Putnam target-date strategies

Putnam target-date strategies

Investment diversification tailored to retirement


  • As retirement plan sponsors consider a range of target-date fund choices, greater attention is being given to glide path structures
  • It's important to consider the range of risks that glide paths can address in addition to stock and bond allocations
  • Our research-driven view is that a glide path should address different risks at different stages of asset accumulation and distribution

Each phase of an investor's path to retirement from aggressive asset accumulation, to conservative accumulation, to diversified distribution — presents unique risks and tradeoffs. We believe that a glide path — the strategy that determines the automatic shifts in allocations from stocks to bonds over time — should be structured to address different risks depending on the number of years until retirement, and should work in concert with the savings behavior of plan participants.

In each of the three phases retirement savers experience, the glide path is structured to address the most prominent risks

  1. The Aggressive Accumulation phase begins as soon as the participant begins saving. This is the period when maximizing saving as well as equity holdings can combine to reduce shortfall risk, which is the risk that savings will be insufficient for a secure retirement. Failure to ultimately reach the savings goal makes all other risk irrelevant.
  2. The Conservative Accumulation phase covers the 20-25 years before retirement. Continued maximization of savings remains critical, but avoiding losses during this period is equally important because the saver's retirement nest egg has grown and market volatility plays a larger role in outcomes.
  3. The Diversified Distribution phase begins with retirement, when retirees hope to be positioned to have adequate savings. While faced with many risks, such as inflation and longevity, successfully managing sequence-of-returns risk — that is, the risk of a significant market downturn just before or just after someone retires — is essential and can help to mitigate other risks.

Putnam favors a low equity allocation in retirement

We emphasize risk protection for everyone in retirement. Others take a different view, but we believe that the high-risk/high-reward approach of maintaining elevated exposure to equities in retirement places savings in jeopardy by increasing the number of "wrong-path" scenarios that could occur. Our study, included in the sidebar of this page, indicates that the optimal long-term target equity allocation is 25%, resulting in an extremely balanced and well-diversified overall portfolio. Approximately 50% of portfolio risk is derived from equities, which we believe reduces sequence-of-returns risk substantially.

Ultimately, achieving retirement goals requires discipline by all parties. Investors should consider trade-offs involving current and future income in order to accumulate assets during the first two phases. Throughout all three phases, the target-date fund manager should identify significant, yet manageable, risks that can be mitigated without decreasing the probability of positive outcomes.

Putnam target-date strategies

Putnam target-date strategies

Putnam Retirement Advantage Funds
Collective investment trusts


Putnam RetirementReady Funds
Mutual funds


Our thinking on glide paths

Our thinking on glide paths


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Resources

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