Shifting Asset Allocation Around Retirement — The Risk-Reduction Path

A glide path is an asset-allocation path that lowers the stock share and raises the bond share as you age, like a plane gradually descending toward a runway.

Target-date funds (TDFs) work on exactly this principle. For example, you start aggressively when young—say 90% stocks / 10% bonds—lower stocks and bonds to a similar level near retirement, and adjust more conservatively thereafter.

The logic is simple. When young, you have plenty of time to recover even if a crash comes, but near retirement you lack time to recoup a large loss. So "as time shrinks, so does risk."

The few years before retirement and the few years right after are the period of greatest "sequence-of-returns risk" in your investing life.

Sequence risk is the risk that, for the same average return, the result changes depending on "when the decline comes." When you're only accumulating money, an early crash can even be an opportunity to buy cheap. But if a crash comes right after you retire and start "withdrawing" money monthly, recovery becomes much harder because you keep withdrawing from reduced assets.

That's why a 100% stock portfolio right before retirement is risky. Not because its long-term expected return is low, but because there's no way to undo a few bad early years. Remember that if you take a large drawdown at the point your assets have grown the most, the "amount" you lose is also the largest.

Most TDFs use a "descending" glide path that keeps lowering stocks toward retirement. There are two styles here. "To" (arrival type), which locks in the most conservative allocation at the retirement point, and "Through" (pass-through type), which keeps lowering stocks further for 10-20 years after retirement.

But there's also research that flips this common sense. In a 2014 paper, Wade Pfau and Michael Kitces proposed that a "U-shaped (rising-equity)" path—lowering stocks briefly at the retirement point and then raising them again after retirement—can lower the probability of running out of funds. The "bond tent" strategy of raising the bond share like a tent just before and after retirement and then lowering it is in the same vein.

The core purpose is the same: defending against sequence risk in the most vulnerable period around retirement. However, which path is better is still debated in academia, and it's only a simulation based on past data and does not guarantee the future.

This isn't telling twenty-somethings with over 40 years until retirement to raise bonds right now. On the contrary, now—when you have the most time to recover—is a period with great capacity to bear risk.

Still, understanding the principle in advance that "you don't hold the same allocation your whole life but adjust risk by life stage" lets you make far wiser choices later when picking a TDF or managing a pension account.

And if you build the habit now of directly seeing the maximum drawdown (MDD) and loss duration with your own eyes, you'll come to understand in your bones, far down the road, why sequence risk is so scary.