Paper-to-Podcast

Podcast Transcript

Hello, and welcome to paper-to-podcast.

Today, we are tackling the world of retirement investing—a topic that causes more confusion than trying to assemble flat-pack furniture without instructions. But don’t worry, by the end of this episode, you’ll know why you might want to question some of the most popular advice about saving for your golden years. We’ll be exploring an eye-opening study called “Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice,” brought to us by Aizhan Anarkulova and colleagues, published in October 2023.

Let’s start with the basics. If you’ve ever talked to a financial advisor, read a money magazine, or been cornered by your uncle at Thanksgiving, you’ve probably heard two main rules of thumb for retirement investing:

First, you’re supposed to split your investments between stocks and bonds—sort of like splitting the check at dinner, but with fewer awkward glances. Second, if you’re young, you should put more money in stocks, and then shift more to bonds as you get older. This is the “glidepath” strategy, which sounds a bit like you’re taking off in a plane, then slowly descending into a peaceful, bond-filled runway.

Well, get ready for some turbulence. According to this paper, these rules might not just be outdated—they might be costing you money, security, and even your children’s inheritance! I know, that’s a lot to take in. So let’s break down what the researchers did, what they found, and what it could mean for your future beach house—or, at the very least, your future ability to buy really nice socks.

The researchers behind this study decided to go big—really big. Instead of looking just at the United States stock market or a few decades of data, they reached back nearly 2,500 years. That’s right, they went so far back that the Roman Empire was basically a start-up. They collected monthly real returns (that’s after inflation) from 38 developed countries, including domestic and international stocks, bonds, and bills. If you’re wondering whether your retirement plan would survive the fall of Constantinople, this is the study for you.

But they didn’t stop at gathering a mountain of data. They also built a detailed model simulating the financial lives of typical United States couples, starting at age 25 and following them all the way through retirement. This model included everything from uncertain wages (because let’s face it, who’s ever really sure what their boss is thinking?) to Social Security, and even the possibility of living longer than expected.

Now, here’s the twist: the researchers compared the traditional “target-date fund” approach—a mix of stocks and bonds that shifts toward bonds as you get older—with a much simpler strategy. In this simple strategy, you put half your retirement money in United States stocks, half in international stocks, and then just... never touch it again. No adjusting, no fancy rebalancing, and definitely no panicked late-night trading after reading bad news.

So, what happened when they ran this simulation one million times for each strategy? Let’s just say the results were about as lopsided as a tug-of-war between a sumo wrestler and a kitten.

First, the all-equity strategy (50% United States stocks, 50% international stocks) produced, on average, 32 percent more wealth at retirement than the typical target-date fund. The average retirement nest egg for the all-equity plan was about $1.07 million, compared to just $0.81 million for the target-date fund. That’s a difference big enough to buy a lot of early-bird specials.

Second, when it comes to enjoying retirement, the news gets even better. The average income replacement rate—that is, how much of your working income you can continue to spend in retirement—was 1.24 for the all-equity strategy. That means, on average, people using this strategy could actually spend more in retirement than they did while working. Compare that to 1.06 for the target-date fund. So, you might not just keep up your lifestyle—you might upgrade to the fancy guacamole.

Third, the all-equity strategy isn’t just about ballooning your bank account. It also reduces the risk of running out of money. The probability of retirees running out of savings before they die—what the researchers politely call “ruin probability”—was just 8.2 percent for the all-equity plan, compared to a stomach-churning 16.9 percent for the target-date fund. And if you are hoping to leave something to your heirs, the average bequest left behind was a whopping $2.97 million for the all-equity strategy, versus $0.86 million for the target-date fund. Your future heirs can start practicing their surprised faces now.

But before you rush out and sell all your bonds, there’s a catch. The all-equity approach comes with bigger “drawdowns.” That’s finance-speak for those moments when your account balance takes a nosedive and you start stress-eating ice cream. The largest average drop during retirement was about 50 percent for the all-equity portfolio, compared to 38 percent for the target-date fund. That means you’ll see your portfolio fall further in a really bad market. So, you need to be able to stomach some temporary pain if you want those long-term gains. But if you can stay calm and avoid making rash decisions during market crashes, the payoff is worth it.

Now, let’s zoom out to the bigger picture. If everyone in America swapped their target-date funds for this simple 50/50 stock strategy, the researchers estimate a collective retirement welfare boost of around $240 billion each year. That’s enough to fund a lot of bingo nights, or, you know, actual important stuff like healthcare and grandkids’ college tuition.

You’re probably thinking, “If this is so great, why isn’t everyone doing it?” The researchers have an answer. The traditional advice—mixing in bonds and shifting as you age—only looks better if you assume the United States stock market will always perform like it did in the past, and if you ignore the way returns tend to “clump” together over long periods. When you use global data and account for the quirks of real-world markets, the all-equity approach comes out on top.

How did the researchers pull off such an epic analysis? They used a simulation method called a “stationary block bootstrap”—which sounds like a fun dance move, but is actually a way to preserve the patterns and dependencies in financial data. This keeps the results realistic, instead of pretending that each year is totally independent from the last. They also included real-life messiness, like unpredictable earnings, Social Security, and the risk of living longer than expected. They ran these simulations a mind-blowing one million times per strategy, so these results are not just a lucky fluke.

Why is this study especially convincing? For starters, the sheer scale and diversity of the dataset—2,500 years of returns from 38 countries—means we’re not just relying on what happened in the United States during a couple of good decades. The simulations also account for the natural ups and downs of markets, and the sometimes weird way returns cluster together. The researchers were transparent about their methods, tested their results in lots of different ways, and documented everything clearly. Basically, they did everything short of hiring a skywriter to spell out their findings.

Of course, no study is perfect. There are some caveats. The future might not look exactly like the past, even if you have 2,500 years of data. The model assumes things like steady savings rates, typical couples, and following the four percent withdrawal rule—rules that might not fit everyone’s situation, especially if you’re single, living abroad, or planning to spend your retirement as a professional skydiver. The analysis also assumes that investors keep their cool during big downturns and stay fully invested. If you’re someone who tends to panic and sell at the worst possible moment, those big drawdowns could hurt more. And finally, the study doesn’t subtract real-world annoyances like taxes, transaction costs, or the occasional need to buy a new roof.

So, what does this all mean for you, your family, and society? On a personal level, this research suggests that a simple, globally diversified all-stock portfolio could help you retire richer, spend more, and leave a bigger inheritance—if you can handle some bumps along the way. For financial advisors and retirement plan sponsors, the findings could inspire a rethink of the default options in retirement plans, potentially leading to better outcomes for savers. Policymakers and regulators might want to revisit their official guidelines and consider whether it’s time to ditch the old “mix your bonds and stocks” advice for a strategy that actually works better over the long haul.

Educational programs could use these findings to help people make smarter investment choices, and asset managers might even launch new products based on the results (though, let’s be honest, they’ll probably still find a way to charge a fee). Even insurance companies and pension funds could apply these insights to manage their own risks more effectively.

In short, this study suggests that when it comes to retirement investing, sometimes the simplest approach—just splitting your money evenly between United States and international stocks, and sitting on your hands—might be the most powerful move you can make. Just remember, you’ll need to ignore your instincts when the market gets wild. So, practice your best “zen” face and maybe keep some calming tea on hand.

That’s all for today’s deep dive into the world of retirement investing. You can find this paper and more on the paper2podcast.com website.