powder,” that will let me benefit from the next stock crash. Once it happens, I’ll use much of my cash position to buy stock when share prices are low, and then ride the eventual recovery to additional excess returns.

How I Personally Approach the Dilemma of Near-Retirement Stock Allocation

The question now is, what do I think is the best time to move out of stocks as I approach retirement, and to what extent?

Should I follow one of the conventional age-based glide path formulas and move my stock allocation to somewhere between 40% and 75% because I’m nearly 60?

Or should I follow Pfau’s unconventional suggestion, moving almost entirely out of stocks as I approach retirement and then gradually back in as I move further into my retirement years?

Frankly, neither feels right to me. Here’s why.

Remember the 4 questions I introduced in my previous article? Here they are with my personal answers.

  1. What is my risk tolerance? We’ve already established that it’s very high, high enough for a large stock allocation.
  2. What is my time horizon? Since I want to leave a large bequest to my kids, my time horizon extends to when I pass away. If I live to my parents’ age at their passing, I should have over 30 years. That’s a long enough time horizon for the above-mentioned large stock allocation.
  3. How much growth do I need? My projections assume a 5% annual inflation-adjusted growth. This is far more than I can expect from bonds (especially when interest rates are rising due to inflation), so again, a large stock allocation makes more sense.
  4. How flexible is my budget? We could cut our spending 30% for 2–3 years without heroic measures. If things became dire, we could probably double that cut. In case of financial catastrophe, well, people survive on far less than even that. This means that I won’t have to sell a lot of stock when the market crashes, even with a large stock allocation.

My conclusion from all that is that I’ll stay with my current 70% stock allocation until the market crashes, and then go back closer to my historic 90% stock allocation.

The big difference relative to my historic approach of selling shares only when I need excess money is that it was appropriate for my “accumulation phase.” In retirement, my need for money from my portfolio will be ongoing, so I don’t want to sell each and every year, since the market will have down years. If I want to avoid forced loss-selling, I need to follow Pfau’s suggestion of maintaining a cash buffer to cover short-term expenses.

For me, that means keeping 3–4 years’ worth of expenses in cash, say 15%.

That way, I can sell shares to cover current expenses if the market is doing well, and use the cash (and trim expenses) if the market is down. Once the market recovers, I can replenish my 15% cash position, and go back to normal spending.

This lets me maximize my exposure to the growth of stocks, while minimizing the impact of sequence-of-returns risk.

Finally, I have one more “string” to my retirement plan “bow.”

Instead of going from 100% full-time work (or more) to zero work in one step, I plan to make a gradual transition. In ~4 years, I plan to reduce to 50% of full time. Then, ~4 years later, I plan to reduce to 15–25% of full time, to stay productive and engaged.

That part-time income should cover most or all of our expenses for at least the next 8 years, allowing our retirement portfolio to continue growing for those years. As an added benefit, it’ll reduce the number of years we need our portfolio to provide for us by those same 8 years.

The Bottom Line

My approach to retirement planning is vastly different than conventional wisdom, and while I agree with some of Wade Pfau’s ideas, I chart a different path than he suggests.

My approach starts with the 4 questions I listed in my previous article, and uses my experience building our by-now-comfortable nest egg. Finally, I’ve come up with an extra “string to my bow” that reduces our risk and increases my confidence that my retirement plan should work.


This article is intended for informational purposes only, and should not be considered financial, investment, business, or legal advice. You should consult a relevant professional before making any major decisions.

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