Glide paths

Individual Retirement Portfolios and Glide Paths
As mentioned in the Bond Percentage Equal to Your Age, many people prefer not to keep a static stock/bond allocation throughout their retirement, but to gradually have their portfolio become more conservative by reducing the stock allocation and increasing the bond allocation as they age. However, the rule-of-thumb method where your bond percentage is equal to your age is sometimes seen as a bit too conservative. Another method, similar to the allocations used by some retirement-date funds is to follow a glide-path allocation change that isn't necessarily directly linear, as is the bonds=age method. Often, a glide-path method will add bonds to the portfolio mix more slowly in the early years before retirement, thus allowing the portfolio more possibility for growth before retirement. Then, after retirement, the glide-path may transition more quickly to a bond-heavy allocation, thus shielding the portfolio from stock market volatility during later retirement years. Figure 3 shows a graph comparing the (100-age) stock allocation and the Log(100-age)-1 glide-path allocation. The blue (100-age) line is linear, changing the allocation by 1% each year. The glide-path allocation changes more slowly in the earlier years, presumably allowing for more portfolio growth during the accumulation years, and then turns quicker towards a more conservative allocation during the retirement years, eventually becoming more conservative and following a 100% bond allocation for age 90 and later.

As with the similar Bond Percentage Equal to Your Age method, following a glide-path stock/bond allocation allows the overall portfolio to become more conservative each year. The results, shown in Figure 4, are similar to the Bonds Equal Age method, but in the time-period shown in the graph, the slower transition to bonds allowed the overall portfolio to grow a bit more, resulting in slightly more money being withdrawn from the portfolio, while retaining a similar volatility.

Links

 * Investopedia
 * Vanguard Target Retirement Fund Glide Paths
 * How Fidelity Freedom Funds Work