Understanding Glide Path Target Date Funds for Better Outcomes

Glide path target date funds are designed to automatically adjust their asset allocation as the target retirement date approaches, ensuring a smoother ride for investors. This is especially important for those who don't want to constantly monitor and adjust their investments.

The glide path typically starts with a more aggressive asset allocation, such as 80% stocks and 20% bonds, and gradually shifts to a more conservative allocation, such as 40% stocks and 60% bonds, as the target date nears. This gradual shift helps to reduce risk and increase stability.

Investors can choose from different types of glide path target date funds, including those that focus on income generation or those that prioritize capital preservation. By understanding the glide path, investors can make more informed decisions about their retirement savings.

A glidepath is the gradual shift in asset allocation that occurs over time in a target date fund. It's like a roadmap, guiding the fund's investments to become more conservative as the target date approaches.

The glidepath is designed to balance risk and return, with the fund's investments becoming more conservative as the target date nears. This means the fund will hold more bonds and less stocks in the years leading up to the target date.

For example, a target date fund with a glidepath might hold 80% stocks and 20% bonds in the early years, gradually shifting to 40% stocks and 60% bonds by the time the target date arrives. This helps to reduce risk as the target date approaches.

The glidepath is typically designed to be smooth and gradual, with the goal of minimizing losses in the years leading up to the target date. This is important, as the fund's investors are likely to be nearing retirement and want to minimize their exposure to market volatility.

Accumulation assumptions are a crucial factor in glide path target date funds, covering young savers and midlife savers. Young savers can take on greater investment risk due to their many years left in their careers to generate earnings.

Human capital, or the net present value of expected future earnings, is highest for young savers. It declines as a percentage of total wealth as the individual ages and financial capital increases.

Financial capital, which reflects an individual's total saved assets, starts low and grows over time. Many fund managers use the human capital/financial capital model to inform glidepath design, allowing for high equity allocations for younger participants that gradually decline over time.

Glidepaths vary in several key areas, including initial equity allocation, equity allocation at retirement, terminal equity allocation, and the choice between "to" and "through" retirement. These differences are driven by fund managers' concerns about longevity risk and their views on equity allocation at different stages of life.

Fund families have varying initial equity allocations, which can range from 20% to 80% or more, depending on the manager's approach to combating longevity risk. This allocation can significantly impact the overall glidepath.

The terminal equity allocation at the end of the glidepath depends on each manager's research and their efforts to balance market, longevity, and inflation risks. This allocation can also vary widely between fund families.

Fund managers choose between "to" and "through" retirement glidepaths based on intensive research and modeling. The choice between these two glidepaths can have a significant impact on the overall investment strategy.

Here's a comparison of the two glidepath types:

The slope of the glidepath can also vary, with "to" glidepaths typically having a steeper slope than "through" glidepaths. This steeper slope often occurs between ages 40 and 65, when most participants are anticipated to retire.

Accumulation assumptions cover two main groups of savers: young savers and midlife savers. Young savers are just beginning their careers and can take on greater investment risk.

Young savers have many years left in their careers to generate earnings, making their human capital highest at this stage. Human capital is the net present value of all expected future earnings.

As individuals age, human capital declines as a percentage of total wealth, while financial capital increases. Financial capital reflects an individual's total saved assets in stocks, bonds, and other investments.

Many fund managers use a human capital / financial capital model to inform glidepath design. This model allows for high equity allocations for younger participants with greater expected volatility that gradually decline over time due to lessened earning power from their human capital.

Midlife savers, on the other hand, can take on investment risk, but to a lower degree as they get closer to their retirement target date.

As people live longer, they need to plan carefully to avoid running out of money in retirement. Americans are living longer, and this trend is expected to continue.

The goal is to generate enough income to sustain withdrawals of a fixed percentage over the course of a participant's retirement period. This means creating a sustainable income stream that won't deplete their funds.

Some target date fund managers have studied participant behavior to inform their glidepath construction. They've found that many people withdraw their account balances at retirement and move them to another investment vehicle.

Participants may seek alternative means of investment management in their retirement years, such as annuities or IRAs. This is why some managers support a "to" model for glidepath construction.

Glide path target date funds are designed to automatically adjust their asset allocation based on the fund's target retirement date, which can be a significant advantage in terms of ease of use.

As a result, investors can expect a more consistent and predictable investment experience, with the fund's asset allocation shifting from more aggressive to more conservative over time.

Investors should evaluate the fund's performance by looking at its returns over various time periods, including the past year, 3-5 years, and 10 years or more.

The fund's returns should be compared to a relevant benchmark, such as the S&P 500 or the Russell 2000, to determine if it's outperforming its peers.

Investors should also consider the fund's fees and expenses, which can eat into their returns over time.

A fund with lower fees and expenses can be a more cost-effective option, even if its returns are not significantly higher than its peers.

The Morningstar ratings can be a useful tool in evaluating the fund's performance, with a 5-star rating indicating that the fund has outperformed its peers over the past 3-5 years.

Investors should also consider the fund's risk level, with lower-risk funds generally offering more conservative investment options.

A fund's risk level can be determined by looking at its standard deviation, with lower standard deviation indicating a lower risk investment.

Investors should also evaluate the fund's manager's experience and track record, as a seasoned manager can make a significant difference in the fund's performance.

The fund's manager's tenure and experience can be an important factor in determining the fund's long-term potential for success.

As you approach age 65, you'll enter Phase 3, retirement. This is the approximate year when an investor would retire and leave the workforce, according to Vanguard's Target Retirement Trusts and Funds.

Investments in these trusts and funds are subject to the risks of their underlying funds, and the year in the trust or fund name refers to the target date. The trust or fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date.

An investment in a Target Retirement Trust or Fund is not guaranteed at any time, including on or after the target date. Vanguard is responsible only for selecting the underlying funds and periodically rebalancing the holdings of target-date investments.

The asset allocations Vanguard has selected for the Target Retirement Funds are based on their investment experience and are geared to the average investor. Regularly check the asset mix of the option you choose to ensure it is appropriate for your current situation.