Everything About The "100 Minus Age" Rule

Over time, several general rules of thumb have evolved to assist in making this selection. One of them is referred to as the "100-minus-age rule." According to this guideline, you are supposed to deduct your age from 100. The number that emerges is the proportion of your resources that should be invested in stocks, often known as "equities." At the age of 40, you would have a stock allocation of sixty per cent. In what is known as a "declining equity glide path," you would get that number down to 35% by the time you reach the age of 65. You would reduce your exposure to risk and volatility by lowering the percentage of your portfolio invested in equities on an annual or semi-annual basis.

Problems With This Rule

This guideline works on the assumption that everyone's approach to financial planning is the same. Your decisions need to be driven by your objectives, the state of your finances, the prospects for your future income, and a host of other considerations. If you are 55 years old and do not intend to withdraw from your accounts until you are legally obligated to do so at 71/2, your money will have many more years to continue working for you. If you want your money to have the best possibility of generating a return of more than 5% per year on average, having 50% of your assets invested in equities may be too cautious of an approach given the objectives and period established for yourself.

On the other hand, you can be 62 years old and approaching retirement. Many individuals can improve their financial situation by postponing the age at which they begin receiving Social Security payments and instead drawing money out of their retirement accounts to cover their living costs until they reach the age of 70. In the following eight years, you could have to withdraw a significant amount of your invested money. It's possible that having 38% of your assets in equities is too much.

What the Research Shows

The academic community has started studying how well a falling equity glide route performs compared to other available choices. This kind of route is what you get when you apply the rule of 100 minutes your age. Another alternative is using a static allocation technique, such as having 60% of your assets in stocks and 40% in bonds with yearly rebalancing. You might also adopt a rising equity glide path, which involves retiring with a large portion of your portfolio allocated to bonds. You should invest those bonds in something riskier while you let your equity allocation grow.

According to research by Wade Pfau and Michael Kitces, using 100 minus an investor's age has produced the poorest results in a volatile stock market. It would have rendered you financially destitute thirty years after you had retired. The optimal strategy resulted in the highest return by following a rising equity glide path in which bonds were spent first. The static approach produced the highest account values at the very end of the process. The technique that followed a rising equity glide path had the most favourable ending account values. But even so, they significantly improved over what you had initially. The findings obtained through the use of the 100 minus age technique fell directly in the centre of those obtained through the use of the other two choices.

Plan for the Worst, Hope for the Best

There is no way to determine in advance whether or not you will be retiring at a time of favourable performance in the stock market. It is in your best interest to construct your stock-and-bond strategy to function based on a scenario in which the worst possible result occurs.

It seems that the "100 minus your age" guideline is not the most effective strategy when planning for retirement. When the stock market is doing poorly, it does not fair well. Retirees need to give some thought to taking the other route, which entails entering retirement with a more significant allocation to bonds that may be spent while leaving the equity part alone to grow. This would almost always lead to a steady growth in the value of your equity holdings throughout your retirement.

Retirement Planning Is Complicated

There are many different approaches to the distribution of assets. The finest one is the one that takes into consideration a wide range of aspects. The amount of money you will need in retirement is determined by financial planners using software that takes into account both your present situation and your expectations for it in the future. The models that you may discover online might be able to provide you with some direction. However, arranging one's finances is best left to professionals in the field.