Asset Allocation in Retirement: Does Glide Path Matter?

Abstract

We compare the performance of the commonly nominated default retirement investment option, the lifecycle fund, to alternative investment strategies during retirees’ decumulation phase. Under different shortfall risk measures, we find balanced portfolios with constant exposure to equities, equity dominated portfolios as well as ‘reverse lifecycle’ portfolios that increase exposures to equities over time to consistently outperform the conventional lifecycle portfolio. While an increasing equity glidepath improves the performance of an investment strategy, the starting asset allocations are equally important. Using a utility-of-terminal wealth approach which allows for loss aversion as discussed in prospect theory by Kahneman and Tversky (1979), we find the Growth portfolio to dominate the alternative strategies at low and moderate thresholds. With increasing wealth threshold levels, a strategy with all equity allocations becomes dominant. The lifecycle portfolio is dominated by the ‘reverse lifecycle’ portfolio at all threshold levels.

Keywords: Asset Allocation, Lifecycle, Prospect Theory, Glidepath, Shortfall Risk, Retirement