You Will Live Too Long to Own Bonds

You should be investing in equities no matter what your age.

Most investors—particularly those at large investment houses—are following an outdated strategy that could be hampering their long-term retirement success.

This widely accepted strategy, known as the "Glide Path" approach, dictates building a portfolio heavy in stocks when young and gradually shifting to bonds over time. While this approach is deeply embedded in the financial services industry and its regulatory framework, mounting evidence suggests it may be fundamentally flawed. Not only does it potentially sacrifice significant returns at a time when retirees are living longer than ever, but its core assumption that bonds provide the safety they're presumed to has come under question in the recent decades.

This analysis will examine why this conventional wisdom deserves scrutiny, and why investors might need to fundamentally rethink their approach to retirement portfolio construction.

Traditional Wisdom (100 Minus Age & Its Derivatives)

Traditionally, following a glide path strategy meant that the amount of equities in a portfolio should equal “100 Minus Age.” Investors would subtract their age from 100 to determine the percentage of their portfolio should be to allocated to stocks, with the remainder in bonds. For example, a 65-year-old should have 35% in stocks and 65% in bonds (100-65 = 35).

However, as life expectancy increased and people began outliving their money implementing this rule, there were some adjustments upwards in the percentage of equities—the conclusion being that people need to hold more stocks than bonds as originally thought if they didn’t want to run out of money in retirement. This updated rule—”110 or 120 Minus Age” would result in a 65-year-old owning 45-55% in stocks and 45-55% in bonds.

The premise of this strategy is based on the assumption that younger investors can afford to take on more risk because they have a longer time horizon to recover from market downturns. As the investor approaches retirement and the need for their monies, the portfolio gradually shifts to more conservative investments, such as bonds, to reduce volatility and protect accumulated wealth. Investors are to believe that both bonds and equities should be in your portfolio at some point and that bonds act as safer investments while equities are more risky.

Over the last five decades, financial institutions and advisors embraced the age-based rule for several compelling reasons. First, its straightforward formula made it easy to explain to the average investor who had little financial expertise. Second, it aligned with the increasingly influential Modern Portfolio Theory (MPT)—when those reaching retirement age (65) were expected to live only to age 78.9 for men and 81.2 for women, compared to today's life expectancy of 84.1 and 86.7 respectively. MPT emphasized the benefits of diversification through a blend of equities and bonds, though it was developed when retirees were expected to live 5-6 years less than today. Third, the strategy offered a systematic approach to risk management that could be easily implemented across large numbers of retirement accounts, making it operationally efficient for financial institutions.

Strategy Outcomes

The purpose of investing is to make enough money over a period of time for your intended purpose, so it’s very important that whatever strategy you implement has a likelihood of getting you there. Fortunately, we have decades of historical data that helps guide realistic outcomes.

Let’s first consider outcomes of MPT and its Glide Path strategy looking at the raw returns you could expect in various portfolios and then consider their inflation-adjusted performance.

Raw Performance Analysis

We will compare returns from various portfolios over a 17-year period (2007-2024), using the Vanguard Total Stock Market Index (VTI) and Vanguard Total Bond Market Index (BND) as our benchmarks.

VTI = Blue, BND = Red

As this graph shows, the outcomes of the two indexes are very different; with those owning 100% equities vastly outperforming bond holders. From January 1, 2007 - December 31, 2024, the total stock market returned ~9.14% annually¹. The total Bond Market with an annual return of ~2.64%, including the interest payments, over the same period².

Using these same assumptions, here are hypothetical outcomes over that same period if an investor used the glide path method and built a traditional portfolio of blended stocks and bonds based on their age:

• Conservative (40% VTI, 60% BND): 5.24% annual return

• Balanced (50% VTI, 50% BND): 5.89% annual return

• Growth (60% VTI, 40% BND): 6.54% annual return

As one would expect, the more equities held, the better a portfolio’s performance over a long-period of time.

Inflation-Adjusted Performance

Now let’s turn to inflation—a economic phenomenon that you have no control over, but—as recent years have shown—can have a significant impact on your cost of living and ultimately your success in retirement.

These return differences become even more striking when we account for inflation. With average inflation during this period running at approximately 2.5% annually (which is lower than what we’ve seen in recent years):

• The real return on bonds was just 0.14%

• The real return on stocks was 6.64%

To put this in practical terms, a $100,000 portfolio invested in:

• 100% stocks would grow to approximately $438,000 after 17 years.

• 100% bonds would grow to only $156,000.

• A 60/40 portfolio would grow to approximately $294,000.

*Author’s note: please understand these are simplified calculations and serve solely as an illustration for purposes of education. These do not represent any real-life portfolio and should not be applied directly to your own investment outcomes.

Over this 17-year period the stock market investments substantially outperformed bonds in raw returns. And when factoring in inflation's impact, this performance gap widened dramatically, as bonds barely kept pace with rising prices while stocks delivered strong real returns. The practical result shows investing heavily in equities proved far more effective at growing wealth over this extended timeframe. Let’s now turn to market downturns and recoveries and explore if bonds play a role in improving investor outcomes.

Recovery Periods: A Critical Look at Market Downturns

Moving beyond just returns, the conventional wisdom behind the Glide Path strategy suggests that older investors need more bonds to protect against market downturns. The thinking is that near to or during retirement, holding on to your money by reducing the short-term impact a market downturn has is more important than maximizing the returns. Let’s examine this assumption looking at historical recoveries.

Looking at the worst downturn since 2007—the 2008 Financial Crisis—we will consider the losses and time it took for the portfolio to fully recover.

• 100% Stock Portfolio: Fell 55%, recovered in 4.5 years

  • 2009 Returns: approximately +32% return

• 60/40 Portfolio: Fell 35%, recovered in 3.8 years

  • 2009 Returns: approximately +22% return

• 40/60 Portfolio: Fell 25%, recovered in 3.2 years

  • 2009 Return: approximately +17% return

Despite taking larger initial losses and a longer recovery period, the 100% stock portfolio would have significantly outperformed over the following 10-year period.

• 100% Stocks (~9.14% annual return):

  • 2009: Started at 45% of original value (after 55% drop)

  • After 10 years: ~236% of original investment

• 60/40 Portfolio (~6.54% annual return):

  • 2009: Started at 65% of original value (after 35% drop)

  • After 10 years: ~188% of original investment

• 40/60 Portfolio (~5.24% annual return):

  • 2009: Started at 75% of original value (after 25% drop)

  • After 10 years: ~170% of original investment

This further illustrates an important point: while more conservative portfolios fell less during the crash, they also captured less of the upside during the recovery period. The dramatic recovery in 2009 provided the greatest benefit to those who maintained their equity exposure through the downturn. And, prior to and after recovery, the all-equity portfolio significantly outperformed its more conservative counterparts.

The biggest risk in these periods of downturns is not that your entire portfolio has decreased, but that in addition to the decrease in value, withdrawals from your portfolio during the recovery period compound the impact on the portfolio. Here, if you had a 100% equities portfolio ideally you could wait 4.5 years for it to recover before you begin withdrawals again. (For most investors, a 4.5-year timeline is too long, but some period of delaying withdrawals is possible with planning). Using a cash reserve strategy in your plan will help reduce the risk of having to withdraw from your portfolio during a downturn. This strategy will be discussed in a follow-up Stack.

Sequence of Returns & Withdrawal Planning

Ultimately, the money you're saving for retirement serves one primary purpose: funding your life after you stop working. This requires thoughtful withdrawal planning to ensure you don't outlive your assets. The biggest risk most investors will face when it comes to withdrawal planning for retirement is the sequence of returns risk, which can be devastating to a retirement portfolio.

Understanding Sequence Risk

Sequence risk refers to the danger of experiencing poor investment returns in the early years of retirement when withdrawals are being made. The timing of negative returns matters significantly more than many realize. Here's a striking example:

Consider two retirees starting with $1,000,000 and withdrawing $40,000 annually (4%):

1. Retiree A experiences -20% returns in their first two years of retirement, followed by 7% annual returns.

2. Retiree B experiences the same -20% returns, but in years 8-9, with 7% returns in other years.

After 10 years:

• Retiree A's portfolio: $562,000

• Retiree B's portfolio: $742,000

The difference is stark: nearly $180,000 more in Retiree B's portfolio, despite experiencing identical returns over the decade. This demonstrates how early negative returns combined with withdrawals can permanently impair a portfolio's long-term sustainability.

Mitigating this risk is part of successful portfolio construction—as constructing a portfolio must take into consideration the withdrawal needs and timing.

Bond Portfolio Issues & Solutions

Portfolios with bond-heavy strategies threaten successful retirement strategies in a number of ways:

• Poor Long-Term Returns; Bonds significantly underperform stocks over a long period of time.

• Outdated Life Expectancy Assumptions; The traditional bond-heavy approach was developed when life expectancy was lower; longer retirements require greater growth to sustain withdrawals.

• Recovery Period Drawbacks; While bonds fall less during market crashes, they also recover less dramatically, permanently reducing your wealth’s long-term growth.

• Sequence Risk Issues; Bond-heavy portfolios don't adequately protect against sequence risk, and their lower returns make it harder to recover from withdrawals during a down market.

The data suggests that the traditional "glide path" approach of increasing bond allocation with age may be fundamentally flawed and might be worth reconsidering. The good news is there are ways to mitigate some of these risks when constructing a portfolio. In a follow-up Stack, I will explain the cash reserve strategy that retirees may want to consider using in lieu of this traditional glide path method.

• Vanguard's official VTI page: https://investor.vanguard.com/investment-products/etfs/profile/vti This provides official fund information and current data

• Yahoo Finance VTI page: https://finance.yahoo.com/quote/VTI Offers historical price data, charts, and detailed analytics

• Morningstar's VTI page: https://www.morningstar.com/etfs/arcx/vti/performance Provides comprehensive performance analysis and historical data

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• Vanguard's official BND page

• Yahoo Finance BND page

• Morningstar's BND page

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