Retirement Glide Path: How It Works

The 10-second version

A retirement glide path is a pre-planned schedule that reduces your portfolio’s equity weight as you approach retirement, replacing it with lower-volatility assets (debt/bonds, cash). The goal is to protect your nest egg from big drawdowns in the years just before and after you stop working—when losses hurt the most.

Core idea in one line

Glide paths trade some long-run upside for smoother outcomes when it matters most.

Why glide paths exist: the sequence-of-returns problem

Average returns aren’t the whole story. Sequence risk is the danger that poor market years happen right before (or just after) retirement, shrinking the pot from which you’ll draw income. If you’re 30, a crash is painful but you’re still contributing and have decades to recover. At 60, the same crash can permanently lower your sustainable withdrawal. A glide path gradually lowers risk as the date approaches, narrowing the range of outcomes.

How a glide path is built

1. Starting equity (e.g., 80–90% in early career) to harness growth.
2. De-risking slope (e.g., reduce equity 1–2% per year) so risk falls smoothly.
3. Landing allocation at retirement (e.g., 30–50% equity, 50–70% debt/cash) based on income needs and risk capacity.
4. Rebalancing rule (annual/semi-annual bands) to stick to the plan.
5. Floor & ceiling (e.g., never below 30% or above 90% equity) to avoid extremes.

“Debt” here means lower-volatility, income-oriented assets (investment-grade bonds, deposits, short-duration funds, etc.).

A simple, sensible glide path

Illustrative only; customize to your risk capacity and local investment options.

You can implement this as a straight line (e.g., reduce equity ~1–1.5% per year) or a two-stage slope (slower in your 40s, faster from 50–60). Some investors keep equity stable or even slightly rising after 65 to offset inflation and longevity risk.

Mechanics: the math behind the curve

A linear rule is easy to automate:

equity_target(age) = clamp(eq_max − slope × (age − start_age), eq_min, eq_max)

• eq_max = starting equity (e.g., 0.85)
• slope = annual reduction (e.g., 0.015)
• eq_min = floor at retirement (e.g., 0.35)
• clamp keeps the value between eq_min and eq_max

Rebalance to targets on a fixed date (e.g., each January) or when drift breaches bands (e.g., ±5% around target). Contributions and withdrawals can be directed to the lagging asset to reduce trading.

Risk/return intuition

• Early career: Equity dominates growth; volatility is tolerable because human capital (your future earnings) acts like a bond-like asset.
• Pre-retirement (55–65): Sequencing dominates; cutting equity lowers drawdown risk.
• In retirement: Keep some equity (30–50%) for inflation and longevity protection, layered with stable income assets to fund near-term spending.

Quick worked example (sequence risk)

Two investors reach age 60 with ₹1.0 crore. Both expect the same average return over three years (say ~6%/yr). But the order of returns differs:

• Investor A (high equity): Year 1: −15%, Year 2: +10%, Year 3: +16% → ends near ₹1.01 crore.
• Investor B (glide-pathed to 40% equity): With lower volatility, the sequence lands nearer ₹1.07 crore.

Same average, different outcomes: lower volatility near retirement helps preserve the base on which compounding—and withdrawals—operate. Numbers for illustration only; actual results vary.

Implementation options

• Target-date / life-cycle funds: One-stop vehicles that automatically de-risk as the target year approaches.
• DIY glide path: Combine low-cost index equity funds with short/intermediate-term bond funds; automate rebalancing.
• Bucket strategy: Segment by time horizon (e.g., 0–3 years cash/ultra-short, 3–10 years bonds, 10+ years equity) and replenish buckets annually.
• Partial annuitization: Convert a slice of the portfolio into guaranteed income to reduce required return from the remaining assets.

Personalization levers

• Risk capacity: Stable job, pensions, or other income allow a slightly higher equity landing.
• Liability shape: Known future cash needs (e.g., mortgage payoff, education) may favor more debt earlier.
• Longevity/inflation view: Longer life expectancy and high inflation risk argue for a higher equity floor.
• Behavioral fit: A plan you can stick with beats a “perfect” plan you abandon in a downturn.

Practical rules of thumb

• Reduce equity gradually (around 1–2% per year) from mid-career to retirement; avoid step-changes.
• Keep an equity floor at retirement (30–50%) to defend against inflation and longevity risk.
• Hold 2–3 years of planned withdrawals in cash/short-duration bonds.
• Rebalance on a calendar date or drift bands; use new contributions/withdrawals to nudge toward targets.
• Stress-test: What if a −25% equity drawdown happens at age 60—can the plan absorb it?

Common mistakes to avoid

• All-or-nothing switches: Jumping from 80% equity to 20% overnight invites bad timing.
• Too conservative too soon: Cutting equity aggressively in your 40s can starve long-run growth.
• Mismatched bonds: Reaching for yield with long-duration or low-quality debt can add hidden risk.
• Ignoring taxes & costs: Rebalance tax-aware and fee-aware; prefer low-cost, diversified funds.
• Set-and-forget forever: Review annually and after life events (job change, windfall, health shocks).

Five-minute checklist

• Do I have a written equity/debt schedule by age?
• What’s my equity floor at retirement, and why?
• How will I rebalance (calendar or bands)?
• Do I hold 2–3 years of withdrawals in low-volatility assets?
• Have I stress-tested a bad three-year sequence around retirement?

Bottom line

A glide path doesn’t predict markets; it manages exposure. By pre-committing to a gradual shift from equity to debt, you reduce the chance that unfortunate timing derails decades of saving. Build a path that fits your risk capacity, automate rebalancing, and review once a year. Simple, boring—and powerful.