Retirement Glide Path: How to De-Risk Before and After Retiring

Sequence-of-returns risk is the reason the order of returns matters once withdrawals begin. Here is an illustrative example. Two retirees each start with $2 million and withdraw $100,000 at the start of every year for 10 years. Both earn exactly the same ten annual returns, averaging 6%: minus 18%, minus 12%, 4%, 9%, 11%, 14%, 10%, 8%, 13%, and 21%. The first retiree gets them in that order, bad years first. The second gets them in reverse. After 10 years, the first retiree has about $1.57 million and the second about $2.31 million, a gap of roughly $740,000 from nothing but timing. With no withdrawals, both would end with the identical balance. Withdrawals during early losses are what turn a temporary decline into a permanent one.

The red zone framing explains where that risk concentrates. Ten years before retirement, a bad market mostly delays your date, and you still have contributions and time. Twenty years into retirement, the portfolio has already done most of its work and your remaining horizon is shorter. The years immediately before and after the retirement date are when the balance is at or near its lifetime peak and withdrawals are about to start or have just started. A 30% decline on $2.5 million at 64 is a $750,000 loss that the plan then has to fund withdrawals from, which is why that window gets the most deliberate allocation decisions.

The traditional glide path, the one embedded in most target date funds, steadily lowers equity exposure with age, both before and after retirement. The rising equity glide path challenges the second half of that. Kitces and Pfau modeled retirement portfolios that started with a relatively low equity allocation at the retirement date, in some scenarios around 30% to 40%, and then increased equity gradually over the following 15 to 30 years. In the scenarios that mattered most, the ones with poor early returns, the rising path generally produced better outcomes. The logic: you are most conservative when sequence risk is highest, and by the time you add equity back, either markets have done well (and you can afford the risk) or they have done poorly (and you are buying stocks at lower prices).

Age formulas such as 110 minus your age are blunt tools because they ignore the thing that actually creates sequence risk: how much you need to withdraw and when. A better way to de-risk is by spending years. If a couple needs $120,000 a year from the portfolio after Social Security, then three years of withdrawals is $360,000. That reserve sits in cash, Treasury bills, and short-term bonds, and it funds spending during a downturn so stocks do not have to be sold at depressed prices. Everything beyond the reserve can remain invested for growth. Two households of the same age with the same balance can have very different glide paths if one spends 3% of the portfolio a year and the other spends 5%.

Where you de-risk matters almost as much as how much. Selling stocks in a taxable brokerage account to buy bonds can realize large capital gains, adding federal tax, Arizona's 2.5% income tax, and possibly the 3.8% net investment income tax. Selling stocks inside a traditional IRA, 401(k), or Roth IRA creates no tax at all. So the practical sequence is to shift the allocation inside retirement accounts first, direct new contributions and taxable-account dividends toward the safer assets, and leave low-basis stock in the taxable account for last. Holding bonds in the IRA and stocks in the taxable account is usually the more tax-efficient arrangement anyway.

The opposite error is real too. A couple retiring at 62 may be planning for a 30-year horizon, and at 3% inflation, $100,000 of spending today requires about $243,000 a year by year 30. A portfolio that moves to 20% stocks at retirement and stays there has little chance of keeping up after taxes. The goal is to be conservative enough to survive a bad first five years without selling stocks at the bottom, and growth-oriented enough to fund the next 25. For most retirees, that means somewhere between 40% and 60% equity at the low point, not a wholesale move out of stocks.

Start about five years out. Estimate your first-year portfolio withdrawal after Social Security, pensions, and any part-time income. That number, multiplied by two to five years depending on your flexibility, is the target size of your safe reserve on your retirement date. Build it gradually over those five years rather than in one trade, which also spreads out the timing risk of the de-risking itself.

Make the shifts inside IRAs and 401(k)s first. If most of your savings are pre-tax, you can usually build the entire reserve without realizing a single capital gain. If you hold a large taxable account with low-basis stock, look for lower-income years, such as the years after you retire but before Social Security and RMDs, to realize gains in the 0% or 15% federal bracket.

Plan the rise back up in advance. Write down when and how the equity allocation will increase, for example refilling the reserve only from good years and letting the reserve shrink during bad ones, or raising equity a few percentage points a year once you pass the fifth year of retirement. Deciding this in advance keeps you from making the call based on the latest headline.

Think about the spending side as a second lever. Retirees who can trim discretionary spending by 10% for a year or two after a large decline dramatically improve their odds in the scenarios that hurt most. The reserve and the spending flexibility work together: the more flexible your spending, the smaller the reserve needs to be.

Stress-test the plan with an actual sequence analysis rather than an average return assumption. An average return of 6% hides the outcomes that matter. Look at how your specific withdrawals would have fared if you had retired into 2000 or 2008, and whether the reserve would have carried you through without selling equities near the bottom.

• Keeping a growth-heavy allocation right up to the retirement date because the market has been good, which leaves no reserve if the first year of retirement starts with a large decline.
• Moving most of the portfolio to cash or bonds at retirement and never adding equity back, trading sequence risk for a near-certain loss of purchasing power over 25 to 30 years.
• Using an age formula instead of your actual withdrawal needs to set the allocation.
• De-risking by selling low-basis stock in a taxable account and paying capital gains tax, when the same shift could have been made inside an IRA with no tax.
• Relying on a target date fund's glide path without checking whether its equity level at your retirement date fits your spending rate and other income.
• Refilling the cash reserve by selling stocks during a downturn, which defeats the purpose of having the reserve in the first place.