Glide Paths Based on a Retirement Goal and Depleting Human Capital

Abstract

The retirement goals of many Americans are underfunded. The problem is compounded by the complexity of self-managing distribution portfolios, particularly as DC plans replace DB plans. We believe most retirement glide paths are satisfactory but suboptimal solutions. We introduce a glide path of financial assets over the life cycle based on a retirement goal and depleting human capital. The method is anchored to the foundational principles of intertemporal portfolio theory while borrowing heavily from goals-based asset allocation. The result is a dynamic asset allocation over the life cycle that is a function of critical input variables relevant to retirement planning such as retirement savings, retirement consumption and risk aversion. The glide path can be customized to individuals, or semi-customized to discrete subpopulations of DC plan participants.