This retirement approach of focusing on minimization to spending risks over maximization of wealth accumulation has led to a wide range of retirement asset allocation and product strategies, including the use of annuities with guarantees, bucket strategies with cash reserves, and most recently the “rising equity glidepath” approach where portfolios start out more conservative early in retirement and become progressive more exposed to equities over time as bonds are spent down in the early years.
The caveat of risk minimization strategies, though, remains the simple fact that most of the time, they turn out to be unnecessary, as the risky event never actually manifests. As a result, tools like Shiller CAPE that allow advisors to understand whether clients are more or less exposed to a potential decade of mediocre returns (which brings about the “sequence-of-return risk” in retirement) can be remarkably effective at predicting when it’s necessary to focus on risk minimization in the first place, and when wealth maximization may be the more prudent course.
In fact, as it turns out, market valuation measures like Shiller CAPE can actually be so predictive of the optimal asset allocation glidepath in retirement, that the best approach may not be to implement a rising equity glidepath or a static rebalanced portfolio at all, but instead to adjust equity exposure dynamically based on market valuation from year to year throughout retirement. While such an approach is not necessarily a very effective short-term market timing indicator, the results suggest nonetheless that it can help to minimize risk when necessary, take advantage of favorable market returns when available, and have some of the best of both worlds – albeit with the caveat that markets can still deviate materially in the short run from what valuation alone may imply regarding long-term returns!