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A glide path is a long-term management plan for investments that is designed to guide those investments into maturing by a specific date. The glide path is used to map out an investment plan that will meet the needs of the investor and is most classically used for retirement planning, although it can come up in other contexts as well. The metaphor of a “glide path” references the idea of choosing the path of smoothest flight and coming in for an easy landing.
In the case of planning for retirement, people want to know that they will have enough money by the time they are ready to retire. They must consider expenses that will come up in retirement, accounting for inflation to ensure that they have calculated appropriately. Once they have determined how much they need to save, they can map out a glide path to help them achieve that goal.
In the early stages, investments with high returns and accompanying high risks can be used to raise money quickly, increasing the total in the retirement account so that it can start earning interest. As people get closer to retirement, the mix of investments is shifted to become more conservative. Younger investors planning ahead for retirement can afford to take some temporary losses, while older people getting close to retirement age cannot. Using a more conservative balance ensures that the funds will be there when they are needed.
The earlier people start with investments, the gentler the slope of the glide path can be, because people can afford to take their time building up investments and gradually shifting the mixture of investments. People who start later may need to have a steeper curve when it comes to developing an investment plan, because less time is available. Financial advisors can assist people with developing their own glide paths and people can also turn funds over to an account manager who will handle investments on their behalf.
Target-date funds are a classic example of a financial product that uses a glide path approach to plan out a shifting mix of investments. The goal is to raise money for retirement by saving and using some savings to invest in order to generate returns, without exposing people to unnecessary risk. Once the account matures, people can continue to keep their investments where they are, withdrawing small sums as needed to pay for retirement, or they can buy an insurance product like an annuity that will pay out a steady amount for life.
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