Among all the principles of retirement planning, perhaps none is more fundamental than the idea that a portfolio should become less risky as the client gets older. Indeed, the whole industry of target-date retirement funds is built upon the idea that equity allocations should gradually decrease as the investor gets older. But a pair of prominent researchers recently flipped that idea on its head.

In their paper, Reducing Retirement Risk with a Rising Equity Glide-Path, Wade Pfau and Michael Kitces explain how they ran thousands of Monte Carlo simulations to estimate the probability that various portfolios would last throughout retirement (typically 30 years). They tested different starting and ending asset mixes with the equity allocation either increasing or decreasing.

The results were unexpected. “We find, surprisingly, that rising equity glide-paths in retirement—where the portfolio starts out conservative and becomes more aggressive through the retirement time horizon—have the potential to actually reduce both the probability of failure and the magnitude of failure for client portfolios,” they write. Overall, Pfau and Kitces found the optimal starting equity exposures were between 20% and 40%, gradually increasing to between 40% and 80%.

Luck of the draw(down)

While getting more aggressive later in retirement is the opposite of conventional wisdom, it makes sense when you think it through. The biggest threat when you’re drawing down a portfolio is the sequence of returns risk.

Imagine Sarah retired at the beginning of 2003 and enjoyed about five years of outstanding stock returns before the financial crisis hit in September 2008. Because she was lucky enough to enjoy high returns when her portfolio was large, she was able to survive the downturn without running out of money. Now consider David, who retired in September 2008 and saw his equity portfolio devastated over the next five months. Although the markets rebounded dramatically after March 2009, those big returns came after his life savings had been cut in half. It’s quite possible that Sarah and David could enjoy the same average return over the course of a 30-year retirement, but David is far more likely to run out of money.

With that in mind, Pfau and Kitces explain that the real risk comes during the first half of one’s retirement. If you can get through the first 10 to 15 years without suffering big losses, the risk of outliving your money becomes extremely low, even if you experience a serious bear market near the end of your life. That’s why it makes sense to keep the portfolio conservative in those early years. If the markets perform poorly, you’ll be protected from large losses, and if you get lucky and enjoy outsized returns, you’ll have the luxury of being able to afford more equity risk later on.

Will clients buy it?

The problem with a financial planning model like this, of course, is that clients don’t see risk in the same way academics do. Once people stop working, they naturally become more risk averse. So while you may have little trouble convincing them to keep only 20% to 40% of their portfolio in equities when they retire, getting them to increase that allocation is likely to be a tough sell.

In a video discussing the highlights of the paper, Pfau acknowledges “there may be behavioral concerns about implementing this with clients.” He suggests framing the story in a way that’s easier for clients to accept: invite them to consider that they’re simply spending the fixed income allocation of the portfolio first. Pfau also reminds advisors that increasing the equity allocation with age is not mandatory: the key is protecting the portfolio during those vulnerable first years of retirement. After that, any increase in risk is purely optional.