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The Markets May 6, 2010
Russell Weighs in on Post-Retirement Target-Date Glide Paths
In its latest research, Russell Investments concluded that once a target-date fund reaches an individual's planned retirement date, it should have conservative allocations and a flat glide path to minimize risk and improve the potential for attaining financial security.
Reported by Fred Schneyer
Russell’s research found that a 32% equity allocation at retirement gives over a 94% probability of preserving a nest egg if one assumes an annual withdrawal of 4% of the initial balance from retirement savings. A 60% equity allocation reduces the probability of preserving the nest egg to 88%, and an 80% allocation reduces the probability to 84%.
“[A]t retirement, investors face a great risk of outliving their savings,” said Josh Cohen, defined contribution practice leader, in a press release. “We believe that a properly designed post-retirement glide path is flat and has a more conservative allocation to stocks in order to help more people meet or exceed their retirement income needs. At the end of the day financial security at and during retirement is paramount.”
Russell said it can demonstrate that for any given downward sloping glide path, it can create a flat one that its research indicates is better in terms of its risk and reward trade-off. Specifically, Russell said it can show that for any downward sloping glide path, any withdrawal policy, and any time horizon, there exists a flat glide path that either (1) provides greater expected wealth at the time horizon for the same risk of running out of money before death, or (2) provides lower risk of running out of money for the same expected wealth at the time horizon.
Russell recommends examining the investment rationale for a sloping versus flat post-retirement glide path and questioning how aggressive those post-retirement allocations should be.
“Russell believes, without regard to level of aggressiveness, that a flat glide path in retirement always makes sense relative to a sloping one because it is categorically better in terms of relative risk and reward tradeoff,” explained Cohen. “This belief marks Russell as a proponent of the ‘to’ approach, but the glide path we advocate is designed just as much to get a participant ‘through’ retirement as ‘to’ retirement, only in a well-planned and well-executed way. The whole pre- and post-retirement picture is more nuanced than ‘to’ and ‘through.'”
The research report, “The date debate: Should target date fund glide paths be managed ‘to’ or ‘through’ retirement?,” can be accessed here.