Rules of Thumb versus Industry Glide Paths: Some Bootstrapping Evidence

Abstract

The authors compare the performance of retirement portfolios using the average glide path of five popular target date funds to general rules of thumb for asset allocation. Surprisingly, the industry average target date fund has similar return and risk as the “120 minus your age rule”. In addition, a simple “140 minus your age rule” produces greater expected savings at retirement and a lower failure rate for average US investors retiring in their early 60s. A naive approach such as the “120 minus your age” rule or the “140 minus your age” can benefit average US employees by reducing transaction costs, improving retirement balances and increasing the probability of a comfortable retirement through an easy-to-understand investing rule. TOPICS:Wealth management, retirement, performance measurement, portfolio construction Key Findings • Rule of thumb asset allocation strategies such as 120 minus your age rule and 140 minus your age rule are superior to the industry average glide path in terms of retirement balances and failure rates. • Target date fund glide paths tend to perform better than rules of thumb only for investors retiring in their late 60s and receiving social security payments or those willing to take a reduction in their retirement income. • Rule of thumb strategies are easy to understand and save transaction costs over an average industry glide path.