For Americans already in retirement and those drawing close, optimizing their investment portfolio while minimizing risk is top of mind. That’s where the 100-minus-your-age rule claims to help, primarily by setting an age-appropriate cap on the percentage of stocks in your retirement portfolio.
Here’s how to weigh the 100-minus-your-age rule and determine whether it works for you.
— What is the 100-minus-your-age rule?
— Weighing the pros and cons of the 100-minus-your-age rule.
— How to build a 100-minus-your-age portfolio.
— Factors that impact 100-minus-your-age portfolios.
— Alternatives to the 100-minus-your-age strategy.
— Use funds to simplify your retirement portfolio.
— Examine risk levels with the 100-minus-your-age rule.
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. That means a 65-year-old retiree should have no more than 35% of their retirement portfolio invested in stocks, with the rest invested in more conservative investments such as bonds, money market funds and cash.
In theory, the rule imposes risk guardrails for retirees, who should hold a declining percentage of stocks as they age since equities are historically a riskier investment than bonds. Take 2022, for example, when the S&P 500 returns for the year slid by 18%. Just as certainly, stocks can generate higher returns than bonds as they do take more risk. But in 2023, the S&P 500 rebounded with a 24% gain for the year.
Taking a long-term approach that balances out stock market risks over time is what the 100-minus-your-age retirement investment strategy is all about.
[READ: 10 Strategies for Investing After Retirement]
Weighing the Pros and Cons of the 100-Minus-Your-Age Rule
Relying on this standard formula can provide decent comfort for retirees. That said, it can backfire, too.
“The problem with using this as a blanket strategy is that every retiree’s financial situation is different and personalized,” said William A. Stack, a financial advisor at Stack Financial Services in St. Louis, in an email. “Some retirees can afford more risk than that and still enjoy a safe and comfortable income throughout retirement. Others, meanwhile, could not afford the short-term risks that come with a 40% stock allocation in an overpriced market such as we have today.”
On the upside, this investment formula can work for retirees in specific situations.
“General rules of thumb, such as the 100-minus-your-age rule, are a decent starting point if you’re an investor unsure how to invest,” said Chris Urban, a certified financial planner and founder of Discovery Wealth Planning in Vienna, Virginia, in an email. “The rule is similar to the 60/40 portfolio, which is a fine, balanced approach to investing in retirement for most retirees.”
Yet the 100-minus-your-age formula may not always give retirees the best path forward.
“Should you have 0% of your assets in stocks at age 100? Probably not,” Urban said. Once you’re at an advanced age, you may not need the money. “In this scenario, you’re simply saving and investing towards a legacy goal and leaving your assets to the next generation.”
The strategy may also be a mismatch for younger retirees. “This is especially the case if you live a simple life at 60, with very modest living expenses, and don’t have any beneficiaries in mind to leave your assets,” Urban said. “It’s also the case if you have barely saved enough for your retirement and if you check your investment portfolio almost daily and get extremely anxious when your value fluctuates significantly.”
[SEE: 7 Dividend Stocks to Buy and Hold Forever]
How to Build a 100-Minus-Your-Age Portfolio
The formula’s rationale is that as a retiree ages, the retiree can tolerate less volatility and less portfolio risk.
The need to diversify a 100-minus-your-age retirement portfolio is paramount. “For example, imagine a client with a 60/40 portfolio who retired in 2007 only to experience a negative 25% return during the 2008 Great Recession,” said Lance Dobler, a market leader with TIAA Private Asset Management in Raleigh, North Carolina, in an email. “This scenario forced several retirees to re-enter the workforce so their portfolio could recover.”
“The allocation of a portfolio generally accounts for over 90% of the returns achieved over time, so getting this right is step one,” Dobler said. “Step two is to make sure there are no areas of the portfolio, both equity and fixed income, that are over- or under-exposed to underlying economic or market risk exposure.”
The main risk for someone not properly diversified is that the returns can deviate from the expected returns with a diversified portfolio. “That deviation can be substantial depending on the degree of concentration of the fund, as well as the individual stocks or bonds being used in the portfolio,” Dobler noted.
Once the appropriate asset allocation is determined, it’s time to pick your stocks, bonds and funds.
“The best approach is to create a core portfolio invested in broadly diversified, low-cost, tax-efficient investment vehicles,” Dobler said. “Active portfolio management can play a role in a well-diversified portfolio.”
Factors That Impact 100-Minus-Your-Age Portfolios
Whether to adjust or reduce stock market exposure as clients age is also an important consideration, Dobler said. “When you’re having that conversation with your money manager, key factors need to be considered,” he advised. These factors should be at the top of your list:
— Life expectancy. Should the age be adjusted up or down from 100? Life expectancy estimates should play a big role in those decisions.
— The current level of retirement funding. Is the retiree well-funded, minimizing the risk of lower returns as the retiree approaches retirement, or have they recently retired?
— Retirement income needs. How much does a retiree need to draw from their portfolio in retirement, and is there a guaranteed source of income available, such as Social Security, a pension or an annuity?
— Legacy and philanthropic planning. Are there goals that justify keeping a more significant equity allocation to increase the ending value of someone’s portfolio?
— Current and forward-looking market and economic outlook. Are asset classes behaving normally based on historical data?
Alternatives to the 100-Minus-Your-Age Allocation Strategy
There are other options if you decide the 100-minus-your-age rule isn’t the right retirement investment path for you.
Take bonds, for example.
“Retirees often don’t realize that being overweight in bonds could be devastating, especially when bonds aren’t behaving as a safety asset should behave, which has happened in recent years,” said Ryan Redfern, chief investment officer at Shadowridge Asset Management in Austin, Texas, in an email.
Redfern also thinks so-called target-date funds, which prioritize age-based management, will fail investors over the coming decades. “The problem is a potential decades-long rising interest rate environment, much like the 1960s and 1970s,” he noted. “If that’s the case, traditional bond allocations will do little to help.”
In such a scenario, retirees should avoid the 100-minus-your-age concept as there are more effective methods of retirement investment allocation. “For example, the 60/40 portfolio has a better chance because it doesn’t force an investor to be overly conservative when they don’t need to be,” Redfern said.
Or consider a 70/25/5 retirement strategy where, regardless of age, 70% is allocated to equities, 25% goes to low-risk assets, which could be short-term bonds or money market funds, and 5% stays in cash for the retirement distribution. “Having a cash allocation helps relieve the pressure on the other investments because you aren’t forced to sell at a bad time in the market just to meet the distribution needs,” Redfern added.
In the 70/25/5 scenario, the retiree can fill the 5% cash portion when the equity bucket fills up over a few months.
Use Funds to Simplify Your Retirement Portfolio
For a retirement savings portfolio that optimizes income in retirement, try using low-cost, broad-based index exchange-traded funds (ETFs) and/or mutual funds within your portfolio.
“Emphasize simplicity,” Urban said. “You can own hundreds of stocks (and) bonds and multiple real estate investment trusts and alternatives with just a handful of funds.”
This strategy makes implementation, monitoring, and rebalancing your retirement portfolio much easier and more efficient.
“This approach also offers a potential way to invest and draw down your assets tax-efficiently, through strategies such as asset location, tax-loss and -gain harvesting, dynamic and retirement income withdrawals from accounts with various tax treatment,” Urban added.
Examine Risk With the 100-Minus-Your-Age Rule
If you opt for the 100-minus-your-age savings path, don’t be reluctant to expand your investment portfolio to suit current economic and market conditions.
“For example, with current fixed interest rates higher than projected stock returns for equities, some retirees could decrease their stock portfolio percentage in exchange for higher-yielding bonds, fixed annuities or certificates of deposit,” Redfern advised. “That gives a retirement fund more stability.”
For those with greater risk tolerances, Redfern recommended prioritizing value and dividend stocks from consumer staple companies in retirement.
“This can offer some protection during recessionary conditions,” he noted. “Dividend-paying consumer staple companies usually have pricing power to keep up with inflation, as consumers will need to continue to buy them regardless of economic conditions.”
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Should Retirees Follow the 100-Minus-Your-Age Rule for Stock Allocation? originally appeared on usnews.com
