What You Need To Know About The ‘Rule Of 100’ For Retirement Investing

Republicat de Platon

Urmaritori: 0

August 13, 2021

By Wayne Duggan

One of the longest-standing rules of thumb for investing for retirement is the “rule of 100.” Here’s a look at what the rule of 100 is, how it works and why it might not be the best retirement investing strategy in 2021.

How the Rule of 100 Works
The rule of 100 is an extremely simple rule of portfolio allocation. All you have to do is subtract your age from 100, and the result is the theoretical percentage of your retirement portfolio that should be invested in stocks. The rest of the portfolio, according to the rule of 100, should be invested in lower-risk assets (like bonds).

For example, a 23-year-old investor is relatively young and therefore can devote a larger percentage of their retirement portfolio to stocks. The rule of 100 suggests they put about 77% (100 – 23) of their investments into stocks and just 23% into bonds. A 52-year-old investor, on the other hand, should put just 48% (100 – 52) of his retirement investments into the stock market.

The rule of 100 is a straightforward way to make sure you are not being too aggressive with your investments as you approach retirement age or too conservative with your investments when you are younger. Unfortunately, the rule of 100 may no longer work as well as it once did.

Problems with the Rule of 100
The single biggest problem with the rule of 100 is that modern medicine and technology have significantly increased the life expectancy of people living in developed countries. One simple way some investors have adjusted the rule to factor in a longer life expectancy is to raise 100 to 110.

By using the rule of 110, the 23-year-old hypothetical investor mentioned above would instead have 87% in stocks, while the 52-year-old investor would have 58% of their holdings in equities. Some investors even use 120 as the starting point, an even more aggressive strategy.

Another factor distorting the rule of 100 is the steady decline in interest rates on low-risk U.S. Treasury bonds over the past 40 years. In 1980, investors were getting paid a more than 15% yield on 10-year U.S. Treasury bonds. Today, that yield is just 1.2%.

Ce trebuie să știe investitorii
Like any rule of thumb, the rule of 100 is an oversimplification of a general idea that almost every financial advisor would agree on. As investors get older, it’s typically a good idea to reduce the risk in their retirement portfolios.

Exactly how quickly you reduce that risk and by how much depends on a number of factors, including your age, your retirement goals, your health, your risk tolerance and your expected standard of living in retirement.

The rule of 100 may not be the best retirement investing strategy for everyone, and it’s certainly not the only one that works. What’s much more important than selecting the perfect strategy is staying disciplined, contributing regularly and maintaining the course even during periods of extreme market volatility.

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