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Using the 100 minus your age asset allocation rule is a handy guide to risk.

There’s a simple formula you can follow to reduce risk during retirement-age years

by Joseph Arroyo | Contributor
May 13, 2020


A crucial task of retirement planning is keeping your risk at acceptable levels. Using the 100 minus your age asset allocation rule is a handy guide to risk. The basic premise is that the older you get, the less money you should have exposed to the fluctuations of the stock market.

What is the 100 minus your age rule?

This rule of thumb is designed to give an easy-to-calculate and actionable asset allocation strategy to the average American. This can be calculated by yourself, without having to rely on an investment professional or risk management software.

This simple formula also can be used to check up on your risk profile if your assets are professionally managed. You want to make sure that your advisor is not keeping too much of your nest egg at risk.

To calculate the asset allocation ratio, simply subtract your current age from 100. The resulting number represents the maximum percentage of assets that should be invested in the stock market. As an example, if you’re 64 years old you should allocate no more than 36% of your assets to the stock market. The remaining 64% would be allocated to more conservative asset classes.

This rule results in increasingly lower allocations to the stock market as you age, which is as close to universal advice as you’ll find in investment management.

Why is the 100 minus your age rule important?

Most investment and financial advisors recommend reduced stock market exposure as you approach retirement age. You’d want to do this because large investment losses near retirement age and beyond could be catastrophic to your retirement lifestyle.

The stock market generally gives you the highest possible investment gains, and we started 2020 with one of the longest running bull markets in history. However, the stock market is also historically volatile, with many years of losses. Consider the tumultuous reaction to the coronavirus threat that began in February 2020. A dramatic market correction (a drop of at least 10%) took place in a matter of mere days and just two weeks after the market had reached an all-time high.

Stock market performance is somewhat related to the economic performance of the nation. The economy grows during booms and shrinks during busts, and the stock market generally matches this pattern. Sometimes the stock market leads the way, and other times if follows after.

In the United States, we average one recession every five years. We are currently in the 10th year of expansion, which is a record. Unfortunately, bear markets, which are usually defined as declines of 20% or more, don’t always need a recession to happen. Bear markets occur every 3.5 years.

Bear markets, whether caused by recession or not, can be enormous buying opportunities for investors with long-term horizons. Unfortunately, this is not the case for those approaching or already in retirement. For retirement-age investors, bear markets wreak havoc that may never be undone.

There have been four recessions in the last 40 years, which happens to be the entire working life of those just entering or nearing retirement. During these four recessions, the Dow Jones lost an average of 33.5%:

Average Dow Jones Industrial Average loss during the last four recessions

Recession Years Peak-to-Trough Loss
Recession Years1981 - 82 Peak-to-Trough Loss24%
Recession Years1990 - 92 Peak-to-Trough Loss21%
Recession Years2001 Peak-to-Trough Loss35%
Recession Years2007 - 09 Peak-to-Trough Loss54%

Consider the case of a 60-year-old six years from retirement. If they have a nest egg of $500,000, a 33.5% loss would reduce their balance by $167,500. If this amount had been put into an income annuity, it could generate guaranteed monthly income of $800 per month for the rest of their life.

Not many people can survive the change in lifestyle that comes from losing $800 a month in income. And, that’s just using the average loss of 33.5%. If they were fully invested in the stock market and lost 54%, like happened with the last recession, they’d lose $270,000, or enough to purchase a life annuity paying almost $1,300 per month.

Lost Income Per Month Based on Total investment

Recession Years Peak-to-Trough Loss Lost Income
Recession Years33.5% (average) Peak-to-Trough Loss$167,500 Lost Income$804 per month
Recession Years54% (extreme) Peak-to-Trough Loss$270,000 Lost Income$1,298 per month

If this person had been following the 100 minus your age allocation rule, only 40% of their nest egg would be exposed to the market. Asset allocation shielded them from these declines, and their purchasing power would be much better preserved compared to the example above.

What kind of investments should I use with the 100 minus your age rule?

We’ve already discussed that this rule gives you a guide to the maximum amount that should be exposed to market losses. We’ll discuss possible investments for this part of your portfolio first.

For money that you will leave exposed to the market, you have a range of options:

  • Stock-heavy mutual funds or exchange traded funds (ETFs)
  • Dividend paying stocks
  • Balanced mutual funds

Having some money exposed to the stock market can help as a hedge against inflation. Since the bulk of your portfolio will be invested in lower-yielding investments, any earnings generated from the stock market will help to keep your purchasing power in line with rising expenses.

For the part of your portfolio that you’re shielding from the market – the percentage represented by your age in the rule of thumb – you’ll want to be invested in products that are protected against market loss.

Working with your advisor, you’ll likely choose products like:

  • Annuities – both fixed and indexed
  • Cash – including certificates of deposit
  • High-grade bonds – like short-term treasury bills or bond funds

Products like indexed annuities can give you the best of both worlds. These products vary, but often protect you from losses but allow you to have a little exposure to the upside from the stock market.

What are the pros and cons of the 100 minus your age strategy?

One benefit of this strategy is that it’s easy to understand. One simple subtraction problem can tell you how much of your portfolio should be exposed to the stock market. Anyone can do this. Another benefit is that this strategy naturally and gradually leads you to lower and lower stock market exposure.

A potential drawback is that you may well lose out on impressive gains from the stock market. There’s no question that people in their 60s have missed out on the potential for gain if they’ve relied on this rule for the past 10 years.

Another drawback is that the 100 minus your age strategy may not be conservative enough. Since you can expect a bear market every 3.5 years, you could experience heavy losses several times in a decade. Having even 35% of your portfolio exposed to this kind of volatility could have a devastating effect on your retirement income, or even your ability to retire at all.

What should I do with the 100 minus your age strategy?

As we mentioned at the beginning, this guideline is simply that: a guideline. It’s not a hard-and-fast rule. Asset allocation is a critical component of your retirement planning strategy. It should be discussed with your advisor.

Be sure to work together to find an investment mix that’s likely to accomplish your goals while protecting you from unwarranted risk. If you’re already implementing a strategy, check your asset allocation against the 100 minus your age rule to see if you need to talk with your advisor about reducing your market risk.

Alliance America can help

Alliance America is an insurance and financial services company. Our financial planners and retirement income certified professionals can assist you in maximizing your retirement resources and help you to achieve your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.

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