Transforming personal finance since 2011

#55 — 100 minus your age...

January 13th, 2020

By Andrew Craig

Reading time: ~ 13 minutes

Today I wanted to write about one of the classic old investment ideas: Something called the “100 minus your age rule”.

Although this idea has been around for quite a few decades, as is so often the case in finance, most people have never heard of it. Given that it is a relatively helpful way of thinking about finance and investment, I thought I’d take a moment to write about it.

To explain:
For some decades now, many financial advisers have used a basic rule of thumb that says that the percentage of your savings you hold in “risky” equities (shares) should be “100 minus your age”, with the rest being held in “low risk” bonds.

For example, if you are 30, you should hold around 70% of any investment pot that you have managed to build in the stock market, and around 30% in more defensive assets – usually government bonds. If you are 70, you should have only 30% in the stock market and 70% in bonds and so on.

As I wrote in my book the idea is that as you get older, you need to be thinking more about the return OF your money rather than the return ON your money. Not losing money becomes increasingly important as we get older. The reasons for this should be fairly obvious: If you are 30 and have built an investment pot of, say, £10,000 – a stock market (or bitcoin) crash might reduce that pot to £5,000 perhaps. This isn’t great but it is clearly a great deal less problematic and stressful than if you are 60 years old and the £1 million you have spent a life-time building falls to £500,000 in the same scenario, not least given that you will need this money reasonably soon to fund you and your family in retirement.

Professors Andrew Clare and Stephen Thomas, with whom we collaborate on our investment fund, describe this reality as ‘sequencing risk’. This is one the most important ideas in investment.

“100 minus your age” is a helpful idea when it comes to reducing sequencing risk. If you reduce your risk as you get older, you should avoid that awful nightmare scenario of seeing your pension pot smashed to smithereens when you most need it – something that has happened to far too many people over the years – and entirely unnecessarily in my view.

Like any idea in investment, “100 minus your age” isn’t perfect. First, it was first devised in an era when bond returns were far higher than they are today.

Source: MacroTrends

This chart shows the 10-year US treasury interest rate going back to the 1960s. This is the interest rate used to decide mortgage rates across the U.S. and is the most liquid and widely traded bond market in the world – so a good proxy for the return an investor might expect on the “bonds” bit of their portfolio.

As you can see – the current rate is below 2% - and this has been the case for much of the time since the financial crisis of 2007. For the last fifty years, however, bond rates have more normally been between 4% and 8% and even as high as nearly 16% at peak. Looking at the chart – you can see that they’ve probably averaged roughly 6%. It should be intuitively clear that implementing “100 minus your age” will give you very different outcomes with bond rates at 2% to what you can achieve when they’re more like 6% (e.g. if 50% of your portfolio is earning 6% vs. 2% for example).

For much of the last fifty years – someone at retirement who had managed to build a nice big pension pot could expect to earn around 6% or even 8% a year just sitting with 100% of their money in bonds. For folks with around £1m in their pension [1], that was around £60,000-£80,000 a year of income. Obviously, with interest rates now at more like 2% - this number has reduced to around £20,000 a year.

This reality has incredibly serious consequences as you might imagine, most particularly for people at or near retirement. As I have written elsewhere, low interest (bond) rates have been one of the most important considerations for investors for the last dozen years or so. Arguably, they make the “100 minus your age” a good deal less useful an idea today than it was when interest (bond) rates were three or four times higher than they are today.

Life Expectancy and retirement age

The other consideration here is life expectancy. Amazingly enough, this has increased by around thirty years in the last century in the developed world. (You can look at how remarkable this phenomenon has been here). Scientists predict that this trend will continue. Many children born today have a very good chance of living well past 100. If we are living 30 or even 40 years longer today than when “100 minus your age” was conceived, then presumably we need to take this into account?

A similar and related point concerns retirement age. If people used to retire at 60 and now many continue to work until 70 or beyond – then that is another decade or more where their money might be better off earning a higher return, given it may not yet be needed to generate income.

120 minus your age?

Given what has happened to interest rates, life expectancy and retirement age, some financial advisers have advocated simply changing the rule to “110 - or even 120 minus your age”. If bond rates are punitively low and we are living and working longer, then we can afford to keep more of our money in “riskier” / “higher return” equities in the hope of building a bigger retirement pot.

A related (and more negative) point concerns the fact that in the last two or three decades the vast majority of people in the (developed) world have made insufficient provision for their retirement. For most of the 1950s right up until the 1980s, Americans saved around 9% of their income on average. This had fallen to about 2% by the time of the financial crisis in 2007.

The same has been true in most of the developed world – certainly in the “Anglo-Saxon” bits of it. As interest rates have fallen and credit has become far easier to get hold of, a depressingly large percentage of the population have chosen to save less and borrow more – the absolute 180-degree precise opposite of what they “should” have done – (and one of the key reasons for the financial and property crises of the last decade or so).

This has been positive for US shares

This phenomenon has also then been one of the key drivers of the exceptional performance of the S&P 500 in recent years – as counter-intuitive as this might sound. This is because millions of baby-boomers now at or near retirement just don’t have enough to live on if they are only able to make annual returns of 2-3% (or even less). For many of these people – and for the financial advisers and investment funds they use – the answer has been to chase higher returns by investing in the stock market – that is to say in shares rather than bonds. This, combined with the rise of inexpensive ETF products, has created an incredibly powerful and long-sustained upward spiral in the world’s largest and most liquid stock-markets - and the S&P 500 in particular as the “big-Daddy” of them all. The S&P was up by more than 30% in 2019 and is up about 385% since the “spooky” bottom in March 2009 which was at the level of 666 (vs. no less than 3,240 as I write)!

What to do?

As ever – whatever you decide to do will depend on your personal circumstances, in particular, how much you earn, when you started investing (very important – youngsters take note!), how long you want to work until you retire and how healthy you are (i.e. – how long you will live after you do!). There is no one-size-fits-all “right” answer here.

That said – I do think there is one way of thinking about “100 minus your age” that can be helpful: My suggestion is that you might think about “aggressive” vs. “defensive” in your allocation, rather than the more simplistic original idea of “equities” vs. “bonds”.

In chapter 7 of my book, I highlight the existence of no fewer than ten different asset-classes with which you might preserve and / or grow your wealth. Specifically, these are:

  1. Cash.
  2. Property (real estate).
  3. Bonds.
  4. Shares (AKA stocks or equities).
  5. Commodities (and precious metals in particular).
  6. Funds.
  7. Insurance products.
  8. Foreign exchange (i.e. FX or currency).
  9. Derivatives (e.g. futures and options) and, nowadays…
  10. Crypto (bitcoin etc.).

You can see that ‘shares’ and ‘bonds’ are only two of these ten different types of asset class. I would argue, therefore, that a slightly more sophisticated way of looking at your investments might include rather more than just those two.

I would suggest that you use “100, 110 or 120 minus your age” to decide on what percentage of your wealth to allocate to “aggressive” vs. “defensive” investments. This implies you have two broad decisions to make: First, whether to use 100, 110 or 120 to make the calculation. Second, (obviously) which aggressive and defensive investments you might use having made that calculation.

Which number to use

Deciding which number to use should be a relatively simple function of a blend of the following three key factors:

  1. How comfortable with risk vs. how risk averse you are: If you are inherently conservative then you should use the number 100 to make your calculation. If you have the mental strength to endure periods where your investments will be deeply under-water, then you might use 120 as the basis for your calculation. Be warned. Very few people have this mental strength.
  2. How much you earn: This tends to be related to the last point. Although this is by no means always the case, people who earn more or who have significant wealth tend to be more comfortable with risk – because they can afford to be. The more surplus you have, over and above funding life’s essentials, the more ambitious you can afford to be with your investments. If you are a high earner, you might be more inclined to use the 120 number as against the 100 number. That having been said, this will be a matter of personal choice. There are plenty of wealthy people who are inherently conservative when it comes to their wealth – a decent number of whom will tell you that this is why they got wealthy!
  3. How old you think you will work to until you wish to retire: I know people who made enough money to “retire” in their thirties and I know people who are so passionate about what they do, that they’re still loving their work (and invariably highly paid) in their late seventies. The longer you are gainfully employed and earning a decent income, the longer it will be before you need to rely on your investments to sustain you. This means, all other things being equal, that you can afford to invest in more aggressive assets for longer and might, therefore, use 120 rather than 100 in your calculations here. That having been said, if you use the 120 number, bear in mind that this implies you could still have no less than 50% of your money in ‘aggressive’ asset classes at the age of 70. That is quite a big call if you ask me.

Whichever number you choose to use, here is a ready-reckoner table to help you work out what this means for how you might allocate your investments:

“Defensive” assets

Of course, one alternative to using 120 in your calculation is to continue to use 100 but pick defensive assets that could do far better than 2% a year. Past performance is no guide of course, but our fund strategy averaged 7.52% over the 16.5 years of our back tested period. It also saw a maximum peak to trough ‘draw-down’ of just over 10.41% (i.e. if you had been unlucky enough to buy at the highest high and sell at the lowest low in that 16.5 year period) and had a worse ever negative year of -6.3% (in 2008) - one of only five negative years from 2001 to the present. The point I am making here is that I believe that our Fund strategy can fairly claim to be described as “defensive” yet it is achieving annualised rates of return of nearly four times US bond rates that are currently lower than 2% and no less than five and a half times current UK cash ISA rates at around 1.35% for what it is worth.

To be “fair, clear and not misleading” as I am quite rightly obliged to be by the FCA (the UK financial regulator) – I should explicitly mention that comparing our fund to cash ISAs is not an “apples to apples” comparison. Our fund can and does have negative years. Cash ISAs do not. That said, regular readers will hopefully be more than aware by now that cash ISAs do of course guarantee the destruction of your real wealth each and every day you hold them given that they return less than real inflation. I think they are one of the very worse investment products out there at current real interest rates). In addition, bond funds can and do have negative years. Many of them also underperform real inflation – i.e. they guarantee the destruction of your real wealth whilst you hold them, just like cash ISAs.

Clearly, I have quite some commercial interest in suggesting that our investment fund might serve as the “defensive” component of someone’s “100 minus your age” approach, but this in no way alters the broad point that I am making:

There are defensive assets out there which I believe could very likely serve the long-term investor vastly better than the convention of using government bonds – a convention that now seems to me thoroughly outdated, even actually quite lazy - in terms of an approach.


For what it is worth - I might also mention that gold is generally viewed as “defensive” – and yet it has produced average annual returns of more than 10% since the US came off the gold standard in 1971 – i.e. for not far off fifty years. Gold can be quite a volatile asset, but long term readers of my output will know that I think its benefits in terms of performance and portfolio-diversification outweigh the negative of its periodic volatility – particularly when it is used in conjunction with all the other asset classes - as I have always recommended. Our fund has a 2.5% allocation to gold and another 2.5% to industrial metals for these reasons. I also advocate that people might consider having 10% or even more of their total wealth in physical precious metals (i.e. bullion), either in gold or both gold and silver (for those with a bigger investment pot). I cover this topic in the “Complete Guide” document our PEF Community subscribers receive when they join.

So – I personally think that you might consider a global multi-asset trend following fund or other similar approach for the “defensive” proportion of your asset-allocation. It should protect the downside enough and give you a chance of capturing far more upside than you will with a more conventional allocation to bonds.

I think that’s enough for today given this has been one of my longer emails. In my next email I will look at some key ideas to bear in mind when implementing “100 minus your age” – such as the importance of ignoring the news and will then look at which “aggressive” assets you might consider in a third and final email in this series to follow not long thereafter.

[1] I explain in my book why £1m is an entirely realistic aspiration for you to achieve in their pension pot, almost no matter how much you earn.