One of the most basic principles of investing is to gradually reduce your risk as you get older. That makes sense when you consider that retirees don’t have the luxury of waiting (or the capital, for that matter) for the market to bounce back after a dip. The dilemma is figuring out exactly how safe you should be relative to the stage of life you're in at any given point in time.
For years, a commonly cited rule of thumb has helped simplify asset allocation. According to this principle, individuals should hold a percentage of stocks equal to 100 minus their age. So, for a typical 60-year-old, 40% of the portfolio should be equities. The rest would comprise high-grade bonds, government debt, and other relatively safe assets.
Key Takeaways
- Reducing the amount of risk as you get older is one of the basic principles of investing.
- One of the common rules of asset allocation is to invest a percentage in stocks that is equal to 100 minus your age.
- People are living longer, which means there may be a need to change this rule, especially since many fixed-income investments offer lower yields.
- It may make sense to hold a percentage of stocks equal to 110 or 120 minus your age.
- You should consider other factors in your investment strategy, including the age at which you want to retire and the amount of money you think you'll need.
Reasons to Change the Rules
Pretty straightforward, right? Not necessarily. While an easy-to-remember guideline can help take some of the complexity out of retirement planning, it may be time to revisit this particular one. Over the past few decades, a lot has changed for the American investor.
For one thing, modern portfolio theory was birthed in the 1950's by Harry Markowtiz. Since then, life expectancy here (as in many developed countries) has steadily risen. The average American lives approximately 77 years, while the average lifespan at the theory's creation was closer to 70 years old. What's the lesson here? Not only do we have to increase our nest eggs, but we also have more time to grow our money and recover from a dip.
At the same time, U.S. Treasury bonds are paying a fraction of what they once did. As of May 2022, a 10-year T-bill yields 2.75% annually. In the early 1980s, investors could count on interest rates upwards of 10%.
Make sure you consult a financial professional when undertaking any investment strategy and before you make any investment decisions.
Revised Guidelines
For many investment pros, such realities mean that the old “100 minus your age” axiom puts investors in jeopardy of running low on funds during their later years. Some modified the rule to 110 minus your age. Those with a higher tolerance for risk may further modify that rule by going even further to 120 minus your age.
Not surprisingly, many fund companies follow these revised guidelines(or even more aggressive ones) when putting together their own target-date funds. For example, funds with a target date of 2035 are geared to investors who are currently around 50 (as of 2020). But instead of allocating 50% of their assets to equities:
- Vanguard's Target Retirement 2035 Fund has more than 70% allocated to equities
- T. Rowe Price's Retirement 2035 Fund builds in even more risk with more than 50% invested in equities
It’s important to keep in mind that guidelines like this are just a starting point for making your investment decisions. A variety of factors may shape an investment strategy, including the age at retirement and the assets needed to sustain one’s lifestyle.
Since women live nearly five years longer than men on average, they have higher costs in retirement than men and an incentive to be slightly more aggressive with their nest egg.
Is There a Proper Asset Allocation by Age?
Your age dictates how much risk you're willing to take on in your investments. The general rule is that the younger you are, the more risk you're able to tolerate. The older you get, though, means you must cut back on the amount of risk in your portfolio. The common rule of asset allocation by age is that you should hold a percentage of stocks that is equal to 100 minus your age. So if you're 40, you should hold 60% of your portfolio in stocks.
Since life expectancy is growing, changing that rule to 110 minus your age or 120 minus your age may be more appropriate.
What Is the Old Rule About the Best Portfolio Balance by Age?
The old rule about the best portfolio balance by age is that you should hold the percentage of stocks in your portfolio that is equal to 100 minus your age. So a 30-year-old investor should hold 70% of their portfolio in stocks. This should change as the investor gets older.
But with individuals living longer, investors may be better suited in changing that rule to 110 minus your age or even 120 minus your age.
Does Changing Investment Portfolio Allocation by Age Make Sense?
It does make sense to change your portfolio allocation by age. That's because the older you get, the less risk you can tolerate. Put simply, you don't have the time to lose and replenish the capital base in your nest egg. Preservation of capital is important for those who are closer to retirement. As such, financial security is important to them since they can't wait for the market to bounce back.
The Bottom Line
Basing one's stock allocation on age can be a useful tool for retirement planning by encouraging investors to slowly reduce risk over time. However, at a time when adults are living longer and getting fewer rewards from “safe” investments, it might be time to adjust the 100 minus your age guideline and take more risk with retirement funds.
FAQs
The common rule of asset allocation by age is that you should hold a percentage of stocks that is equal to 100 minus your age. So if you're 40, you should hold 60% of your portfolio in stocks. Since life expectancy is growing, changing that rule to 110 minus your age or 120 minus your age may be more appropriate.
What is the 100 minus your age rule? ›
Determining the allocation of assets is a pivotal choice for investors, and a widely used initial guideline by many advisors is the “100 minus age" rule. This principle recommends investing the result of subtracting your age from 100 in equities, with the remaining portion allocated to debt instruments.
What is the rule of 100 in retirement? ›
What Is the 100-Minus-Your-Age Rule? To follow the 100-minus-your-age rule, retirees deduct their current age from 100 to achieve an optimal balance of stocks and bonds in their retirement portfolio.
At what age should you get out of the stock market? ›
There are no set ages to get into or to get out of the stock market. While older clients may want to reduce their investing risk as they age, this doesn't necessarily mean they should be totally out of the stock market.
What is the 120-age rule? ›
The Rule of 120 (previously known as the Rule of 100) says that subtracting your age from 120 will give you an idea of the weight percentage for equities in your portfolio.
Should a 70 year old be in the stock market? ›
Conventional wisdom holds that when you hit your 70s, you should adjust your investment portfolio so it leans heavily toward low-risk bonds and cash accounts and away from higher-risk stocks and mutual funds. That strategy still has merit, according to many financial advisors.
What is the best asset allocation for retirement? ›
At age 60–69, consider a moderate portfolio (60% stock, 35% bonds, 5% cash/cash investments); 70–79, moderately conservative (40% stock, 50% bonds, 10% cash/cash investments); 80 and above, conservative (20% stock, 50% bonds, 30% cash/cash investments).
What is the $1000 a month rule for retirement? ›
According to this rule, one should aim to save $240,000 for every $1,000 of monthly income they anticipate requiring during retirement. To put it simply, if your retirement budget is projected to be $4,000 per month, then your savings goal would be $960,000 ($240,000 * 4).
How long will $100000.00 last in retirement? ›
With $100,000 you should budget for a retirement income of around $5,000 to $8,000 on top of Social Security, depending on how you have invested your money. Much more than this will likely cause you to run out of money within 25 – 30 years, which is potentially within the lifespan of the average retiree.
What is the golden rule for retirement? ›
Retirement may seem like a distant dream, but it's never too early or too late to start planning. The “golden rule” suggests saving at least 15% of your pre-tax income, but with each individual's financial situation being unique, how can you be sure you're on the right track?
A recession could result in a lower IRA balance, but that's not guaranteed to happen. If a recession does negatively impact your IRA, your best bet is to do nothing. It's a good idea to have an emergency fund for surprise expenses that could pop up during a recession, so you can let your IRA recover.
When should seniors stop investing? ›
A general rule of thumb says it's safe to stop saving and start spending once you are debt-free, and your retirement income from Social Security, pension, retirement accounts, etc. can cover your expenses and inflation.
How much should a 60 year old have in stocks? ›
For years, a commonly cited rule of thumb has helped simplify asset allocation. According to this principle, individuals should hold a percentage of stocks equal to 100 minus their age. So, for a typical 60-year-old, 40% of the portfolio should be equities.
How much money do I need to invest to make $1000 a month? ›
A stock portfolio focused on dividends can generate $1,000 per month or more in perpetual passive income, Mircea Iosif wrote on Medium. “For example, at a 4% dividend yield, you would need a portfolio worth $300,000.
How much money do I need to invest to make $3,000 a month? ›
Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.
What is a good portfolio for a 75 year old? ›
Age 65 – 70: 50% to 60% of your portfolio. Age 70 – 75: 40% to 50% of your portfolio, with fewer individual stocks and more funds to mitigate some risk. Age 75+: 30% to 40% of your portfolio, with as few individual stocks as possible and generally closer to 30% for most investors.
What is the 100 pages minus your age rule? ›
Nancy Pearl has given readers wonderful options with her Rule: If a reader is under 50 years old, then consume 50 pages before dropping a book. If a reader is over 50 years old, take the number 100, subtract your age, and this is the number of pages to read before switching to the next book.
What is the 110 minus your age rule? ›
Age-Based Asset Allocation
For example, there's the rule of 110. This rule says to subtract your age from 110, then use that number as a guideline for investing in stocks. So if you're 30 years old you'd invest 80% of your portfolio in stocks (110 – 30 = 80).
At what age should you have 100k saved? ›
“By the time you hit 33 years old, you should have $100,000 saved somewhere,” he said, urging viewers that they can accomplish this goal. “Save 20 percent of your paycheck and let the market grow at 5% to 7% per year,” O'Leary said in the video.
What is the 125 minus age rule? ›
A useful variation of this rule is to use 125 minus your age, not 100. As people live longer this formula will keep you more fully invested in equities. This introduces more risk, but the long run potential of equities can also offer more growth to keep up with resource needs in retirement.
