One of the Oldest Rules for Retirement Saving Is Wrong, Experts Say. Here's the Fix

You know that old rule of thumb to subtract your age from 100 to get the percentage of your portfolio that should be in stocks? Well as they say in Brooklyn, fuhgeddaboudit!

“You should not robotically reduce your equity allocation because you’re getting older,” says Rich Weiss, chief investment officer of multi-asset strategies at American Century Investments. Instead, most investors should pick a stock percentage that feels comfortable and keep it constant throughout retirement, experts say.

The old rule might have made more sense back when people weren’t living as long. Today, many investors will need their portfolios to last well into their 80s, 90s and even beyond. And you’re not going to get much-needed growth if you stay too cautious with stocks.

Target-date funds are growing in popularity. At the end of 2016, nearly half of all Vanguard investors were invested in a single target date fund — and those with the bulk of their savings in one of these vehicles may be too conservatively invested without realizing it. Designed to be a one-stop-shop for investors, these funds adjust your asset allocation for you and become more conservative as retirement approaches. Once they reach the target year, “the vast majority of target-date funds hit a low [stock] percentage and just stay there,” says Jamie Hopkins, professor of retirement planning at the American College of Financial Services and author of Rewirement: Rewiring The Way You Think About Retirement.

So how much equity exposure is right in retirement? The exact answer will depend on your circumstances, and on who you ask. Weiss says the sweet spot for stocks in retirement is between 35% and 55% of the overall portfolio. People with healthy nest eggs, which he defines as containing at least eight times your ending salary, can afford to stick to the lower part of that range, since their portfolios don’t need to generate as much growth, he says.

Those with inadequate savings should consider sticking to the higher part of the range. Stocks can be volatile over the short term, but over the very long term they have historically delivered positive returns. The Standard & Poor’s 500 has not returned less than inflation during any rolling 40-year period, according to an analysis by personal finance site Don’t Quit Your Day Job. The best rolling 40-year returns were 10.3% annualized after inflation, according to the site. You’re generally not going to find such consistent growth with other assets, such as bonds, real estate, or gold.

Of course, stocks can decline over the short term, and the risk of a downturn is why you don’t want to put all your eggs in the equity basket. It’s also why many financial advisors suggest that retirees keep at least three-years’ worth of expenses in cash or cash equivalents, such as a short-term bond fund, so that they can weather a bear market without having to withdraw from their stock portfolio.

Once you’ve decided on a comfortable stock allocation, you shouldn’t fiddle with it much, if at all. If market volatility keeps you up at night, that’s a sign that you didn’t set the right allocation to begin with, Weiss says. Many investors have been conditioned to use their age as a proxy for their risk tolerance, but in reality, Weiss says, "It's wealth, not age."