The 100 Minus Your Age Rule, often referred to as the Rule of 100, is a straightforward investment guideline aimed at helping retirement savers allocate their assets between stocks and bonds effectively. Per the rule, an investor subtracts their age from 100 to calculate the percentage of their portfolio that should be invested in stocks, with the remainder allocated to bonds and cash. This approach reflects the idea that risk tolerance decreases with age, leading retirees to shift toward more conservative investments as they grow older. However, this rule has significant limitations and may function better as a basic framework, rather than a hard-and-fast rule.
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How Rule of 100 Investing Works
The 100 Minus Your Age Rule is a simple formula intended to help investors determine the asset allocation of their portfolios. To use it, subtract your age from 100. The result is the percentage of your portfolio to allocate to stocks, with the remainder going into lower-risk investments, like bonds or cash equivalents.
For example, at age 50, subtracting 50 from 100 suggests a 50% allocation to stocks and 50% to bonds or other safer investments. As the person reaches 70, subtracting 70 from 100 results in 30%, meaning their portfolio should have 30% invested in stocks and 70% in bonds or similar assets.
This gradual adjustment as a person gets older reduces exposure to the ups and downs of the stock market, aiming to protect accumulated wealth as retirement draws closer. The approach is designed to help individuals maintain a balanced risk-reward profile, ensuring they continue to grow their investments during earlier years while preserving capital and minimizing potential losses as they age and rely more on stable income from their savings.
Benefits of Rule of 100 Investing
Simplicity is one of the primary advantages of the 100 Minus Your Age Rule. It offers a quick guideline for adjusting asset allocation as an investor ages, without requiring deep financial expertise. The rule encourages older investors to reduce exposure to stocks, which are generally riskier, and increase holdings in bonds and cash, which are typically more stable. This shift can help mitigate the impact of market volatility on a retiree’s portfolio.
Additionally, the rule supports the principle of preserving capital for retirees who may no longer have the ability to recover from significant losses. By emphasizing conservative investments as one ages, it aligns with the need for predictable income streams during retirement.
Limitations of Rule of 100 Investing
While Rule of 100 investing offers simplicity, it may not suit everyone’s financial situation.
One significant limitation is that it does not consider individual risk tolerance, financial goals or life expectancy. For instance, someone with a higher risk tolerance might prefer a larger percentage in stocks to capitalize on growth potential, even as they age. Conversely, a more conservative investor might find the suggested stock allocation too aggressive.
Another issue with the rule is its lack of adaptability to economic conditions. In times of low interest rates, allocating a large portion of a portfolio to bonds could result in minimal returns, potentially undermining long-term growth. Additionally, people who end up living longer due to advances in healthcare or an earlier retirement may require a more growth-focused portfolio to avoid outliving their savings.
To illustrate the potential pitfalls of Rule of 100 investing, consider a hypothetical 65-year-old retiree following the rule. Thirty-five percent of their portfolio would be allocated to stocks, while the remaining 65% would be kept in bonds and cash.
If inflation rises significantly, the lower returns from bonds may not keep pace, eroding purchasing power over time. Meanwhile, their reduced exposure to stocks limits their ability to grow their wealth, ultimately risking financial shortfall during later retirement years. This example illustrates that a one-size-fits-all approach can lead to unintended consequences, especially in changing economic environments or under unique personal circumstances.
Alternatives to the Rule of 100
Investors looking for a more tailored approach to retirement investing might consider alternatives to the Rule of 100. One option is the Rule of 110 or 120, which adjusts the formula to reflect increased life expectancy and the need for longer term growth. For instance, under the Rule of 120, a 65-year-old would allocate 55% to stocks (120 – 65) rather than 35%, leaving more room for growth in the portfolio.
For more advanced investors, there are more nuanced alternatives that account for multiple factors such as market conditions, risk appetite and financial goals.
Risk Parity Strategy
Unlike simple age-based formulas, the risk parity strategy aims to balance the risk contribution of each asset class rather than merely allocating based on age. By adjusting allocations according to the volatility of different asset types, investors can better manage risk and potentially enhance returns in diverse market conditions.
Dynamic Asset Allocation
Another alternative is the dynamic asset allocation strategy, which is adaptive rather than static. This method involves periodically re-evaluating your asset allocation based on market signals, such as valuations, interest rates and economic cycles. For instance, investors who use dynamic allocation might increase exposure to equities when valuations are attractive and shift towards bonds or cash when markets appear overvalued.
This proactive approach requires continuous monitoring but allows investors to better position themselves for varying economic conditions.
The Bucket Strategy
The bucket strategy is another useful tool for retirees aiming to balance liquidity needs with long-term growth. In this approach, investments are divided into multiple "buckets" with different time horizons: a short-term bucket for immediate expenses (cash or near-cash assets), a medium-term bucket for income generation (bonds) and a long-term bucket for growth (stocks).
This segmentation can help prevent short-term market volatility from impacting funds that are needed for immediate expenses, allowing the long-term bucket to grow undisturbed.
Factor-Based Investing
Factor-based investing is another alternative that may be worth considering. Instead of basing allocation purely on age, factor-based investing involves tailoring the portfolio to include specific factors such as value, growth, momentum or quality. By emphasizing certain factors that are expected to outperform over different economic cycles, investors can potentially achieve more efficient diversification and better risk-adjusted returns.
Bottom Line
The 100 Minus Your Age Rule, also known as Rule of 100 investing, offers a straightforward framework for managing risk in retirement by gradually reducing exposure to equities as one ages. While the approach provides simplicity, it lacks the flexibility to account for individual preferences, market conditions or longevity. Advanced investors may find that alternative strategies, such as risk parity or dynamic allocation, offer a more tailored approach to balancing growth and stability throughout retirement.
Retirement Planning Tips
- A strategic mix of tax-deferred, tax-free and taxable accounts provides flexibility and minimizes tax burdens in retirement. Gradually converting traditional IRA or 401(k) assets to a Roth IRA during low-income years or when tax rates are favorable will create a pool of tax-free income for retirement. Meanwhile, assess your asset location and consider placing tax-inefficient investments, like bonds or REITs, in tax-advantaged accounts, while keeping equities in taxable accounts to take advantage of lower capital gains rates.
- A financial advisor can work with you to create a retirement plan tailored to your needs. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
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