Target-date funds can offer a streamlined solution for retirement investing. These mutual funds feature an asset allocation that automatically shifts over time as you get closer to your target retirement date. Each target date fund’s allocation shift is determined by its glide path. This track is different for every target-date fund, and it can determine how much or how little risk your portfolio is exposed to over time. When investing in target-date funds, it’s helpful to understand how the glide path works to make sure it aligns with your retirement goals.
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Defining What a Glide Path Is
A glide path is simply the way the asset mix within a target date fund changes over time. In a typical target-date fund, the investment mix becomes more conservative (i.e., less risky) the closer you get to your target retirement date. This is meant to reflect the idea that as you near the age at which you’ll begin drawing down assets, you have less time to recover from market losses.
Target date funds are identifiable by the year that’s included in their name. This can give you an idea of where a particular fund is on its glide path. So a 2030 target-date fund, for example, would likely have a current asset allocation that’s more conservative than a 2040 or 2050 target-date fund.
The point at which a target date fund begins to rebalance toward a more conservative stance can vary. There are target-date funds that can take a gradual approach with a glide path that eases into conservative investments the closer you get to retirement. But there are others that may make a more pronounced shift toward conservative assets in the five to 10 years before retirement.
How Glide Paths Are Determined
Glide paths aren’t chosen for target-date funds at random; instead, they’re set using a formula. Generally, this formula takes into account the time horizon to invest and the overall risk tolerance for the type of investor the fund is aimed at.
Glide path formulas can take different approaches. For example, a target-date fund can be static, meaning the asset allocation automatically resets to specific percentages. So for instance, you may have a fund that aims to keep you invested in 60% stocks and 40% bonds. The fund’s glide path would then adjust periodically to make sure it’s maintaining those percentages.
Some target-date funds can use the Rule of 100 to determine the glide path. The Rule of 100 simply means subtracting your age from 100 to determine your optimal stock allocation. So if you’re 45, for example, the Rule of 100 would dictate allocating 55% of your portfolio to stocks and the rest to bonds. This is just a general guideline, however, and it may not reflect how much risk you’re comfortable taking or how much risk you need to take to reach your goals.
In some cases, target-date funds can follow a glide path that’s allocated more heavily to bonds in the beginning, with the shift to stocks taking place later. The idea behind those funds is that investing in bonds early on gives you time to reap the benefits of the fixed income they can provide once they mature later.
“To” and “Through” Glide Paths
A target-date fund can have a “to” glide path or a “through” glide path and they mean different things. With a “to” glide path, the asset allocation continues to adjust up until the fund’s target retirement date. At that point, the asset mix would remain static beyond that point. So if you have a target-date fund with a retirement date of 2050, for instance, the glide path would stop shifting once you hit the 2050 mark.
A target-date fund with a “through” glide path, on the other hand, continues to adjust and rebalance its asset mix through the target date. This type of fund would typically keep you more invested in equities in the early years of retirement. Between the two, a fund with a “to” glide path would be the more conservative option.
Pros and Cons of Glide Path Funds
Target-date funds are a popular investment option, particularly inside employer-sponsored 401(k) plans. And while they can offer some benefits to investors, there are a few pros and cons to consider.
On the pro side, here’s what’s good about investing in mutual funds that follow a specific glide path:
- It makes investing easier since you don’t have to worry about rebalancing assets.
- They often have lower minimum investments compared to other mutual funds.
- Glide path funds can offer essentially hands-off investing since they’re professionally managed.
Those things might appeal to you if you’re new to investing or you just want a simplified way to build a portfolio for retirement.
But consider these potential downsides of relying exclusively on glide path funds:
- It may be more difficult to diversify if you’re concentrating most or all of your retirement dollars in a small number of funds.
- Some target-date funds can carry higher expense ratios and management fees than others, which can take a bite out of your returns.
- Glide paths aren’t necessarily one size fits all so what works for one investor may not work as well for you.
How to Choose the Right Glide Path
If you’re interested in simplifying your investments with target-date funds, think carefully about what type of glide path would work best for you.
For example, you might prefer a fund with a “through” glide path if you’re okay with remaining more invested in equities once you retire. But if you prefer a more conservative allocation, then a fund with a “to” glide path could be the better fit.
When evaluating target-date funds, it’s important to be realistic about when you plan to and can retire. And consider your personal risk tolerance and risk capacity as well. Risk tolerance is how much risk you’re comfortable with. Risk capacity means the amount of risk you need to take to reach your goals.
Finally, remember to look under the hood to see what a target date fund invests in. This can help you avoid overlap with other investments in your portfolio, which could skew your risk profile.
Glide paths are a simple enough concept, but it’s helpful to know how they work if you’re investing in target-date funds. Be sure you understand the difference between “through” glide paths and “to” glide paths. Further, it’s important to be aware of how the glide path of a fund you’re interested in is calculated. Getting the glide path right can make a difference in the returns you’re able to generate for retirement.
Tips for Investing
- Consider talking to a financial advisor about the advantages of target-date funds and how to choose an appropriate glide path. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Using SmartAsset’s retirement calculator will help you make decisions about target-date funds and the best glide path for you. Also, check the default investment option if you’re enrolling in your employer’s 401(k) for the first time. Some plan administrators set the default to a target date fund so it’s important to know what you’re investing in from day one.
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