What this article covers
In the final part of his three-part retirement series, Opher Ganel explains why neither a conventional age-based glide path nor Wade Pfau’s move almost entirely out of stocks fits his own plan as he nears 60. He walks through his answers to four key questions on risk tolerance, time horizon, growth needs and budget flexibility, and shows how a 70% to 90% stock allocation, a 15% cash buffer and a phased move into part-time work combine to keep his retirement money safer.
Key Takeaways
A high stock allocation near retirement can work if your risk tolerance, time horizon, growth needs and budget all support it
Opher Ganel answers four questions for himself: his risk tolerance is very high, his time horizon runs 30+ years because he wants to leave a bequest, his projections assume 5% inflation-adjusted growth, and he could cut spending 30% for two to three years. That is why he stays at 70% stocks and plans to move back closer to his historic 90% after the next market crash.
A cash buffer of three to four years of expenses helps retirees avoid selling stocks in a down market
Borrowing an idea from retirement researcher Wade Pfau, Ganel plans to keep roughly 15% of his portfolio in cash. He sells shares to cover expenses when the market is up, draws on cash and trims spending when it is down, then replenishes the buffer after a recovery, which limits sequence-of-returns risk while keeping most of his money in stocks.
Phasing into retirement with part-time work lets your portfolio keep growing
Rather than stopping work all at once, Ganel plans to cut to 50% of full time in about four years and to 15% to 25% about four years after that. He expects that part-time income to cover most or all expenses for at least eight years, which lets the portfolio keep compounding and shortens the number of years it has to support the household.
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 conventional wisdom. While I share some of Pfau’s ideas, I have some of my own that I follow as I approach retirement.
My Approach to Asset Allocation: Why I Hold Mostly Stocks Instead of Bonds
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 the 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 I Raised My Cash Position to 30% After a Strong 2020
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.
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How Much Stock Should You Hold as You Approach Retirement? My Answer
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.
My Answers to the 4 Critical Retirement Allocation Questions
Remember the 4 questions I introduced in my previous article? Here they are with my personal answers.
- What is my risk tolerance? We’ve already established that it’s very high, high enough for a large stock allocation.
- 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.
- 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.
- 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.
Keeping a Cash Buffer to Avoid Selling Stocks in a Down Market
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.
Phasing Into Retirement with Part-Time Work
Finally, I have one more “string” to my retirement plan “bow.”
Instead of going from 100% full-time work (or more) to zero work, 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: Build Your Retirement Plan on Your Own Answers, Not Formulas
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 extra “strings to my bow” that reduce our risk and increase my confidence that my retirement plan should work.
Frequently Asked Questions
Should you move out of stocks as you approach retirement?
Not necessarily. Conventional age-based glide path formulas would put someone nearly 60 at somewhere between 40% and 75% in stocks, while Wade Pfau suggests moving almost entirely out of stocks near retirement and then gradually back in. Opher Ganel argues the right answer depends on your own risk tolerance, time horizon, growth needs and budget flexibility, and for him neither approach fits.
What questions should you ask to set your asset allocation before retirement?
The article uses four: What is my risk tolerance? What is my time horizon? How much growth do I need? How flexible is my budget? Ganel’s answers (very high tolerance, a 30+ year horizon, a 5% inflation-adjusted growth target and the ability to cut spending 30% for a few years) all point him toward a large stock allocation.
How much cash should you keep in retirement?
Ganel plans to keep three to four years’ worth of expenses in cash, which for him is about 15% of his portfolio. The buffer lets him avoid forced selling in down years: he spends from cash and trims expenses when the market is down, then replenishes the cash once the market recovers.
Why would an investor near retirement avoid bonds?
Ganel argues that diversifying with bonds buys down volatility by giving up far higher stock returns, so he prefers diversifying with other high-return assets like rental real estate or across stock factors. He stresses that a high stock allocation can crater your long-term goals if you can’t stomach the volatility and end up selling in a downturn.
How does working part-time early in retirement reduce risk?
Part-time income can cover some or all expenses for several years, so the portfolio keeps growing instead of being drawn down. Ganel expects his gradual transition to cover most or all expenses for at least eight years, which also shortens the number of years his portfolio needs to provide for him.
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Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
About the author
Contributing Writer, Wealthtender
My career has taken some unexpected turns, from earning a PhD in experimental high-energy physics, to conducting cosmic-ray research in Antarctica, to supporting NASA projects and programs, to running my own consulting business. I also run several other small businesses and help my wife run her Marriage and Family Therapy practice.
Those experiences taught me to question assumptions, think critically, and recognize that real-world decisions of any significance rarely have simple answers that apply to everyone. Today, I bring that perspective to writing about personal finance. Drawing on my analytical background, business experience, and research, I explore financial decisions, challenge conventional wisdom, and help readers understand the tradeoffs that can affect their financial well-being. To complement my own research and experience, I also weave insights from financial professionals into my articles, drawing on their expertise and real-world experience helping clients navigate financial decisions and challenges.
At medium.com/@opher-ganel, you can read more of my articles and subscribe to receive email notifications when new ones come out.