But the study also highlights that those in poor health could benefit from personalized asset allocation and advice. And all investors are well-served by factoring health care spending into their financial plans.

In one of the paper’s case studies, a hypothetical retiree—an upper-middle-class woman in poor health—would potentially be better off with an equity landing point closer to 42% to meet higher projected health expenses, especially if she lives beyond her life expectancy. However, the needs for the same retiree in moderate or good health would have been met by a more conventional asset allocation, such as a TDF that eventually falls to 30% equities. According to the comprehensive Health and Retirement Study,¹ less than 5% of the U.S. population have severe long-term care conditions that we would designate as poor health. Roughly 24% of the population are in moderate health and 72% are in good health.

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.”

• Selecting an optimal glide path for Target Retirement Funds (article, issued August 2022)
• On track for success? Insights from stochastic health care modeling (12-page research paper, issued September 2021)
• The value of personalized advice (25-page research paper, issued August 2022)