Glide Path Retirement: How to Sail Into Retirement

Are you planning to retire in the next few years or decades?

If so, you might be wondering how to invest your money to achieve your retirement goals. One of the most popular and effective investing strategies for retirement is the glide path approach.

In this article, we will explain what a glide path is, why you should consider it, what are the pros and cons, and how to choose the best glide path for your situation. We will also introduce you to Kubera, a powerful financial dashboard that can help you manage your glide path retirement plan with ease.

What is a Glide Path for Retirement?

A glide path is a formula that determines the asset mix of a target-date fund, taking into account the number of years remaining until the target date. Target date funds (TDFs) are a type of mutual fund that blend stocks, bonds, and other investments to assist in retirement preparation. These funds assume greater investment risks during earlier stages and progressively adopt a more conservative approach as the end date (retirement) approaches.

Breaking Down the Basics of Target-Date Funds

Target Date Funds (TDFs) are designed to simplify the investment process for retirement planning by automatically adjusting their asset allocation over time. As the target retirement date approaches, TDFs generally shift from a more aggressive investment strategy focused on growth (with a higher proportion of stocks) to a more conservative strategy prioritizing capital preservation (with a greater emphasis on bonds and cash equivalents). This shift in asset allocation is commonly referred to as the "glide path."

TDFs often come in different management styles, which can influence their cost structure, asset allocation, and associated risks. The main types of management styles in TDFs are:

1. Active Management: These funds are managed by a team that actively selects investments to try and outperform market indexes.
2. Passive Management: These funds track benchmark indexes and aim to mirror their performance.
3. Hybrid or Blended Management: This style combines active and passive management strategies.

Another key distinction in TDFs is whether they are designed to reach their most conservative asset allocation “to retirement” or “through retirement.” The former typically becomes most conservative at the target retirement date and maintains this allocation throughout retirement. In contrast, “through retirement” funds continue to adjust their asset mix past the retirement date.

The advantages of TDFs include the convenience of having a diversified portfolio aligned with one's investment horizon, professional management, and the potential to manage various investment risks, such as market risk and inflation risk. However, TDFs also have limitations, such as the potential lack of customization for individual investment needs and varying fees based on the management style and fund strategy.

The use of Target Date Funds in the U.S. surged after 2006, partly due to automatic-enrollment pensions legislation. By March 2020, assets in target-date mutual funds and collective investment trusts (CITs) totaled approximately $1.9 trillion. The largest TDF managers in the U.S. include Fidelity, Vanguard, T. Rowe Price, and BlackRock.

But you don’t have to invest in a target date fund to follow a glide path strategy. You can also apply this same strategy to your own investment portfolio. All you need to do is create a timeline for how you’ll allocate investment dollars across different asset classes (such as stocks, bonds, cash, real estate, etc.) in order to prepare for retirement.

Why Take the Glide Path Approach?

Target date funds have gained popularity when saving for retirement because they operate on the straightforward principle that the level of risk one can assume, and the expected returns, should be greater for younger investors or those with a longer time horizon before retirement.

For instance, a portfolio for a young investor would primarily consist of equities and for an older investor more fixed-income investments.

This same principle applies across your entire investment portfolio. By following a glide path approach, you can:

• Maximize growth in your early years by investing more in stocks and other high-risk, high-reward assets.
• Minimize risk in your later years by shifting more of your portfolio to bonds and other low-risk, low-return assets.
• Provide a clear investment strategy that can be dialed in and tweaked as you progress towards your retirement date.

Glide Path Pros

The glide path approach has several advantages for retirement investors, such as:

• Simplifies investing by eliminating the need for frequent asset rebalancing. You can set up your glide path once and let it adjust automatically over time, or make minor changes as needed.
• Attractive for investors seeking a straightforward and easy-to-follow approach to retirement saving. You don’t have to worry about picking individual stocks or bonds, or timing the market. You just need to choose a target date and a glide path that suits your risk tolerance and goals.
• Provides a clear and consistent investment strategy that can help you stay on track and avoid emotional decisions. You can focus on the long term and avoid being swayed by short-term market fluctuations or FOMO (fear of missing out).

Glide Path Cons

The glide path approach also has some drawbacks that you should be aware of, such as:

• Difficulty in achieving true diversification due to concentration on a small number of retirement funds. You may miss out on some opportunities or expose yourself to some risks that are not captured by the funds you choose. For example, you may not have enough exposure to international or emerging markets, or you may be overexposed to certain sectors or industries.
• FOMO can make it difficult to dial down riskier investments as you get closer to retirement. You may be tempted to chase higher returns or stick to your comfort zone, even if it means taking on more risk than you can afford. You may also be reluctant to sell your winners or buy more of your losers, which can hurt your portfolio performance.
• Timing is important and can affect your outcome significantly. Major market shifts, such as recessions, crashes, or booms, can derail your glide path strategy and force you to make new plans. For example, if the stock market crashes right before you retire, you may not have enough time to recover your losses. Or if the bond market booms after you retire, you may miss out on higher returns.

Types of Glide Paths

There are different types of glide paths that you can choose from, depending on your preferences and objectives. The main types are:

Rising Glide Path

Portfolios with this approach typically have a higher proportion of bonds compared to equities. The equity share grows as bonds mature, provided the stock values don’t shrink. For example, a portfolio may contain 70% bonds and 30% equities at first, then as bonds mature, the composition may shift to 60% equities and 40% bonds.

The rising glide path is suitable for investors who are more conservative and want to preserve their capital in the early years of retirement. It also assumes that the investor has other sources of income, such as pensions or annuities, that can cover their living expenses. The rising glide path can help increase the longevity of the portfolio by boosting its growth potential over time.

Static Glide Path

This path maintains a consistent allocation strategy throughout the retirement period (e.g. 65% equities, 35% bonds). So if market fluctuations alter your glide path allocations, the portfolio undergoes rebalancing to restore the original proportions.

The static glide path is suitable for investors who are more moderate and want to balance their risk and return in retirement. It also assumes that the investor has a reliable and sufficient income stream that can cover their living expenses. The static glide path can help reduce the volatility of the portfolio by keeping it aligned with the investor’s risk tolerance and goals.

Declining Glide Path

On the declining glide path, investors progressively diminish their equity allocation as they approach and enter retirement. For example, at age 50, an investor with 40% equities might reduce those holdings by 1% annually to increase allocation to safer assets.

The declining glide path is suitable for investors who are more aggressive and want to maximize their growth potential in the early years of retirement. It also assumes that the investor has a flexible and adaptable income stream that can adjust to their changing needs. The declining glide path can help protect the portfolio from market downturns by lowering its risk exposure over time.

Understanding “To” and “Through” Glide Paths

A rising, static, or declining glide path can follow either a “to” or “through” approach, depending on when the asset allocation stops changing.

• To: asset allocation undergoes continuous adjustments until the fund reaches its target date. Then, asset allocation becomes static and remains unchanged for the rest of the retirement period.
• Through: asset allocation continues to undergo adjustments even after reaching the target date, until the end of the retirement period or the depletion of the fund.

The “to” approach is more conservative and aims to reduce the risk of running out of money in retirement. It is suitable for investors who expect to withdraw a large portion of their savings at or soon after the target date, or who have other sources of income that can cover their expenses.

The “through” approach is more aggressive and aims to increase the growth potential of the fund in retirement. It is suitable for investors who expect to withdraw a small portion of their savings at or soon after the target date, or who have a longer life expectancy and need to stretch their savings.

The Rule of 100

One of the simplest ways to determine your glide path is to use the Rule of 100. This rule states that you should subtract your current age from 100 to get the percentage of your portfolio that should be allocated to stocks. The remaining portion should be allocated to bonds and other fixed-income assets.

For instance, if you are 45 years old, the Rule of 100 suggests allocating 55% (100 - 45 = 55) of your portfolio to stocks and the remaining 45% to bonds. Note that this is a broad guideline and might not accurately align with your risk tolerance or investment objectives.

The Rule of 100 can help you create a simple and easy-to-follow glide path that adjusts automatically as you age. However, it also has some limitations, such as:

• It does not account for your personal factors, such as your income, expenses, savings, goals, health, lifestyle, etc.
• It does not account for market conditions, such as inflation, interest rates, returns, volatility, etc.
• It does not account for your preferences, such as your risk appetite, time horizon, withdrawal rate, etc.

Therefore, you should not rely on the Rule of 100 alone to determine your glide path. You should also consider other factors and consult a financial advisor if needed.

Further Prep for a Successful Retirement with Kubera

If you want to take your glide path retirement plan to the next level, you should check out Kubera, an all-in-one financial dashboard designed for today’s modern DIY wealth management needs. Kubera can help you:

• Get a big-picture view of your entire portfolio, including your glide path and target date funds, as well as your other assets and liabilities, such as bank accounts, cryptocurrency accounts, brokerage accounts, real estate, loans, etc.
• Rebalance your portfolio according to your glide path and target date, using the built-in features that help you monitor and adjust your target asset allocation, performance, and returns.
• Model real-life situations to see how they affect your net worth in the future. Traditional retirement calculators use fixed withdrawal rates, inflation rates, and social security benefits, which are too simplistic for today’s complex financial landscape. You need an adaptable yet simple tool for the fluctuating market conditions and personal circumstances. Kubera lets you simulate different financial scenarios, such as changing your income, expenses, savings, investments, taxes, inflation, interest rates, etc., and see how they impact your future wealth.
• Track your finances in your preferred currency, view your net worth and asset ROI in real-time, and organize your financial documents all in one place with Kubera.
• Access your dashboard from any device, anywhere, anytime, with secure and encrypted data storage and backup.
• Enjoy a simple and intuitive user interface that makes wealth management easy and fun.

Kubera is the ultimate financial dashboard for glide path retirement investors. It can help you create, manage, and optimize your glide path strategy, as well as keep track of your other financial assets and goals.

Whether you are just starting your retirement journey, or already enjoying your golden years, Kubera can help you sail into retirement with confidence and peace of mind.

Sign up for a trial of Kubera today and see for yourself how it can transform your glide path retirement plan.