How is a lifecycle investing glidepath designed?

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AcadiFi · Accepted Answer

A lifecycle glidepath specifies how the equity-to-bond ratio changes with age. The classic heuristic '100 minus age in equities' is a starting point, but rigorous glidepath design considers human capital, longevity, risk aversion, and Social Security. Design framework: (1) Human capital proxy: the present value of future labor income. For Fernanda, age 30, earning $85k real with 35 years to retirement and discount rate 4%, human capital = 85000 * annuity factor(35, 4%) = $1.59M. Financial wealth of $120k makes human capital 93% of total wealth, justifying near-100% equity allocation in financial portfolio. (2) Human capital depletion: as age progresses, human capital declines toward zero at retirement, while financial wealth grows. Total wealth equity allocation stays roughly constant if financial equity percentage rises initially then falls as human capital erodes faster than wealth accumulates. (3) Longevity risk: with median life expectancy at 87 and conditional expectancy at age 65 of 87, retirees still need growth allocation through retirement, not just capital preservation. (4) Risk aversion: higher CRRA coefficients produce steeper glidepaths that de-risk earlier. ```mermaid flowchart LR A[Age 25
95% Equity] --> B[Age 40
82% Equity] B --> C[Age 55
65% Equity] C --> D[Age 65
50% Equity] D --> E[Age 80
40% Equity] ``` Through-retirement vs to-retirement glidepaths differ: to-retirement funds stop declining at 65 while through-retirement continue declining to ages 80-85. The financial crisis showed that traditional 60/40 at age 65 still produced 23% drawdowns for 2008 retirees, reinforcing the importance of conservative landing points. For Level III, link glidepaths to goals-based structures where each goal has its own horizon.

How is a lifecycle investing glidepath designed?

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