An Old Adage for an Out-Of-Date Way of Retirement Planning

Maybe you’ve heard this old retirement planning rule of thumb before? Take your age and subtract it from 100. The remaining number represents the percentage you should have invested in equities. Your age then is what you should have in bonds. So if you’re 45, your portfolio should be 65% equities and 45% in fixed income holdings.

As rules of thumb go, it’s not the worst. It’s straightforward and very easy to follow. And, frankly, if an investor has no other guidance, at least it has them thinking about a glide path, whether they know it or not.

The problem is, like many old adages, it’s just that, old, and not truly responsive to the challenges of today’s markets or adequate for the realities of today’s investors. There are many factors that should have us all looking very closely at the efficacy of this dated thinking.

First, people are living longer and working well into their ‘golden years.’ Some are doing so out of a personal desire to keep working and are fortunate to be healthy enough to do so. Others, however, must keep working out of financial necessity to not touch their retirement savings or take Social Security too early.

Second, and this relates to that last group, many investors are playing catch-up in their retirement savings. There are myriad reasons for this, from crippling medical bills or a costly divorce to wiped out portfolios from the Great Recession or just a late start on a savings and investment plan. Regardless of the reason, the reality is that many 50-60 year-olds may need to look at their investments as if they were decades younger.

Third, those fixed-income positions may not be as safe and secure as many believe. We’ve seen just in the past week-plus since the election  of a new U.S. President that the bond market can and does move quickly. And, as our friends at Beaumont Capital Management  (sub-advisor on the Cavalier Tactical Rotation and Global Opportunities funds) have written about, “Bonds Have Bear Markets Too! ” The clouds may be gathering over the bond market now and those closest to retirement age, with the largest portion of their portfolios invested bonds, could be most vulnerable to sizeable losses.

Some advice may be timeless, and useful across the ages. The “Subtract-your-age-from-100” portfolio rule of thumb may not be one of them. Our industry must look at these old ways of thinking and test them against the realities of today’s volatile and uncertain markets, and the often challenging situations of today’s investors.


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