For Retirement Savers, 60 Is the New 30

No, if you’re still relying on the traditional 60/40 glidepath. The idea of placing 60% into stocks and 40% into bonds — and then reducing the equity allocation as the client ages — works well for retirements that last only 10 to 15 years. But this approach fails when that investor lives to 100 or beyond.

It’s Not Just Aging That’s Changed

We’ve enjoyed a bull market in bonds pretty much nonstop since 1981, when the 10-year Treasury yield peaked at about 15%. From that point until the past decade, interest rates steadily fell.

You know that bond prices rise when interest rates fall. Combine the yield with the appreciation, and it’s easy to see why financial advisors were happy to recommend such high allocations to bonds.

But those days are gone. The 10-year Treasury is now under 4.5%, and no one is expecting substantial declines in interest rates. That means bonds can’t perform over the next 40 years the way they did in the past 40.

Add the ever-present challenges of inflation, volatility and longevity, and you can see why determining the correct allocation for client portfolios — and making the right adjustments for them as they age — is the new big challenge for financial advisors.

You’ve seen others start to offer commentaries on this, with some arguing that the answer is to reconsider the 4% withdrawal rule (Morningstar recommends lowering it to 3.3%). But reducing the distribution rate isn’t the answer.

Instead, the correct response to longevity is simple: We need to completely revise the 60/40 glidepath.

The Portfolio of the Future

There are two components to portfolio allocation, and advisors need to update both. First, clients need to allocate more to equities than merely 60% of their assets. The correct allocation is at least 80% and as much as 100%, depending as always on the client’s circumstances and risk tolerance.

Equally important: Advisors must update — meaning extend — the glide path. That means not merely allocating more to equities than we’ve generally done in the past, but maintaining that higher allocation for far longer as the client ages.

Think about it: Most advisors would tell a 30-year-old client who’s saving for retirement to place 100% of their portfolio into stocks, on the premise that the client has 40 years to go and can thus tolerate occasional market downturns (and even benefit from them, thanks to rebalancing, dollar cost averaging and tax-loss harvesting). That premise now equally applies to today’s 60-year-olds! After all, they too have 40 years to go!

This is why 60 is the new 30, and 80/20 is the new 60/40 — and that 80/20 ought to be held well into the client’s eighth and ninth decade of life. It also means we must reconsider the components for this new, larger equity allocation — to help make sure that your client gets the returns needed to support the income they’ll need for decades.

In my recent white paper, I showed how changes in allocation dramatically alter long-term outcomes. This includes adding uncorrelated assets to complement stocks and bonds.

Your clients are going to live to age 100, and they’re counting on you to deliver them the financial security they need. This is why we must all rethink and revise the 60/40 glidepath — so that your clients’ money can last as long as they do.

Ric Edelman is an author and founder of the RIA Edelman Financial Engines. He now leads the Digital Assets Council of Financial Professionals.