Retirement Guideline: Subtracting 120 from Your Current Age
In the realm of retirement planning, the "120 minus your age" rule has long been a well-known guideline for determining the percentage of one's portfolio that should be invested in stocks. However, as Melissa Caro, CFP® and founder of My Retirement Network, points out, this rule doesn't hold up as a standalone framework in today's more complex environment.
The rule, which suggests subtracting behaviours that could derail your plan, rather than just your age, can be a useful starting point. But it is essential to consider individual factors like comfort with market risk, shaped by experience, personality, and current events, which can vary significantly from person to person.
For instance, a 30-year-old might be 90% in stocks, while a 70-year-old would scale back to 50%, according to this rule. But personalization is key to ensuring that the investments align with an individual's unique financial needs and emotional resilience.
Nathan Sebesta, CFP® and founder of Access Wealth Strategies, agrees. He recommends a portfolio based on both financial goals and emotional resilience. An in-depth conversation with your adviser, guided by questions about your response to market drops and your feelings about portfolio changes, can help find an allocation you can stick with, not just when times are good, but when the market tests your nerves.
One method to personalize the rule is using a bucket strategy: dividing investments into different buckets aligned with time horizons and risk tolerance. This approach helps manage reactions to market downturns and sequence of returns risk. Since risk tolerance can change due to life events like job loss or caregiving, regularly revisiting risk assessments and engaging in discussions about emotional responses to market volatility helps maintain an allocation one can stick with, even in stressful markets.
Financial planning should also integrate a life-cycle approach that connects current savings with future spending needs, health care costs, and expected longevity, all personalized to the individual’s situation to provide flexibility and greater confidence. Moreover, strategic retirement income planning considers multiple income streams—including Social Security, portfolio withdrawals, and alternative investments—and adapts withdrawals and asset allocations dynamically to changing market and personal circumstances.
Effective personalized solutions require participant engagement, transparency about costs and fee structures, and balancing the benefits of personalization against risks like overtrading or excessive monitoring.
In summary, personalization transforms the "120 minus your age" rule from a simple age-based guideline into a dynamic process that accounts for unique emotional, behavioural, and financial circumstances, thereby improving retirement outcomes and the retiree's peace of mind. It is crucial to remember that everyone's retirement journey is unique, and a personalized approach can help navigate the complexities of retirement planning more effectively.
Trading strategies in personal-finance, such as the "120 minus your age" rule, should be personalized to account for individual factors like comfort with market risk and emotional resilience. A more dynamic process, considering unique emotional, behavioural, and financial circumstances, can improve retirement outcomes and provide greater peace of mind.
Investing based on personal needs and emotional resilience may involve using a bucket strategy, dividing investments into different buckets aligned with time horizons and risk tolerance, or integrating a life-cycle approach that connects current savings with future spending needs, health care costs, and expected longevity.
