However, the outcomes in the case studies also change depending on any of the other assumptions made for the retiree—gender, pre-retirement income, wealth, income replacement ratio, risk tolerance, and so on, said Fu Tan, investment research analyst in Vanguard’s Investment Strategy Group (ISG) and a co-author of the paper.
“As an example, if our case study subject was male and everything else was the same, the optimal equity allocation would be lower just because of the shorter life expectancy,” Tan said. “Our scenarios are built on the Vanguard Life-Cycle Investing Model [19-page research paper]. They’re examples in testing the rigors of Vanguard models and building out new features.”
Although the study focuses on the impact of health on asset allocation, for individual investors that should not be the only takeaway. Focusing on asset allocation over saving and spending might be putting the cart before the horse, said Nathan Zahm, head of goals-based investing research in ISG.
“Asset allocation is not a panacea,” Zahm said. “Especially with issues that are better addressed by saving and spending plans. Those are the primary drivers of financial solvency. Furthermore, a more aggressive asset allocation would be introducing more volatility to the portfolio—not something we would want for retirees who may not have the temperament or the finances to bear severe ups and downs in their assets. All of these should be considered in conjunction with a broader financial plan.”
For most investors, it would be premature to dismiss TDFs’ default glide paths, Zahm added. “TDFs still meet the needs of the majority of the population, but the population is heterogenous. The outliers—those who have more complex financial goals or circumstances—may need tailored advice.”
That complexity might be in the form of unique demographics, extended families, bequests, or more ambitious spending goals, not just health status.
The extra guidance could come from digital spending tools or calculators that plan sponsors could provide with TDFs in DC plans, Zahm said. Those with more complex needs might want to seek the more personalized guidance that a human advisor can provide.
“TDFs are great vehicles,” Tan said. “But the bottom line is that a default glide path alone may not be enough for some investors, and it can be well-complemented by financial planning.”