Asset Allocation in Decumulation: The Rising Equity Glide Path, the Bond Tent and Property Income

What you will learn

• Why "reduce equities with age" can be wrong in the first decade of decumulation.
• How a rising equity glide path and a bond tent are constructed with concrete percentages.
• How the glide path interacts with buckets and guardrails.
• How to count property income without overstating it.

Explanation

Accumulation glide paths were covered in the course "Portfolio Construction in Depth". Decumulation is different because the danger is concentrated: lesson 3 showed that a bad sequence in the first ten years does the damage, while a crash in year 25 hits a plan that has usually already succeeded. The allocation should be most defensive around the retirement date, not at the end of life.

The rising equity glide path

A rising equity glide path starts retirement with a low equity share and raises it gradually over 10 to 20 years. A 2013 paper by Wade Pfau and Michael Kitces examined paths such as 30 percent rising to 60 percent and found, in their historical and simulated data, modestly lower failure rates than a constant allocation, with the largest gain in poor-start scenarios. The intuition: if markets fall early, you buy equities as you glide up; if they rise early, you have "won" and the higher later share costs little.

The bond tent

Over the whole life the pattern is a bond tent: the bond share rises during the last 10 years of work, peaks at retirement and falls afterwards, covering the vulnerable years on both sides of the date. A three-bucket setup (lesson 5) is a bond tent in disguise: spending cash and bonds first and refilling only after good years lets the equity share drift up.

How to implement it

• Fix a start share, an end share and a number of years, for example 35 to 55 percent over 10 years, so plus 2 points per year.
• Take withdrawals from the bond and cash side first; rebalance into equities only up to the current year's target.
• Combine with guardrails (lesson 4): the glide path governs the mix, the guardrails govern the amount.
• Stop raising the share once the floor (lesson 9) is secured by pension and ladder; then the remaining equity risk mainly affects heirs and discretionary spending.

Property income in the plan

Rental yield mechanics were covered in the course "Real Estate & REITs". For the withdrawal plan: (1) count only the net cash flow after costs, vacancy and a repair reserve; (2) treat it as partly indexed income with concentration and liquidity risk, not as a bond; (3) a mortgage is a fixed nominal obligation that acts like negative bonds; (4) decide in advance whether and when the property will be sold, and model the sale costs.

Worked example

Hypothetical example: Petra retires with €1,000,000 and withdraws €40,000 a year (taken at year-end). Bonds return 2 percent every year. We compare a constant 60/40 allocation with a rising path from 30 percent to 50 percent equities (+5 points a year), under two equity sequences. Fees, taxes and inflation are ignored.

Sequence A (early crash): equities −30 percent, +10, +15, +8, +8.

Sequence B (late crash): +15, +10, +8, −30, +10.

Reading: with an early crash the rising path ends year 5 about €64,000 ahead; with a late crash about €23,000 behind. It gives up upside in good starts to protect against bad ones. That is the trade, and it is not free.

Property: Petra also owns a debt-free flat worth €300,000 with a net cash flow of 3 percent (€9,000 after costs, vacancy and reserve). She counts it as partly indexed income, reducing the portfolio withdrawal to €31,000 (3.1 percent), and notes a possible sale around 75, with selling costs and tax effects to be checked with a Steuerberater.

Common mistake

Practice activity

Hypothetical: a €800,000 portfolio pays €32,000 at year-end. Year 1: equities −25 percent, bonds +3 percent, allocation 40/60. Year 2: equities +12 percent, bonds +2 percent, and the path has moved to 50/50. Calculate the balance after each year. Then calculate year 2 if the allocation had stayed 40/60.

Key takeaways

• Be most defensive around the retirement date, then let equities rise: the rising glide path and the bond tent are two views of the same idea.
• Implement with explicit start share, end share and years; spend bonds first and rebalance into equities only to the current target.
• The path helps in bad starts and costs something in good starts; it is insurance, not a free lunch.
• Count property only at net cash flow, treat it as partly indexed but concentrated and illiquid, and plan any sale in advance.

Next step

Lesson 12 quantifies the levers outside the portfolio: part-time income, spending cuts and moving somewhere cheaper, and what a 10 percent cut in bad years is really worth.