Is Your Retirement Set to ‘Glide’ Toward Success?

The financial advising business is chock full of jargon and catch-phrases, some more useful than others.

One that attempts to clarify matters is the common term “glide path.”

It’s a metaphor for how you will go from being a young investor with many decades left to invest to being, some day, a newly retired investor with decades left to live, perhaps, but not as much need to set aside money.

Financial planners often talk about those early years of saving and investing as the “accumulation” phase and the later years as “deccumulation” — a strange twist on the word accumulation better thought of as gradually “spending down” your savings.

Of course, you will need to know when it’s time to stop saving and safe to start spending.

Circumstances may dictate that date to be the day you leave work. After all, once you finish off whatever severance you get and short-term savings, you will have to come up with income from somewhere.

And that’s the point of the glide path concept.

Many young investors are counseled to keep most of their invested cash in more volatile, growth-oriented products as as stock funds or individual stocks.

The idea is that they can afford to occasionally decline in the face value of their investments. They are under no pressure to sell, after all, since they have a current income.

However, as you steadily approach middle age a different calculus sets in: What if the stock market crashes right before I retire? What if I am forced to sell investments at a loss to pay for rent or food?

To avoid that situation, financial advisors often suggest that you pick a retirement year and try to move steadily out of more volatile investments and into investments that are less likely to lose value in a market decline.

Little by little

Historically, that has been bonds. The “glide path” idea comes from the slow, purposeful shift from one asset type to another, in percentages, over a long period of time, like a plane coming in for a gentle landing.

You don’t have to jump from mostly stocks to mostly bonds in a month or even a year. Instead, you can sell off a portion of your stocks and substitute bonds year by year, aiming to change the balance little by little.

That way, if a serious market decline were to hit the year you turn, say, 60, it’s less likely that you will panic at the prospect of suddenly lower investment account balance. The rising bond holdings would shore up your account and be less susceptible to decline.

Finally, upon arriving at the magic day — retirement — you open your statement and find yourself in a position to take regular withdrawals knowing more or less what you can afford to take for many years to come.

There might still be some stock in your portfolio. Who knows how long you will live and need some growth to offset the march of time and potential inflation.

But, having taken the “glide path” toward the ideal portfolio at retirement, you will have reached your ultimate with minimal risk of drama should the economy tumble unexpectedly.

MarketRiders, Inc. is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.