Retirement Glidepath

Pre-Retirement Glidepath: Asset Allocation 5 Years Prior to Retirement

De-Risking your Portfolio Prior to Retirement: The Pre-Retirement Glidepath

De-Risking your portfolio for retirement and a pre-retirement glidepath are important yet neglected topics of conversation. What should your asset allocation be 5 years prior to retirement?

Assume you want to retire at some point. Currently, in the depths of accumulation, you stash away money as per your investor policy statement in an asset allocation that allows you to sleep at night, yet meets future income goals.

When do you de-risk this portfolio prior to retirement? Or do you continue aggressive investing to and through retirement?

What does an ideal pre-retirement glidepath look like to get your portfolio retirement ready for retirement?

How do Target Date Funds De-Risk a Portfolio for Retirement?

Target date funds actually start de-risking about 25 years before retirement.

De-risking the portfolio for retirement

Figure 1 (Vanguard Target Date Fund De-Risking begin at age 40)


For instance, look at Vanguard’s model target date fund above. This is an example of a pre-retirement glidepath. They start de-risking at age 40 for a planned retirement at age 65!

International and US equities decrease steadily over 25 years as bond allocation increases. Five years before retirement, add short-term TIPS. Note the change in asset allocation 5 years from retirement.

Does the average investor want to de-risk a portfolio 25 years before retirement? This seems excessive to me. Given that stocks win out over bonds during most 10-year periods, aren’t target date funds leaving a lot of returns on the portfolio by this gradual decrease in stocks over decades?

Asset Allocation Before and After Retirement

I have looked at asset allocation AFTER Retirement (see thoughts on Rising Equity Glidepaths and Bond Tents) but what is the ideal glidepath before retirement?

Let’s look at this question visually.

retirement glidepath

Figure 2 (Bond Tents and retirement glidepaths)


Let’s look at a visual of how your bond allocation might change prior to retirement. Above, bond increase from age 25-55 from about 10% up to 40%.

Next, rapidly increase bond allocation from 40% up to 70% over the 10 years before retirement.

This is an interesting pre-retirement glidepath. Is this the ideal way to de-risk the portfolio for retirement? What is the slope, the rate, and what age is the landing point?

Key Point: When and How Much Should You De-Risk before Retirement

This point is key. When and how much should you de-risk prior to retirement?

Let’s look at them individually.

When Should You De-Risk Before Retirement?

We’ve seen above that Vanguard starts de-risking 25 years before retirement and the bond tent has a 40 year transition.

When should you increase bond allocation- that is- when should you de-risk prior to retirement??

Adding bonds means giving up potential returns in the long run. Why do you have bonds in your portfolio?

Good Question! Bonds are volatility dampeners. That’s it. That’s the whole story for the time being. Bonds are not for income; they are to mitigate against sequence of return risk by decreasing volatility in the portfolio. You have bonds so you never sell low.

Sequence of returns risk is the largest risk facing pre-retirees today.  Sequence risk describes permanent negative effects to your long term net worth if you are withdrawing from a down portfolio.

The withdrawing part is key. This is why you have bonds in your portfolio: in case you need to withdrawal money during a sequence of bad returns. When is sequence risk at its very worst?

Sequence of Return Risk and De-Risking for Retirement

Sequence of Return Risk and De-Risking

Figure 3 (Sequence of Return Risk and De-Risking the Pre-Retirement Portfolio)

In Figure 3, you retire at year 30. Prior to this, you can see how a significant negative market event affects your portfolio long term. That is, each year, what is the risk that a negative market can cause sequence of return risk?

Twenty-five years before retirement (which is year 5 of the graph), you see there is very little explanatory power of a negative market causing sequence risk. This slowly but steadily increases over time until the year you retire.

Year 30, (the year you retire in the graph above), the explanatory power jumps up by 3.3 times! Yes, sequence of return risk is largest the year you retire and start withdrawing from your account.

Here, we are not focusing on the “tail” risk once you retire, rather the risk BEFORE you retire. Looking at Figure 3, the risk in the decade before retirement is not insignificant, and there is risk for even the decade before that!

Mitigating Pre-Retirement Sequence of Return Risk

As an aside, it is difficult to study pre-retirement sequence of return risk.

Looking at Rising Equity Glidepaths, we can use historical data or Monte Carlo simulation to study what we should do in the FUTURE after retirement.

But before retirement, looking to the left side of the graph above rather than the tail, it is more difficult to use future possibilities to predict what the ideal slope of the bond tent should be.

Stick with me here for a second.

If I’m trying to study WHEN you should de-risk your portfolio prior to retirement, the only data point of significance is WHEN the market drop happens. Obviously, the best time to de-risk your portfolio is right before a big market correction, and you are always better off taking lots of risk until right before the correction happens.

So, since we are looking at the left part of the graph in real time, rather than in the future as with the tail, it is hard to nail down a way to study de-risking. The only question, and the one that no one ever can answer, is when is the market crash?

That said, I note that those in the accumulation phase and in retirement (who have adequately mitigated sequence of return risk) have NO Market Risk. This is a bit controversial I know.

Only in pre-retirement do you have market risk.

When to De-Risk a Portfolio Pre-Retirement

So, when should you de-risk your portfolio pre-retirement? I suggest 5-10 years before retirement.

asset allocation 5 years from retirement

Figure 4 (Mitigated Sequence of Return Risk and De-Risking Pre-Retirement Portfolio)

I just made Figure 4 up to represent a thought process. There is no data to support it.

But if we adequately mitigate Sequence of Return Risk, which I suggest is the largest risk pre-retirees face today, you will have de-risked by 5 years before retirement.

With that in mind, what I’m trying to demonstrate above: the mitigated portfolio is at equal risk in years -10 through -5 (5 to 10 years before retirement) as it is the year of retirement—when the unmitigated portfolio faces massive sequence risk.

In Figure 4, “risk” on the left scale is relative and not any demonstrable value. As you live pre-retirement in real time (again, rather than looking at the future risk after retirement), you can only choose to de-risk now or at some future time.

Thus, risk is highest the year before you de-risk your portfolio, and increases real time every year you don’t de-risk.

How to De-Risk a Pre-Retirement Portfolio

Morningstar talks a little about HOW to de-risk the portfolio for retirement.

The idea here: know your accumulation asset allocation, and, understand your target pre-retirement asset allocation. Then, overtime, increase the fixed income/bond allocation to get to the target allocation.

You can do this all at once: selling equities and buying fixed income. Or, you can do this over time through rebalancing. Or, stop re-investing dividends and instead re-balance into fixed income.

Another way to de-risk your portfolio over time is to change the investments with your new money. Although one should almost always dollar cost average new money into equities, during your transition phase, buy fixed income assets rather than stocks.

There are many ways to skin this cat, and substance beats form when de-risking the portfolio before retirement.

A harder question is, of course, what should your asset allocation be when you de-risk?

How Much Should You De-Risk before Retirement?

How much you should de-risk before retirement is a very individualized issue. Asset allocation is the first true decision that an investor makes after deciding to invest in the first place.

Ten years before retirement, in accumulation mode, you should take as much risk as balances cans and needs. Not only how much risk can you tolerate, but how much risk do you need to reach your goals? The usual pre-de-risking asset allocation is anywhere from 60/40 to 100/0 stocks to bonds.

What should your asset allocation be 5 years from retirement? That is:

How much should you de-risk?

Look back at at Figure 1. Vanguard has a 70/30 asset allocation 10 years before retirement. This then decreases to 50/50 at retirement. Next, they get even more risk averse through retirement and decrease to 30/70 over the next 10 years.

Similarly, back in Figure 2, there is a 30/70 asset allocation at retirement. Here, a decade before we are at 60/40. So, Figure 2 suggests a more rapid progression to but then away from bonds.

So, should you consider starting retirement somewhere between 30/70 and 40/60? It depends on your goal asset allocation and what lets you sleep at night. More commonly, a 60/40 portfolio at retirement may be adequate to protect your downside during the initial withdrawal phase of retirement.

I actually like to consider how much “safe” money you want in order to avoid sequence risk. Is 5 or 7 years enough? As it turns out, some might consider being much more aggressive in their asset allocation 5 years from retirement.

What does an Ideal Pre-Retirement Glidepath Look Like to get your Portfolio Retirement Ready?

De-risking your portfolio in preparation for retirement is important.

De-risking includes preparing for sequence of return risk. I suggest you consider de-risking your portfolio 5-10 years prior to retirement.

Specifically, between 5-10 years before retirement, decrease from your accumulation asset allocation to your retirement asset allocation. These are personal decisions, but if one went from 80/20 (or higher) down to 60/40 (or lower), you would not be seen as having three heads.

Of course, if you have enough other sources of income and don’t really need to make withdrawals on your portfolio, no de-risking is necessary.

Conversely, if you don’t fear sequence risk or think you can ride out short term downturns in the economy, you will also be less apt to de-risk.

At least now you have some suggestions on what to do if you do decide to do it.

Posted in Retirement, Retirement Income Planning and tagged , .


  1. Awesome post.
    I almost even understood this one!
    I started de-risking probably too soon. I think around 2012 and I’m only in my early 50s now.
    In retrospect, I would be much richer if I stayed all-in with stocks.
    On the other hand, I sleep well. And I likely have more assets than I truly need.
    The next stock crash will devastate and shock many in the young FIRE community.

  2. I started de-risking in the beginning of 2019 and then saw equities post incredible gains. Always makes you second guess and think “what might have been” but overall I’m still happy with becoming more conservative as I approach my exit window.

  3. I think you made a mistake . . at 10 years before retirement, the graph from vanguard shows way more than 40% stocks as you say in your closing section.

    “Look back at at Figure 1. Vanguard has a 40/60 asset allocation 10 years before retirement. This then decreases to 30/70 at retirement”

    It is 40% US stocks and 30% international for s total of 70% stocks 10 years away.

  4. What do you de-risk into (for an IRA)? With interest rates so low (and the risk of interest rates increasing in the near future?), I’ve not been able to get myself to pull the trigger. I’ve been researching munis (don’t need the tax exempt status), ultra-short term, short term, etc…have even considered cash, but that seems silly. I’m 45 (single) and have been FIRE’d for 2 years. 90% of my savings are in pre-tax accounts. My AA is ~90/10 and I’d feel more comfortable at 80/20. I’ve started a Roth ladder in order to access funds prior to 59.5 with ~$40k per year of spending. I’m using Bulletshares BSCO, BSCP, etc for the ladder. Looking for fixed income options for my IRA totaling ~$200k-400k?

    • Yes, fixed income is tough. Since we cannot give specific advice, ideas for consideration: 1) what is the purpose of the money? 2) don’t reach for yield (and take extra risk) 3) think about when you might spend the asset (when the market is down, otherwise you don’t spend it) — how much do you need for a 3 year or 5 year bear market where you cannot sell stocks? Consider correlation with the stock market. In this setting, fixed income is insurance. Do you expect a positive return from other forms of insurance?

  5. The asset allocation which includes bonds at the current yield rate seems to be almost equivalent to cash presently. Inflation has a more immediate impact on bond values (if one is using the sale of bonds for current needs in a down market) than it has on cash. So, which is the safer bet? Conceptually, I like the ‘bucket’ allocation model of a pool of very liquid assets to tide one over in a down market. (CD’c, MM, cash)
    Nice presentation of sequence risk which in my own experience isn’t covered much by advisors.

  6. SUPERB, AS USUAL. I find it interesting that T.Rowe Price and other large financial firms advocate a substantial common stock portfolio not only 10 years prior but even 10 years AFTER retirement. I take to heart your sage advice about not incurring undue risk esp. in one’s later years. Cheers.

Comments are closed.