Two reasons for changing inventory allocation rules
Very simple, isn’t it? not necessarily. While this easy-to-remember how-to guide can help remove some of the complexity from retirement planning, it is time to revisit this specific guideline. Over the past few decades, a lot has changed for the American investor. On the other hand, life expectancy here, as in many developed countries, has risen steadily. Compared to just 25 years ago, Americans in 2017 lived nearly three years longer.1 Not only do we have to increase nest eggs, but we also have more time to grow our money and recover from the fall.
Meanwhile, US Treasuries are paying a fraction of what they previously paid. As of March 2020, 10-year Treasuries yield less than 1% annually. In the early 1980s, investors could count on interest rates of over 10%
For many investment professionals, facts like these mean that the “100 minus your life” axiom puts investors at risk of running out of money in their final years. Some have modified the rule to 110 minus your age – or even 120 minus your age, for those with a higher tolerance for risk.
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Not surprisingly, many fund companies follow these revised guidelines – or even stricter guidelines – when assembling target appointment funds. For example, funds with a target date of 2035 are for investors who are currently around 50 years old (as of 2020). But instead of allocating 50% of its assets to stocks, the Vanguard Target Retirement 2035 Fund has allocated roughly 75%. The T. Rowe Price Retirement 2035 Fund increases the risk, with nearly 80% in equity.
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It is important to keep in mind that these guidelines are only a starting point for making decisions. A variety of factors may shape the investment strategy, including retirement age and the assets needed to maintain an individual’s lifestyle. Because women live nearly five years longer than men on average, their retirement costs are higher than men and an incentive to be more aggressive with their eggs.
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The bottom line
Establishing an individual’s stock allocation on the basis of age can be a useful tool for retirement planning by encouraging investors to slowly reduce risk over time. However, with adults living longer and receiving fewer rewards from “safe” investments, it may be time to amend the “100 Minus Your Life” guidelines and take more risks with pension funds.