Retirement Path Planner Glide

A glide path is the schedule that fixes how much of a retirement portfolio sits in equities at each point on the run-up to the target date. The simplest form is linear: the equity weight in year t is w_E(t) = w_start - (w_start - w_land) x (t / N), where t counts years from today and N is the number of years remaining, so the portfolio sheds a constant (w_start - w_land) / N percentage points of equity every year. Everything else follows from that one schedule. The blended expected return for a given year is w_E R_E + w_B R_B, and the blended standard deviation comes from the two-asset variance identity sqrt(w_E^2 s_E^2 + w_B^2 s_B^2 + 2 w_E w_B s_E s_B rho). Because the cross term carries the correlation rho, a mix of imperfectly correlated assets is always less volatile than the weighted average of its parts, so each step down the glide path buys a little more risk reduction than the weights alone would suggest. Volatility still falls more slowly than the equity weight itself under the assumptions used here, because the bond sleeve carries volatility of its own: cutting equity from 90 to 50 percent is a 44 percent cut in the weight but only a 39 percent cut in portfolio volatility, from 14.47 to 8.82 percent. The economic case for de-risking is not that equities become safer or riskier with time. Paul Samuelson and Robert Merton both showed in 1969 that under constant relative risk aversion and independent returns the optimal share in risky assets is the same at every horizon, so horizon alone does not justify a glide path. Two arguments do. The first is human capital: a worker's future earnings behave like a large bond-like holding that shrinks as retirement approaches, so the equity share of the financial portfolio must fall to keep total risk steady, a point formalized by Zvi Bodie, Robert Merton and William Samuelson in 1992. The second is sequence-of-returns risk: once withdrawals begin, a poor early return is realized rather than merely on paper, and the balance is at its largest exactly then, so the same percentage loss costs the most money it will ever cost. Typical planning inputs are 7 to 9 percent nominal expected return with 15 to 18 percent volatility for broad equity, and 4 to 5 percent with 5 to 7 percent volatility for investment-grade bonds; the stock-bond correlation is not stable, having been clearly negative through the 2000s and clearly positive in 2022. This model holds the capital market assumptions constant along the whole path, ignores taxes, fees, inflation and rebalancing costs, and reports the parametric 95 percent one-year loss as E[R_p] - 1.645 sigma_p, which assumes normally distributed returns and therefore understates genuine tail losses.

Age-based de-risking was folk wisdom long before it was a product. The old broker's rule set the bond share of a portfolio to the investor's age in percent, which is the same as holding 100 minus age in stocks; as life expectancy rose and bond yields fell, advisers stretched the equity side to 110 or 120 minus age. Formal life-cycle theory arrived in 1969, when Paul Samuelson and Robert Merton published companion papers in the Review of Economics and Statistics showing that with constant relative risk aversion and independent returns the optimal share in risky assets does not depend on the horizon at all. That result set the puzzle the following two decades tried to answer, and the resolution that stuck came from Zvi Bodie, Robert Merton and William Samuelson in 1992: human capital is a bond-like asset that runs down as a career progresses, so the financial portfolio has to de-risk to keep combined exposure roughly constant. Packaging that schedule into a single fund happened in the 1990s. Wells Fargo Nikko Investment Advisors launched the LifePath series in 1993 and Fidelity followed with the Freedom Funds in 1996, but adoption stayed modest until the Pension Protection Act of 2006 and the Department of Labor regulation effective in December 2007 allowed employers to use target-date funds as a qualified default investment alternative, routing automatic-enrollment contributions into them by default. Target-date assets grew from roughly a hundred billion dollars in 2006 to several trillion two decades later. The 2008 crash exposed how differently these funds were constructed. Funds dated 2010, held by people about to retire, lost roughly a quarter of their value on average, with a wide spread between the most and least equity-heavy, and the Securities and Exchange Commission and the Department of Labor held a joint public hearing on target-date funds in June 2009. Out of that came the vocabulary still used today: a to glide path stops de-risking at the target date, while a through glide path keeps declining for years afterwards on the assumption that the investor stays invested deep into retirement. A later strand of research runs the other way. Wade Pfau and Michael Kitces argued in the Journal of Financial Planning in 2014 that a rising equity glide path through retirement, starting conservative and drifting back toward stocks, survived historically worse return sequences than a static or falling allocation.