Ep 62 - The Big Churn: Glidepath Investment Strategy
Apr 24, 2024
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Explore the benefits of optimizing retirement portfolios with glide path investment strategy over target date funds. Learn about post and pre-retirement glidepaths, how to implement them, and important caveats to consider. Discover the importance of active engagement in investment decisions and maximizing portfolio growth for a sustainable retirement.
Custom glide paths post-retirement optimize growth, hedging against sequence of returns risk.
Pre-retirement strategy includes starting at 100% equities, gradually reducing to 60% for optimal growth.
Target date funds may hinder retirement goals by delaying with conservative equity slopes.
Deep dives
The Optimal Glide Path for Post-Retirement
Post-retirement, the optimal strategy is to start with a 60% equity allocation that glides upward to 100% equities. This approach hedges against sequence of returns risk, providing early stability and long-term growth potential. Historical data supports this strategy over fixed allocations or downward gliding paths like those in target date funds, offering improved retirement outcomes with minimal effort.
Pre-Retirement Glide Path Optimization
For pre-retirement, a mirror image of post-retirement strategy is ideal, starting at 100% equities and gradually reducing to 60% equities in the five years leading to retirement. This pre-retirement glide path optimizes market participation and growth, contrasting with suboptimal downward gliding paths of target date funds that sacrifice performance for retirement date predictability.
Challenges of Target Date Funds and Custom Glide Paths
Target date funds, suitable for traditional retirees, may delay retirement goals due to their conservative equity slope. In contrast, custom glide paths tailored to individual financial objectives outperform target date funds by maximizing market returns and flexibility. Implementing upward glide paths pre and post retirement can significantly enhance portfolio performance and financial security.
Optimal Retirement Strategy: 100% Equity for Flexibility
Holding 100% equity until retirement can be an optimal strategy, especially if coupled with flexibility and a high contribution rate. By maintaining a high equity allocation, one can weather market downturns by delaying retirement and contributing to a down market, boosting the retirement portfolio. While this approach may require considerable flexibility, it can lead to a stronger financial position pre-retirement.
Glide Paths and Investment Allocation: Challenging Traditional Approaches
The concept of glide paths challenges conventional investment wisdom, advocating for a post-retirement rise from 60% to 100% equities over a decade. Contrary to traditional target date funds, which can be overly conservative, a customized glide path can cater to individual risk profiles. This strategy emphasizes active involvement in managing retirement funds, promoting a balanced approach to mitigate risks and optimize long-term growth.
Final installment of the Big Churn series, exploring how to better optimize your retirement portfolio for maximum growth & longterm sustainability, and why Target Date Funds can delay your retirement and leave you retiring with less.
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