Retired? Might Want to Keep Some Stocks

An investor in Fidelity Freedom funds would have about 81% of assets in equities at a point that is 23 years before the retirement date. The figure drops to 43% two years after retirement, and 20% 15 years after retirement.

The target funds offer convenient diversification for millions of investors who never had it before, and shareholders seem to be embracing this approach even if the funds may not be perfect for everyone. Assets in the target funds climbed from $114 billion in 2006 to $182 billion in 2007, according to the Investment Company Institute, the mutual fund trade group.

Examine the Test

To test whether target-date and other conventional portfolios actually provide protection, the two professors looked at thousands of scenarios, examining how different strategies would have performed under historical market conditions.

In one scenario, a retiree has 50% of assets in stocks and 50% in bonds. The investor withdraws 4% of assets annually. To raise cash, the investor begins by selling bonds. Once the bonds are exhausted, the saver sells stocks to take withdrawals. In other scenarios, the investors sell stocks first or a mix of stocks and bonds.

For each scenario, the professors calculated whether there would be a shortfall -- an instance when the portfolio would have been exhausted.

In the study, the strategy of withdrawing bonds first was the clear winner, producing the fewest number of shortfalls. Professor Spitzer explains why: In the portfolio with 50% in bonds, the saver would spend his fixed-income holdings in about 12 years. During that time, the stocks would produce returns and gradually account for 100% of the portfolio. Since stocks generally outdo bonds, the investor would likely have more money in the stock-heavy portfolio than in one that has a mix of stocks and bonds.

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