Stock Allocation Rules

One of the most basic principles of investing is to gradually reduce your risk as you get older since retirees don’t have the luxury of waiting for the market to bounce back after a dip. The dilemma is figuring out exactly how safe you should be relative to your stage in life.

For years, a commonly cited rule of thumb has helped simplify asset allocation. It states that individuals should hold a percentage of stocks equal to 100 minus their age. So, for a typical 60-year-old, 40% of the portfolio should be equities. The rest would comprise of high-grade bonds, government debt, and other relatively safe assets.

Two Reasons to Change the Rules

Pretty straightforward, right? Not necessarily. While an easy-to-remember guideline can help take some of the complexity out of retirement planning, it may be time to revisit this particular one. Over the past few decades, a lot has changed for the American investor. For one, the life expectancy here, as in many developed countries, has steadily risen. Compared to just 25 years earlier, Americans in 2017 lived almost three years longer. Not only do we have to increase our nest eggs, but we also have more time to grow our money and recover from a dip.

At the same time, U.S. Treasury bonds are paying a fraction of what they once did. As of March 2020, a 10-year T-bill yields less than 1% annually. In the early 1980s, investors could count on interest rates upwards of 10%.  

Revised Guidelines

For many investment pros, such realities mean that the old “100 minus your age” axiom puts investors in jeopardy of running low on funds during their later years. Some have modified the rule to 110 minus your age – or even 120 minus your age, for those with a higher tolerance for risk.

Not surprisingly, many fund companies follow these revised guidelines – or even more aggressive ones – when putting together their own target-date funds. For example, funds with a target date of 2035 are geared to investors who are currently around 50 (as of 2020). But instead of allocating 50% of its assets to equities, the Vanguard Target Retirement 2035 Fund has roughly 75% allocated. The T. Rowe Price Retirement 2035 Fund builds in even more risk, with almost 80% in equities.

It’s important to keep in mind that guidelines like this are just a starting point for making decisions. A variety of factors may shape an investment strategy, including age at retirement and assets needed to sustain one’s lifestyle. Since women live nearly five years longer than men on average, they have higher costs in retirement than men and an incentive to be slightly more aggressive with their nest egg.

The Bottom Line

Basing one's stock allocation on age can be a useful tool for retirement planning by encouraging investors to slowly reduce risk over time. However, at a time when adults are living longer and getting fewer rewards from “safe” investments, it might be time to adjust the “100 minus your age” guideline and take more risk with retirement funds.

Article Sources

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  1. Centers for Disease Control and Prevention. "Health, United States, 2018 – Data Finder." Download Table 004. Accessed March 15, 2020.

  2. Federal Reserve Bank of St. Louis. "10-Year Treasury Constant Maturity Rate," 1980-01-01 to 2020-03-12. Accessed March 15, 2020.

  3. Vanguard. "Vanguard Target Retirement 2035 Fund." Accessed March 15, 2020.

  4. T. Rowe Price. "Retirement 2035 Fund." Accessed March 15, 2020.