Allocation in Retirement: A Flat Glide Path Always Make Sense
by Josh Cohen
You’ve probably heard about Ali versus Frazier and Coke versus Pepsi. But have you heard about the next great debate—in the defined-contribution industry—known as “to” versus “through”?
This debate centers on what type of glide path (evolving mix of stocks and bonds) should be designed once a target date fund reaches the target year of an individual’s retirement.
In this article
Share this article
Facebook
Twitter
E-mail
SeekingAlpha
Stumbleupon
Delicious
LinkedIn
The investment industry has characterized the “to” camp as proponents of the idea that target date funds should be designed primarily to build savings up to an individual’s target retirement date. Target date funds exemplifying the “to” principle have more conservative allocations to stocks (or other risky assets) at an individual’s target retirement date, typically with a flat or static allocation during later retirement years.
In contrast, the “through” side has been defined as those who believe target date funds should be designed to help investors save through retirement. The “through” camp reasons that because of increased longevity, investors need their accumulated balances to last them long after retirement. Target date funds employing the “through” approach may have higher allocations to stocks at an individual’s target retirement date, with a declining allocation to stocks for 15 to 30 years after retirement.
The distinction between “to” versus “through” philosophies took shape at a hearing held by the Securities and Exchange Commission SEC and Department of Labor on target date funds in June 2009. These agencies were trying to better understand how there could be such wide differences in the performance of 2010 target date funds from different providers. For example, the Morningstar Direct universe of 2000–2010 target date funds had a range of returns in 2008 from –3.6% to –41.8%. That caused many to scratch their heads and ask “How could strategies designed for the same person have such different results?”
To read more, please become an AAII Registered User or CLICK HERE.
Discussion
Josh Cohen has an fascinating article on allocations during retirement. However, I would like to see some examples in graphical form showing how sample glide paths change over time during retirement. Also, the discussion changes from a 6% withdrawal rate to a 4% rate. Confusing, to say the least. Granted, the Investor Professor tried to clear things up a bit, but clarity overall was poor, IMHO.
Does Mr Cohen have a more complete exposition of the glide path construct with more complete examples? I'd love to see it.
posted over 2 years ago by Anthony from New York
To complete his published article "Allocation in Retirement...," Josh Cohen must furnish a definition that his writing omits (AAII J, July, 2010, p. 10). In Figure 1 he plots expected ending wealth along the y-axis and another variable on the x-axis. But nowhere in his figure or article does the writer define this latter variable, which he calls "Shortfall Risk (Square Root of Penalized Shortfall)." Pray tell us what a penalized shortfall is and how to calculate it. Lacking this information, Mr. Cohen's work is an unfinished symphony.
posted over 2 years ago by Richard from Montana
This article might be helpful after extensive re-writing, starting with the graph. The graph displays one curve (described as "flat" even though it is upward sloping), and five data points below the graph. Where are the 5 downward sloping glidepaths described in the figure legend? Single data points do not define "slopes."
It appears that nothing has been done to alleviate the confusion described by the 2 previous reviewers (Anthony and Richard) since their posts 8 months ago.
I suggest the editors stop featuring this article on the AAII homepage until the corrections are completed.
posted over 2 years ago by John from New Jersey
