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Opinion | Stocks Are Great for the Very Young — and the Very Old

Many financial advisers recommend a fairly high allocation to stocks even for people in their 50s and 60s on the grounds that stocks protect against inflation and bonds don’t. But that’s a weak argument. First, stocks don’t reliably protect against inflation. Second, there are bonds that do guarantee that your asset won’t be eroded by inflation — namely, Treasury inflation-indexed securities and Series I savings bonds sold by the Treasury Department. Kotlikoff recommends putting some of one’s wealth into inflation-protected securities and holding them to maturity, “laddering” them so they pay off on a regular schedule when the money is needed in retirement.

Dimensional Fund Advisors, which manages about $66 billion in defined-contribution plans, is one company that has embraced the economic approach to retirement investing. Mathieu Pellerin, a senior researcher there, says its research has found that 50 percent of assets — which some target-date funds aim for — is too much for most near-retirees to have in the stock market and that for many people, something closer to 25 percent is a better choice. (For people whose target retirement date was 2020, the average allocation to stocks in target-date mutual funds as of late 2021 was 43 percent, according to Morningstar, an investment research firm.)

Dimensional aims to use inflation-protected securities along with other assets to generate a stream of income that matches retirees’ spending needs year by year, says Tim Kohn, the head of Dimensional’s retirement distribution group. That’s kind of like how pension funds work.

One reason that economists and financial advisers seem to operate in different worlds is that academic economists aren’t rewarded for applying their theories to real people, which can involve a lot of bothersome detail. “Nobody wants to worry about Idaho taxes,” Kotlikoff says. His often iconoclastic book has chapters on saving for college, home buying, marriage and divorce, among other topics.

Another worthy book in the small genre of economists doing personal finance is “Risk Less and Prosper: Your Guide to Safer Investing,” by Zvi Bodie and Rachelle Taqqu, from 2011. Like Kotlikoff, the authors say investors should focus on what living standards they can maintain rather than the size of their nest eggs. They also lean hard against the idea that stocks are a sure thing. “At no time will we argue that your risk in the stock market goes away or even diminishes over time,” they write. “This popular and rather seductive belief is a fabrication based on misconception, illusion and confusion.”

Wade Pfau, who has a doctorate in economics from Princeton, has spent his career in financial planning. He teaches at the American College of Financial Services. He agrees with Kotlikoff that many retirees would be wise to gradually increase their allocation to stocks as they run down their assets and Social Security looms larger as a source of wealth. That’s something that not many target-date funds do. In fact, some target-date funds continue to decrease the allocation to stocks throughout an investor’s retirement.

Pfau and Michael Kitces wrote an article advocating a “glide path” of increasing stock exposure during retirement that was published by the Journal of Financial Planning in 2014. “It did seem to resonate with a lot of consumers and readers,” Pfau said. “People said, ‘That’s really interesting. I’d like to apply that to my own retirement.’”

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