Target-date fund assets have experienced huge growth—from $8 billion at the turn of the millennium to a staggering $3.24 trillion at the end of 2021.¹ That growth largely stems from the passage of the Pension Protection Act of 2006 in the United States, which allowed target-date funds to play a more dominant role in defined contribution plans and act as a qualified default investment. Today, 80% of all participants in Vanguard-administered defined contribution plans use a target-date fund. More than half of those participants use just one target-date fund as their sole retirement plan holding.²

For retirement savers, the availability of target-date funds has dramatically simplified the investment process while improving investment diversification. The managers of these all-in-one vehicles maintain the target mix through retirement, which helps free investors from the need to regularly rebalance. 

Vanguard has constructed several powerful tools that we use when vetting potential retirement glide paths. They include the Vanguard Capital Markets Model^®, which considers a wide range of potential future market scenarios and economic conditions, and the Vanguard Life-Cycle Model, which incorporates a long list of investor characteristics such as demographics, risk tolerance profile, retirement funding needs, savings rates, expected retirement age, and guaranteed income sources such as Social Security or defined benefit pensions.

By using these models in concert, we can determine which glide path is most appropriate given investor needs and characteristics, while accounting for market uncertainty. The optimal glide path will identify the risk-return sweet spot—that point where potential risk and return align to an investor’s comfort level while, at the same time, providing sufficient assets to meet their spending goals through retirement.  

The two most relevant variables we consider when measuring glide-path success are certainty fee equivalents, a single variable that captures a glide path’s combined risk and return profile by determining the amount of annual return an investor would give up to take one glide path over another, and the probability of success, which is the likelihood that a particular glide path will meet an investor’s spending goals through retirement across the full range of economic scenarios.³ We aim for a probability of success of 70% or more of meeting retirement spending needs until at least age 95.

We serve a heterogeneous population: Wages evolve through time and across demographics, health care costs and savings rates vary, and longevity factors differ. We carefully consider which population averages and characteristics will help us design a Target Retirement Fund glide path that can give savers their best chance at investment success. In general, our Target Retirement Fund investors:

• Have a conservative risk tolerance.
• Save at the average rate for their age cohort.
• Want to retire at age 65.
• Expect 75% to 80% of their ending salary annually in retirement.

Still, we constantly review and reassess these assumptions, how sensitive the optimal glide path is to changes in these assumptions, and the range of observations in the population. We partner with thought leaders throughout Vanguard to make sure we understand the behavioral attributes of the people for whom we design these portfolios. Are retirement ages shifting? (Perhaps. Some forces, such as longer, healthier lives, are driving later retirements; others, such as COVID-19, are driving earlier retirements.) Have auto-escalation features in 401(k)s changed how people save? (Yes, for the better.) Have the concepts of retirement and retirement income changed? (For second careerists and retirement business launchers, yes.)

Vanguard Target Retirement Funds are a straightforward investment option, but there is rigor behind the methodology. Our research team constantly tests the model to make sure our assumptions reflect real-world conditions (be they robust market returns, inflation, or volatility), include a range of possible asset classes, and reflect the needs and wants of modern-day retirement savers. We have a responsibility to investors who rely on this glide path to help carry them through retirement. We take that very seriously.