Chapter 15
Investing and Spending in Retirement
After a foundation chooses its asset allocation, it should be able to leave that allocation unchanged for the indefinite future. As the last chapter showed, a foundation can set up a spending plan and choose a long-run strategic asset allocation to support it. Unless there is major distress in the markets, the foundation should be able to carry out its plans without making changes to its allocation. It will hire and fire managers, but the overall investment plan should remain unchanged. Some foundations, of course, will pursue tactical asset allocation in an attempt to take advantage of short-term opportunities to overweight or underweight specific asset classes. But usually the tactical asset shifts are relative to a strategic (i.e., long-run) asset allocation that remains unchanged.
Individual investors are different. Most individual investors have one major investment goal—to save enough for retirement. Spending out of their portfolio is usually minimal in the years when they are working. Then spending becomes essential at the time of retirement. For this reason, there is a life-cycle to investing. In the years when wealth is being accumulated, asset allocation is much more aggressive than when the investor nears retirement.
In the last few years, investment firms have begun to formalize this process by which asset allocation changes over time. These firms have created target retirement funds which change continuously as the investor ...
