The "100 Minus Age" Rule Puts Retirees at Risk

Other allocation approaches offer better outcomes

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One of the biggest investment decisions you'll make is your asset allocation for retirement. This is how much of each investment type (stocks vs. bonds) that you'll hold at any given time. Many rules of thumb have developed over the years to guide this decision. One is the 100 minus age rule.

What Is the 100 Minus Age Rule?

This rule says you should subtract your age from 100. The result is the percentage of your assets you should put to stocks, also referred to as equities. You would have a 60% allocation to stocks at age 40. You would reduce this to 35% by age 65. This is referred to as a “declining equity glide path.”

You would decrease your allocation to stocks each year or few years, reducing your volatility and risk level.

Problems With This Rule

This rule assumes that financial planning is the same for everyone. Your choices should be based on your goals, your current assets, your future income potential, and still other factors.

Your money has many more years to work for you if you're 55 and not planning on taking withdrawals from your accounts until you are required to do so at 70½. Having 50% of your funds in stocks may be too conservative based on your goals and time frame if you want your money to have the highest probability of earning a return in excess of 5% a year.

But you might be age 62 and about to retire. Many people gain from delaying the start date of their Social Security benefits in this case, and using their retirement account withdrawals to fund their living expenses until they reach age 70. You may need to use a great deal of your investment money in the next eight years. Having 38% in stocks might be too high.

What the Research Shows

Academics have begun to conduct research on how well a declining equity glide path performs compared to other options. The 100 minus age rule results in this type of path.

Other options include using a static allocation approach, such as 60% stock and 40% bonds with annual rebalancing. Or you might use a rising equity glide path, where you enter retirement with a high allocation to bonds. Spend those bonds while letting your stock allocation grow.

Research by Wade Pfau and Michael Kitces shows that the 100 minus age approach has delivered the worst outcome in a poor stock market. It would have left you out of money 30 years after retirement. Using a rising equity glide path where you spend your bonds first delivered the best outcome.

Pfau and Kitces also tested the outcome of these allocation approaches over a strong stock market. All three would have left you in good shape in this case.

The static approach delivered the strongest ending account values. The rising equity glide path approach offered the lowest ending account values. But they were still far more than you started with. The 100 minus age approach delivered results right in the middle of the other two options.

A bond ladder with staggered maturity dates can help you plan your retirement spending. It works well with many allocation strategies.

Plan for the Worst, Hope for the Best

There's no way to know whether you will be in a period of strong stock market performance when you retire. It's best to build your stock/bond plan so that it works based on a worst-case outcome.

The 100 minus age rule doesn't appear to be the best approach to use in retirement. It doesn't fare well in a poor stock market. Retirees should think about the opposite approach—retiring with a higher allocation to bonds that can be spent while leaving the equity portion alone to grow. This would most often result in a gradual increase in equities throughout your retirement.

Retirement Planning Is Complicated

There are a lot of asset allocation strategies. The best one takes a variety of factors into account. Financial planners use programs that figure your retirement needs based on your current and projected financial picture. The models you find online may give you some guidance. But financial planning is something to leave to the experts.