The Rule of 100

Sean HarrisRetirement

Over the years, we’ve worked with hundreds of people to plan their retirement income strategies. A comprehensive strategy has many moving pieces, and each piece can have a significant impact on the others. In planning retirement strategies for our clients, we often see them making the same mistakes. In fact, we’ve identified seven retirement mistakes that nearly everyone makes. The first common retirement mistake is investing as if you’re still working.

With any investment, there is always a tradeoff between risk and return. If you aren’t already familiar, higher-return investments typically involve a higher level of risk, while investments with more conservative returns are associated with a lower amount of risk. We always recommend that our clients phase out risk as they get closer to retirement for additional security within their portfolios. Earlier in your working career, you have less savings, and you need to accumulate a greater amount of capital to reach your goal. You also have a higher risk tolerance because you have much more time ahead of you, and you’re still receiving a paycheck. So, at that phase in life, it makes sense to brave the risk for the promise of greater returns because you have more time to recover if you suffer a loss.

But as you approach retirement, and once you stop working, your investment strategy should turn toward preserving your capital. This means phasing out those investments that are subject to wider fluctuations and greater uncertainty. The gradual move away from riskier investments should begin as you enter your mid to late forties with the majority of risk purged from your portfolio by the time you retire. As a rule, riskier investments include stocks, mutual funds, variable annuities and bonds. Investments that carry only a minimal amount of risk are fixed annuities, fixed index annuities, certain insurance policies, treasuries, CDs and the like.

That being said, how do you know you’re taking on the appropriate levels of risk and return for your age? You should measure your risk level as percentage of your investment portfolio as a whole. We’ve found there is a simple rule you can use to calculate the maximum level of risk for your age, the Rule of 100. Put simply, just subtract your age from 100. The number you come out with is the maximum amount of risk, as a percentage, that should be incorporated into your portfolio. For example, if you’re 55-years-old, the most risk you can tolerate is 45%. And, you should adjust that level downward continuously until and through your retirement years.

No two people are alike and it’s rare that two of our clients are in the same situation, financially. But in general, the Rule of 100 is a guideline that will help you protect your nest egg, so you can have the income you need to live comfortably once you retire. If you have questions about your investment portfolio or investment strategy, it’s wise to consult a financial advisor to make sure you are on track and that your retirement income is secure. We’re always here to help, so feel free to contact us if you need some guidance on building your retirement strategy.