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What is a Target Date Retirement Fund’s Glide Path?

Target date retirement funds, also called lifestyle funds or simply target funds, are mutual funds that automatically adjust their own asset allocation with a target retirement date in mind. As the years pass, the fund moves from a more aggressive, equity heavy mix to one that is less aggressive and may include more income generation and “safer” investments.

Glide path refers to how that mix of investments intends to change as the years pass. Imagine a chart in which you graphed the asset allocation over time (% in stocks, for example) and you have an idea of what the “glide path” of a fund will be. A steeper glide path means that the fund becomes more conservative faster than one with a shallow glide path. A few years ago, I compared the different asset allocations of target funds for several fund companies [3] and it was obvious that not all funds were equal. IN that example, Fidelity was more aggressive, starting with a higher allocation in stocks and ended with a higher allocation in stocks when compared to TIAA-CREF, Vanguard, and T. Rowe. (These numbers are several years old now and we didn’t get a fund’s specific glide path, we simply used the target years as a proxy for the glide… so this may have changed since then)

Back then, the term glide path hadn’t been coined yet. Nowadays, most funds will give you an idea of their glide path. For example, here is the glide path approach for Vanguard [4] – here’s one for their Target Retirement 2015 trust [5] (with some hard numbers). The glide path chart, which applies to all target funds, gives you an idea of where they want to be at each point in the path. In the 45+ to 25th years from the target date, they want a mix of 63% domestic stocks, 27% international stocks, and the remaining 10% in nominal bonds. Once you break 25 years from the target date, the allocation begins to shift from stocks towards bonds. In fact, the path doesn’t stop at the target date, it continues for another 7 years. At 7+ years beyond the target date, the fund allocation remains the same.

What does this mean for you? It means that you need to check the glide path of any target fund to see if it matches what you want your allocation to be. Are you comfortable with 30% of your target funds in domestic and international stocks once you hit 7+ years after the target date? If not, you will need to adjust. Check the path and make sure it meets your needs, as they will likely be different than other people’s needs. Also, remember that your other investments will play a role in your overall asset allocation.