Should Retirees Follow the '100 Minus Your Age' Rule?

Figuring out how much risk to take in retirement isn’t always straightforward. One popular rule of thumb, the “100 minus your age” rule, offers a quick way to decide how to divide your portfolio between stocks and safer investments. However, while its simplicity is appealing, retirees may wonder whether this decades-old guideline still holds up in today’s financial landscape or if a more personalized approach makes better sense.

A financial advisor can help you plan and save for retirement while creating the right long-term plan that meets your needs.

How Rule of 100 Investing Works

The “100 minus your age” rule is a simple guideline used to determine how much of your portfolio should be invested in stocks. By subtracting your age from 100, you get the percentage of your portfolio that could be allocated to equities, with the remainder typically going into bonds or other lower-risk investments. For example, a 70-year-old investor might allocate 30% to stocks and 70% to more conservative assets.

This rule is designed to help investors gradually reduce risk as they age. Since stocks tend to be more volatile but offer higher growth potential, the idea is to hold more of them when you’re younger and shift toward stability as you approach or enter retirement. It provides a straightforward framework for adjusting your asset allocation over time.

For retirees, the rule of 100 can serve as a starting point for balancing growth and income needs. While preserving capital becomes more important, maintaining some exposure to stocks can help your portfolio continue to grow and keep pace with inflation. The rule offers a simple way to avoid becoming overly conservative too quickly.

Rather than treating it as a strict formula, the rule of 100 is best used as a general guideline. It can help frame your thinking about asset allocation, but your final investment mix should reflect your personal financial goals and comfort with risk. Consulting a financial advisor can also help tailor a strategy that aligns more closely with your retirement needs.

Benefits of Rule of 100 Investing

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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.

1. 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.

2. 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.

3. 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.

4. 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

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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 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 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.
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.