Glide Path

A glide path turns asset allocation into a timetable. Early in a career, when retirement is decades away and future paychecks are your biggest asset, a portfolio can hold mostly stocks and ride out crashes. As the target date approaches, the path moves money into bonds and cash, because a large loss just before withdrawals begin leaves little time to recover. The SEC’s investor education staff describes a target-date fund as shifting from mostly stock funds toward bond funds as its target date nears, and calls the timing of that shift the glide path.

The Labor Department wrote the same idea into its 2007 rule on default investments in 401(k)-style plans. When a worker makes no investment choice, a plan fiduciary that defaults the money into a qualifying option, and meets the rule’s notice and other conditions, is not liable for losses that result, and one such option is an age-based fund or portfolio designed to grow more conservative, with a lower risk of losses, as the worker ages. The idea is not limited to retirement: 529 education savings plans may offer age-based portfolios, sometimes called target-date portfolios, that typically shift into more conservative investments as the beneficiary nears college age.

Target-date funds come in two designs. A “to” glide path reaches its most conservative mix at the target date and then stays put. A “through” glide path keeps shifting for years after the target date, so it usually holds more stock on the retirement date itself. The SEC notes that at many points along the way a “to” fund is invested in lower-return, lower-risk holdings than a “through” fund.

Neither is right for everyone. A “to” path suits someone who plans to move the money soon after retiring, for example into an annuity or a bond ladder. A “through” path suits someone who will keep the fund through a retirement that may last 30 years and still needs growth. Because funds with the same date can follow different paths, the Labor Department’s advice to plan fiduciaries works for individuals too: find out when a fund reaches its most conservative allocation, and whether that happens at or after the target date.

A standard glide path keeps cutting stocks after retirement or holds them flat. Research by Wade Pfau and Michael Kitces, published in the Journal of Financial Planning in 2014, argued for the opposite once withdrawals begin: start retirement with a conservative stock share and raise it over time. In their tests, a portfolio that started at 30% stocks and rose to 60% did better than one held at 60% throughout, and the strongest results generally came from starting at 20% to 40% stocks and finishing at 60% to 80%.

The logic comes from sequence-of-returns risk. Losses do the most damage in the first years of retirement, when the portfolio is near its peak and withdrawals have just begun. Holding the least stock then makes the lifetime pattern of stock exposure look like a U: high while working, lowest around the retirement date, and rising again later. The bond share traces the mirror image, a shape planners call a bond tent. Spending bonds and cash first, as a bucket strategy often does, produces a similar rising path without anyone planning it.

A rising path asks you to buy stocks in your 70s and 80s, which many retirees find uncomfortable, and its results depend on the return assumptions used. Pairing it with dynamic spending lets flexible withdrawals absorb some of the extra volatility.

If you own a target-date fund, its glide path is your asset allocation. Check its stock share today, at the target date and at the landing point, and compare them with your risk tolerance and your other savings rather than choosing by year alone.

To build your own, choose a stock share for now, one for your retirement date and one for later retirement, then connect them with a straight line or a few steps. Rules of thumb such as 110 minus your age give a rough start but ignore pensions, Social Security and how much you have saved. Income that behaves like a bond, such as a pension, can justify more stock in the portfolio; a thin cushion can justify less. Withdrawals reshape the mix too, because the order in which a tax-efficient withdrawal strategy drains accounts changes your overall stock share.

Review the path once a year and move along it as part of normal rebalancing, ideally inside tax-advantaged accounts, where shifting from stocks to bonds realizes no capital gains.

A glide path works only if it matches the rest of your finances and you actually follow it. Measure it across everything you own, including a spouse’s 401(k), an old employer plan and any taxable account, so the combined mix follows the plan rather than one account. Decide in advance what you will do in a crash, too: jumping ahead to a safer mix after a bad year, off the schedule, locks in the loss and can miss the rebound. Taxes matter because every step down the path is a sale unless new savings or withdrawals do the work.