The next two charts show the linear glide path that shifts from 80% to 20%, but with a five-year and 10-year delayed onset. The compressed age-based asset allocations use increments of 5.0% and 8.6% percentage points, respectively.
Linear Glide Path, 80% to 20%, 5 year delayed onset
Linear Glide Path, 80% to 20%, 10 year delayed onset
Impact on investment earnings
These investment glide paths were evaluated using a total of 600 investment glide paths instantiated with historical stock market data from 1950 to 2017.
This table shows that the Linear 100% to 20% investment glide path demonstrates superior investment performance as compared with the Linear 80% to 20% investment glide path. The average earnings were $3,153 higher, assuming monthly contributions of $250.
|Linear 80% to 20%||11.1%||44.3%||26.5%||9.6%||3.4%||$19,642|
|Linear 100% to 20%||11.3%||48.5%||29.1%||11.0%||3.8%||$22,795|
The investment risk was also lower. None of the 600 test scenarios involved an investment loss. The minimum return on investment was higher (11.3% vs. 11.1%) and the maximum return on investment was higher (48.5% vs. 44.3%). The percentage of the test scenarios that involved less than a quarter of the total savings coming from earnings was also lower (41.6% vs. 48.1%).
This table compares the impact of a delayed onset on the investment performance. The average return on investment increases with a greater delayed onset. A five-year delayed onset corresponds to half a percentage point increase in the annualized return on investment and a 10-year delayed onset corresponds to a full percentage point increase. The latter is the equivalent of about an 8% increase in total college savings over a 17-year investment horizon. The average earnings for a five-year and 10-year delayed onset were $3,660 and $8,796 higher, respectively.
|Asset allocation||Delayed onset||Min||Max||Average|
|Linear 80% to 20%||None||11.1%||44.3%||26.5%||9.6%||3.4%||$19,642|
|Linear 80% to 20%||5 years||10.9%||49.0%||29.5%||11.4%||3.9%||$23,302|
|Linear 80% to 20%||10 years||8.9%||55.9%||32.8%||14.0%||4.4%||$28,438|
Although the minimum return on investment was lower, none of the scenarios involved investment losses. The percentage of age-based investment scenarios with less than a quarter of total savings coming from earnings was also lower (48.1% vs. 41.8% vs. 37.3%).
This chart shows the distribution of the performance of the 600 test scenarios for 0, five and 10 years of delayed onset. Increasing the number of years of delayed onset causes a flattening out of the middle of the distribution, shifting the scenarios toward a higher percentage of total savings coming from earnings.
Histogram of earnings as a percentage of total savings for delayed onset of age-based asset allocation, 1950 to 2017
This approach demonstrates several new insights that can be applied to saving for college, retirement and other life-cycle events.
- The return on investment for an age-based asset allocation investment glide path can be improved without significantly increasing the investment risk by transforming the investment glide path.
- One approach transforms an age-based asset allocation by delaying the onset of the shift to a less aggressive mix of investments by a number of years and compressing the original glide path to fit into the remaining available investment horizon.
- A delayed onset of five years yields the equivalent of a 0.5% percentage point increase in the average return on investment.
- A delayed onset of 10 years yields the equivalent of a 1.0% percentage point increase in the average return on investment.
- Investment performance for a 17-year age-based asset allocation improves incrementally for each additional year of delayed onset up to 10. (The investment risk starts to increase significantly with 11 or more years of delayed onset.)
- Another approach starts the age-based asset allocation at 100% stocks when the child is young instead of a smaller percentage (e.g., 80%), yielding superior investment returns without significantly affecting investment risk. That’s the equivalent of a 40 basis point improvement in the annualized return on investment.
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