Glide‑Path Funds Debut — But Retirees Still Face the Withdrawal Dilemma

Retirement planning is supposed to be straightforward: save diligently, shift into safer investments as you approach retirement, then draw down at a modest rate and hope your money lasts. But in reality, it is rarely that simple. Fund providers are now launching new “glide-path” funds designed specifically for retirees, yet the age-old question of how much to withdraw each year remains stubbornly unresolved. Retirees are caught between two fears: the fear of outliving their savings and the fear of delaying life’s joys for too long.

Glide-path funds are designed to gradually shift an investment portfolio’s asset allocation over time, typically moving from growth assets like equities to more conservative options like bonds as the investor approaches or enters retirement. Some of the latest glide-path funds even include built-in distribution features, aiming to provide retirees with a steady cash flow. The idea is to manage risk by reducing exposure to volatile assets at a time when the investor has less room to recover from market losses.

The introduction of these glide-path funds acknowledges a critical reality: accumulating wealth is only half the battle. The other half — withdrawing funds sustainably — remains a complex challenge. While glide-path funds help manage risk and volatility, they do not solve the essential question of how much retirees can safely spend each year.

The Withdrawal Rate Puzzle

Deciding how much to withdraw annually is one of the trickiest aspects of retirement planning. The traditional “4% rule” has long been the standard guideline. It suggests retirees can withdraw 4% of their portfolio in the first year of retirement and adjust that amount for inflation each subsequent year. While this rule was based on historical returns of a balanced portfolio, it has become less reliable due to factors like lower bond yields, higher equity valuations, and longer lifespans.

Sequence-of-returns risk adds another layer of complexity. If a retiree experiences a significant market downturn early in retirement and continues to withdraw a fixed amount, the portfolio may be depleted before the end of their life. Glide-path funds help mitigate this risk by reducing equity exposure, but they cannot completely remove the uncertainty surrounding safe withdrawal rates.

Longevity risk also complicates matters. People are living longer, meaning retirement portfolios must last longer. A strategy designed to support 25 years of retirement may fall short for someone retiring early or living 30+ years post-retirement. Inflation, healthcare costs, and lifestyle changes further affect the sustainability of withdrawals. Flexible strategies that adjust withdrawals based on market performance or remaining portfolio value generally perform better than rigid, fixed-amount rules.

The Trade-Off: Spending Now vs. Saving for Later

Retirees face a delicate balancing act. On one side is the fear of outliving their money, which can lead to overly conservative spending. On the other side is the desire to enjoy retirement, which can tempt retirees to spend too freely and risk depleting their resources prematurely.

Enjoying life now is an important consideration. Retirement is the time to reap the rewards of decades of work, travel, pursue hobbies, and spend quality time with loved ones. Some glide-path funds with built-in distribution features provide retirees with a predetermined level of cash flow, giving them confidence to enjoy these activities without constantly worrying about depleting their portfolio.

Ensuring sustainability later is equally critical. Portfolios must survive market downturns, inflation, and unexpected expenses. Conservative asset allocations that shift to bonds earlier in retirement reduce the risk of running out of money. Withdrawal strategies that adjust based on current portfolio value are more likely to succeed than fixed-dollar withdrawals.

Finding the sweet spot often means blending these approaches. The goal is to provide enough flexibility to enjoy retirement today while maintaining the ability to adjust spending if circumstances change. This may involve setting minimum spending levels for essential expenses, alongside aspirational spending for discretionary activities.

Practical Steps for Retirees and Advisors

Designing a sustainable withdrawal plan requires a mix of planning, flexibility, and ongoing review. Here’s a roadmap:

1. Determine essential and aspirational spending:

    

   • Essential spending covers basic living expenses, healthcare, housing, and minimum lifestyle needs.

      

   • Aspirational spending covers travel, hobbies, and discretionary activities. Establishing these two tiers provides clarity on what must be funded versus what is desired.

      

2. Model different withdrawal scenarios:

    

   • Simulate various withdrawal rates against assumed portfolio returns, inflation, and longevity.

      

   • Stress-test the plan against market downturns and unexpected expenses to see how different rates affect portfolio sustainability.

      

3. Choose a glide-path strategy aligned with risk tolerance:

    

   • Decide whether to adopt a more conservative glide path that reduces equity exposure earlier or a more aggressive one that maintains growth potential longer.

      

   • Align asset allocation with withdrawal strategy to balance the desire for growth with the need for stability.

      

4. Incorporate flexibility into the plan:

    

   • Consider tying withdrawals to a percentage of current portfolio value rather than a fixed dollar amount. This allows spending to adjust automatically to market conditions.

      

   • Set “guardrails” or triggers to reduce discretionary spending if the portfolio falls below a certain level and increase spending if it exceeds targets.

      

   • Review the plan regularly and update assumptions as life circumstances or market conditions change.

      

5. Address the emotional component:

    

   • Fear of running out of money is real and may lead to under-spending. Equally, delaying joy too much can reduce the quality of life.

      

   • Treat retirement planning like a journey in a car with a full fuel tank but an uncertain distance ahead. Choose a pace that balances safety with enjoyment, and adjust along the way.