How to create the perfect glide path for retirement

When most people think of a glide path, they think of an airplane gradually and safely approaching a runway while lining up for a soft, comfortable landing.

Investors need the same thing. But instead of altitude above the earth, investors need to deal with the amount of risk they take as they grow older.

To make an extreme comparison, if you lose most of your savings when you are 25 or 30, you can very likely recover by the time you are ready to retire. But if you lose most of your money at age 55 or 60, you have a much bigger problem.

This article is the seventh in a nine-part series that I think of as Boot Camp for Investors 2023.

• The first installment was The best way to invest for retirement
• The second was Seven simple portfolios that have beaten the S&P 500 for more than 50 years.

The third was How to control your investing losses.

• The fourth was How to turn small amounts of money into huge sums later—and why you should invest beyond the S&P 500.
• The fifth was How to retire even if you’re not rich.
• The sixth was This is the very best way to start retirement.
• The eighth was published earlier this year: Our recommendations for exchange-traded funds.

A glide path, today’s topic, is essentially a plan for gradually making the transition from higher-risk investments when you’re young to lower-risk ones when you’re retired.

One very effective way to do that is to rebalance your investments between equities (higher risk) and bond funds (lower risk) every year as you age. The problem: Few investors will actually do that. We live in a set-it-and-forget-it world, and we want things to be easy instead of challenging.

Fortunately, there are much easier ways.

The easiest and simplest way is to invest your retirement savings in a target-date retirement fund. That way, you’ll own a gradually evolving mix of equities and bond funds, with a built-in glide path oriented to a date you select for your expected retirement.

These extremely popular funds also manage multiple risks and provide relatively low-cost access to professional diversification without requiring their shareholders to make any decisions. For simplicity and reliability, you need look no further.

And yet, if you want more money to spend in retirement, these funds are designed to be relatively conservative, and their equity allocations typically fail to include meaningful exposure to asset classes that in the past have produced higher returns, specifically value stocks and small-cap stocks.

A few years ago, Chris Pedersen, director of research at the Merriman Financial Education Foundation, found an easy way to give target-date shareholders a “piece of the action” along with the comfortable glide path those funds provide.

He calls this solution “two funds for life,” and he’s written a book about the data behind his recommendations, which I endorse. This strategy combines a target-date fund with a “booster” fund that invests in small-cap value stocks, which have the highest long-term performance record of any U.S. asset class.

A basic way to apply this strategy is to invest 90% of your money in a target-date fund and the other 10% in small-cap value.

“If somebody asked me for the simplest way to invest, that is what I recommend,” Chris told me. Compared with a target-date alone, that combination “can increase what you have in retirement by about 25% without a lot of additional risk.”

In the video we recorded, Chris showed that increasing the small-cap value percentage to 20% could boost the lifetime benefit by 75% in inflation-adjusted dollars. You might think going from 10% to 20% in small-cap value would involve taking lots more risk. Chris said that isn’t so.

From 1970 through 2022, the worst drawdown wasn’t much greater than that of a target-date fund by itself.

Those figures assume no rebalancing, and they rely on the target-date fund to provide the glide path.

Here’s how to prevent the small-cap value fund from becoming too big a part of your portfolio. Multiply the number of years until you expect to retire by 1.5, then let that be the percentage of your portfolio invested in small-cap value stocks.

For example, with 20 years until retirement, 30% goes into small-cap value, the other 70% in your target-date fund. Repeat that calculation every year, and you have your own personal glide path.

Some investors wonder if they are too old to invest in small-cap value stocks. It’s a good question.

In our video, Chris cited some figures from Index Fund Advisors, a fee-only advisory and wealth management firm. As it turns out, the longer you hold small-cap value stocks, the more likely they are to outperform the S&P 500. 

Based on history, small-cap value stocks beat the S&P 500:

50.1% of the time in one-month periods;

55.4% of the time in one-year periods;

57.9% of the time in three-year periods;

61.8% of the time in five-year periods;

73.8% of the time in 10-year periods;

85.3% of the time in 15-year periods;

virtually always (99.7%) in 20-year periods. 

Whatever you choose, if you’re planning to embark on this two-fund strategy, I highly recommend you take the time to watch the video that Chris and I recorded.

I also highly recommend Chris’s book, “2 Funds for Life,” which he describes as an owner’s manual for this strategy. You can order it at Amazon for a hard copy or a Kindle version. Or click here for your free PDF.

A few years ago, Richard Buck and I described this strategy in a short book aimed at young investors. Your free copy is waiting behind a link at the bottom of this article.

In the final installment in this series, I’ll recap some of the most important lessons we have learned.

Richard Buck contributed to this article.



Paul Merriman and Richard Buck are the authors of “We’reTalking Millions! 12 Simple Ways to Supercharge Your Retirement.” 

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