Glide Paths

Definition

A glide path is a time-varying asset allocation function that adjusts portfolio risk exposure based on proximity to a target date. The allocation at time t is determined by interpolating between start and end allocations.

allocation(t) = start_alloc - ((start_alloc - end_alloc) / transition_years) * years_elapsed

Monte Carlo Context: Glide paths affect path-dependent outcomes. A declining equity allocation reduces volatility exposure as the portfolio becomes more sensitive to sequence of returns risk.

Allocation Visualization

Standard Declining Glide Path (Age 30 to 65)

Age 30 (Accumulation)

100% Stocks

Age 55 (Transition)

90% / 10%

Age 60 (Mid-Glide)

68% / 32%

Age 65 (Retirement)

45% / 55%

Equities Fixed Income

Accumulation vs Decumulation Phases

Accumulation (decades to target): High equity allocation (90-100%) maximizes expected compound growth. Volatility is tolerable because withdrawals are not occurring.
Transition (~10 years to target): Linear reduction in equity exposure. Each year shifts allocation toward the terminal target.
Decumulation (post-target): Conservative allocation designed to minimize sequence risk during withdrawal phase.

Human Capital Insight: Your future earning potential is like a bond — stable, predictable income. At age 25, you might have $2M in human capital and $20k in stocks. Your true allocation is 99% bonds. As human capital depletes through time, your financial allocation needs to shift to compensate.

Rising Equity Glide Paths

Research by Kitces and Pfau (2014) suggests a rising equity glide path — sometimes called a "bond tent" — may improve outcomes in decumulation. This contradicts conventional target-date fund wisdom:

Rising Path Logic: Start conservative (30-40% equity) at retirement, increase to 60-70% over 20 years. Early conservatism protects against sequence risk; later growth exposure compensates for inflation over a long retirement.

The intuition: sequence of returns risk is temporary. It matters most in the first 5-10 years of retirement. After that, if the portfolio has survived, a bear market is less threatening because you've already built a cushion. The bond tent provides maximum protection during the vulnerability window, then releases capital for growth when it's safer.

Declining path: 90% → 45% (traditional target-date approach)
Rising path: 30% → 60% (Kitces/Pfau research)
Fixed allocation: 60/40 constant (simple but ignores lifecycle effects)

Volatility Tolerance Considerations

Behavioral Risk: A 100% equity strategy experiences drawdowns of 30-50% during market crashes. Simulations assume the investor does not deviate from the plan during volatility.