A glide path is a long-term investment plan that guides investments towards maturity on a specified date, often used for retirement planning. The investment mix changes from high-risk to more conservative as retirement approaches, and financial advisors can help develop a personalized glide path. Target date funds are a classic example of a financial product that uses a glide path approach.
A glide path is a long-term management plan for investments that is designed to guide those investments toward maturity on a specified date. The slip path is used to draw up an investment plan that meets the needs of the investor and is used more classically for retirement planning, although it can arise in other contexts as well. The metaphor of a “glide path” refers to the idea of choosing the smoothest path of flight and arriving for an easy landing.
In the case of retirement planning, people want to know that they will have enough money when they are ready to retire. They should consider the expenses that will arise in retirement, taking into account inflation to ensure that they have been calculated properly. Once they’ve determined how much they need to save, they can map out a glide path to help them achieve that goal.
In the early stages, the accompanying high-return, high-risk investments can be used to raise money quickly, increasing the total in the retirement account so it can start earning interest. As people get closer to retirement, the investment mix changes to be more conservative. Younger investors planning early for retirement can afford to take some temporary losses, while older people nearing retirement age cannot. Using a more conservative balance ensures that the funds will be there when they are needed.
The earlier people start investing, the smoother the slope of the glide path can be, because people can afford to take time to accumulate investments and gradually change the mix of investments. People starting later may need a steeper curve when it comes to developing an investment plan, because there is less time available. Financial advisers can help people develop 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 for a changing mix of investments. The goal is to raise money for retirement by saving and using some savings to invest 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 amounts as needed to pay for retirement, or they can buy an insurance product like an annuity that will pay out a constant amount for life.
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