What is the 100 minus age rule?
This rule states that you should subtract your age from 100. The result is the percentage of your assets that should be allocated to stocks, also known as “equities.” This means that you would own 60% of your assets in stocks at age 40. You would reduce that to 35% by age 65 in what is referred to as a “downward equity glide path.”
Problems with this rule
This rule assumes that financial planning is the same for everyone. Your choices should be based on your goals, current assets, future income potential, and other factors. Your money has many years to work for you if you are 55 and do not plan to take withdrawals from your accounts until you are required to do so at age 70.5. Having 50% of your money in stocks might be overly conservative based on your goals and time frame if you want your money to have a higher likelihood of earning a return above 5% per year.
What does research show?
Academics have begun conducting research on the performance of the downward equity glide path influenced by alternative asset allocation options. The 100 minus age rule gives this type of glide path. Other options include using a fixed allocation approach, such as 60% in stocks and 40% in bonds with annual rebalancing. Or you might use an upward equity glide path, where you enter retirement with a high bond allocation. Spend those bonds while letting the stock allocation grow.
Retirement planning is complex
There are many asset allocation strategies. The best strategy considers a variety of factors. Financial planners use software that determines your retirement needs based on your current and future financial picture. The models you find online can provide some guidance. But financial planning is something best left to experts.
Frequently Asked Questions (Definitions)
What is the primary goal of asset allocation? The aim of asset allocation is to reduce risk and maximize returns in a way that fits your financial goals at any given time in your life. As those goals change over the years, your asset allocation strategy should change as well.
How can I change my asset allocation? Your options for changing your asset allocation will depend on your broker, fund manager, or financial advisor. In some cases, you can make adjustments online without any assistance. In other situations, you will need to request changes through your advisor or account manager.
How much do I need to retire? There are numerous models for calculating how much you need for retirement, but the exact amount depends on various factors, including your health, your age when you retire, and your lifestyle expectations. It also depends on how your assets are allocated in your portfolio, as well as market conditions during your retirement. Discuss your situation with your financial advisor and review your plans regularly to avoid any surprises.
Source: https://www.thebalancemoney.com/100-minus-age-allocation-approach-puts-retirees-at-risk-2388296
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