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) you'll hold in your portfolio at any given time. Over the years, many rules of thumb have developed to guide this decision.

One popular rule is the 100 minus age rule. Let's learn more about this rule relating to asset allocation by age, and the potential risks and consequences of it.

What Is the 100 Minus Age Rule?

This rule says you should take 100 and subtract your age. The result is the percentage of your assets to allocate to stocks (also referred to as equities).

Using this rule, at age 40 you would have a 60% allocation to stocks; by age 65, you would have reduced your allocation to 35%. In technical terms, this is referred to as a “declining equity glide path.” Each year (or every few years) you would decrease your allocation to stocks, reducing your investment portfolio's volatility and risk level.

Practical Problems With This Rule

This rule assumes that financial planning is the same for everybody. Investing decisions should be based on your financial goals, current assets, future income potential, and additional factors. If you're currently 55 and not planning on taking withdrawals from your retirement accounts until you are required to do so at age 70 1/2, your money has many more years to work for you before you’ll need to touch it.

If you want your money to have the highest probability of earning a return in excess of 5% a year, having 50% of your funds allocated to stocks may be too conservative based on your goals and time frame.

On the other hand, you might be 62 and about to retire. In this situation, many retirees benefit from delaying the start date of their Social Security benefits and using retirement account withdrawals to fund living expenses until they reach age 70. In this case, you may need to use a significant amount of your investment money in the next eight years, and a 38% allocation to stocks might be too high.

What the Research Shows

Academics have begun to conduct retirement research on how well a declining equity glide path (which the 100 minus age rule will deliver) performs compared to other options. Other options include using a static allocation approach, such as 60% stock and 40% bonds with annual rebalancing, or using a rising equity glide path, where you enter retirement with a high allocation to bonds and spend those bonds while letting your stock allocation grow.

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

They also tested the outcome of these various allocation approaches over a strong stock market. In a strong stock market, all three approaches left you in good shape. The static approach delivered the strongest ending account values and the rising equity glide path approach offered the lowest ending account values (which 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 and works well with multiple allocation strategies.

Plan for the Worst, Hope for the Best

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

The 100 minus age approach doesn't appear to be the best allocation approach to use in retirement as it doesn't fare well under poor stock market conditions. Instead of allocating portfolios this way, retirees should consider the opposite approach—retiring with a higher allocation to bonds that can be intentionally spent while leaving the equity portion alone to grow. This would most likely result in a gradual increase in your allocation to equities throughout retirement.

Retirement Planning Is Complicated

There are a lot of asset allocation strategies, but the best strategy takes into account a variety of factors. Financial planners use programs that calculate your retirement needs based on your current and projected financial picture. Although the models you find online may give you general guidance on how to deploy your financial resources, financial planning is something to leave to the experts—or at least get an expert opinion tailored to you.