There is a widely held view among financial advisors that seems sub-optimal. This is the idea that retirees’ asset allocations should become increasingly conservative as they age.

My firm recently conducted a survey of financial advisors who derive at least 20% of their income from retired people and we included this question: “Generally, do you believe that clients who are retired should reduce their exposure to equities as they get into their late 70s and 80s?” Three out of five (59%) said yes.

These advisors are not alone. Frequently, people suggest that one way to determine how much to invest in equities is to subtract one’s age from 100, or more recently from 120. This mathematical approach leads to continually reducing equity exposure with age. Additionally, many target-date funds and other asset allocation models reduce equity exposures as the investor ages.

There are a number of reasons why increasingly conservative investing is not effective and will be increasingly problematic in the future.

The main reason is the pressure on many retirees’ finances. Most people have under-funded their retirement, and in these days of rising health insurance and pharmaceutical costs for retirees, longer lives and less defined benefit coverage, this pressure will intensify.

Monte Carlo analysis suggests that it is most prudent for a retiree who is invested half in equities and half in fixed investments to withdraw 4% of assets in the first year of retirement and then increase that amount only to keep up with inflation. That means a person with $1 million should take out $40,000 in year one. Most accumulations are in defined contribution plans and IRAs, so the distributions are taxed as ordinary income. Thus, the person with $1 million will only be able to supplement Social Security by less than $3,000 a month.

Reducing the equity investment can be an anchor on performance. Portfolios that reduce allocations to equities as people age are likely to under-perform.

A better strategy, I submit, is to increase investments in equities prudently. There are two ways to do that; both should be used.

First, when market performance is better than average, which happens more than occasionally, retirees can take more investment risk and can increase exposure to equities.

Second, effective use of immediate annuities can permit an increased exposure to equities. The reason: Immediate annuities produce income with less of an investment than other fixed investments and permit people to buy guaranteed income inexpensively.

Consider: Most advisors suggest about 50% of assets be put in fixed investments, most often bonds. If bonds are paying 5%, it takes $240,000 to produce $1,000 a month. However, a married couple both aged 70 can obtain $1,000 a month for as long as at least one lives for only $157,000. If this couple takes the $83,000 difference, and invests it in equities for the long term, the two would have increased their equity investment from 50% to 58.3%. But they would have the security of the same amount of guaranteed income from their fixed investment.

In our financial advisor survey, advisors were asked what they would recommend to a couple, both age 75 and in good health, wanting to “maximize the amount of money they could spend” without running out of money. Proportionately more advisors said they would suggest reducing investments in equities to reduce risk of investment loss than said they would shift bonds or CDs to immediate annuities.

However, reducing equity investments is most likely to reduce overall return. The couple who wanted to maximize spending would probably have to cut back in this scenario. But at age 75, it would take only $139,300 to guarantee this couple $1,000 a month for as long as at least one lived.

Retirement is clearly changing, and the next generation to retire will put more emphasis on maximizing the lifestyle they can derive from their accumulations. Financial advisors will have to develop new strategies in response.

Portfolios that get increasingly conservative as baby boomers age in retirement will provide neither the security nor the returns they need. But proper allocation to immediate annuities will allow a higher level of investment in equities. Expenses can rise as people age and often it takes a higher proportion of money in equities, not a lower proportion, to meet retirees’ needs later in life. The idea that portfolios should become more conservative with aging should be retired and replaced by more emphasis on immediate annuities.

Mathew Greenwald is president of Mathew Greenwald & Associates, Washington, D.C. His e-mail address is MathewGreenwald@greenwaldresearch.com.