Changing the mix as the client ages
Lots of equity early, less each year, a floor at retirement. The arithmetic is a straight line; the questions are how steep, what it means in dollars this year, and what moving the retirement date does.
- Read an equity weight off a straight-line glide path
- Turn this year's step into dollars moved
- Find the age at which the path reaches a given weight
- Say what a later retirement date does to the line
The intuition
A 25-year-old's biggest asset is forty years of future salary, and a bad decade in the market barely touches it. A 64-year-old's biggest asset is the portfolio itself, and a bad year just before retirement can be permanent, because withdrawals start while prices are down. A glide path turns that into a schedule: high equity early, a little less each year, a floor at retirement. Target-date funds are exactly this.
The line has three numbers: where it starts at 25, the floor it reaches at the retirement age, and therefore the slope, the points of equity it gives up each year. Everything else follows. This year's step times the portfolio is the dollars moved to bonds. Any weight on the line has an age. And a later retirement date redraws the same fall over more years, so the line flattens and the client holds more equity today.
Slope = (starting equity − floor) ÷ (retirement age − 25) points a year. Equity at age a = start − slope × (a − 25), never below the floor. Dollars moved this year ≈ slope × portfolio. Age at which equity reaches x = 25 + (start − x) ÷ slope. The "110 minus age" rule is a comparison, not the plan.
Why it works
- The conventions here: a straight line from a starting weight at 25 to a floor at the retirement age, then flat. This year's shift applies the yearly step to today's portfolio, ignoring growth during the year.
- Human capital is the reason. Early on, future salary is a large bond-like asset the client already owns, so the financial portfolio can be mostly equity. As that asset is spent, the portfolio takes over and the equity comes down.
- Sequence risk is the other reason. Two retirees with the same average return end very differently if one meets the bad years first, because they are selling to live on while prices are low. The floor at retirement is the defense.
- The step is the same every year; the dollars are not, because the portfolio grows. Late in the path the same one-and-a-quarter points is a much larger trade.
- Retiring later flattens the line. The same fall spread over more years means a smaller step and, today, more equity: three more years of salary and three fewer of withdrawals justify it.
- Rules of thumb ignore the two things a glide path is built around, the retirement date and the floor. Compare with "110 minus age", then set it aside.
| Slope: (90% − 40%) ÷ (65 − 25) | 1.25 points a year |
| Weight at 45: 90% − 1.25 × 20 | 65% |
| Dollars moved this year: 1.25% × $500,000 | $6,250 |
| Age at which equity reaches 60%: 25 + (90 − 60) ÷ 1.25 | 49 |
| Retire at 68 instead: slope 50 ÷ 43 = 1.163; weight at 45 | 66.74% |
| "110 minus age" at 45, for comparison | 65% |
Here the rule of thumb happens to agree at 45. It would not at 60, where the plan says 46.25% and the rule says 50%.
The formulas
Points of equity given up each year.
Walk down the line from 25.
This year's step, in dollars.
The line run backwards.
A comparison only.
Worked example
Find the yearly step first: the total fall over the number of years. Then walk down from 25 to the client's age. The follow-up compares with the rule of thumb.
See it move
Same client. Change where the path starts, its floor, the retirement age, the client's age and the size of the portfolio.
- Raise the client's age. The plan's weight falls a step a year until it reaches the floor, then stops.
- Move the retirement age later. The step per year falls and today's weight rises, or stays at the floor: the same fall over more years.
- Raise the floor. The step per year falls and today's weight rises or stays: less to give up.
- Raise the starting weight. The step per year rises, and today's weight rises or stays.
- Change the size of the portfolio. Only the dollars moved this year change.
Run it backwards
Run the line backwards: given the start, the floor and the retirement age, at what age does the equity weight first reach a given level?
The points to fall from the start to that weight, divided by the points given up each year, is the number of years after 25.
It is the same line read the other way, and the way a client asks the question: when will I be half in bonds?
Traps
Say it in the interview
“Why do glide paths reduce equity as clients age, and how steep should the line be?”
Check yourself
4 fresh questions, with new numbers. Answer each one correctly to finish the chapter. Get one wrong and you will see the full working, then you can try it again with new numbers.
Answers within 1% are marked right. Type the number; $, %, x and M are fine. First tries count toward Learned: the topic is Learned once every chapter is done and 75% of first tries were right.
- Slope = (start − floor) ÷ (retirement age − 25).
- Weight at an age = start − slope × years since 25, never below the floor.
- Dollars moved this year = slope × portfolio.
- A later retirement date flattens the line: more equity today.