One of the questions we hear frequently is: How much of my retirement portfolio should still be in the market?
There are plenty of rules of thumb designed to answer that question. One of the most familiar is the Rule of 100. The idea is simple: subtract your age from 100, and the result is roughly the percentage of your portfolio you might keep exposed to market risk. The remaining percentage would be positioned more conservatively.
So, if you’re 65, the traditional Rule of 100 would suggest something like 35% at risk and 65% in safer assets. It’s simple, easy to remember, and can be a useful place to start. But retirement is rarely that simple.
Why Risk Changes When You Retire
During your working years, a market downturn can be painful, but you usually have something extremely valuable on your side: time. If you’re 45 years old and the market falls significantly, you may still have another 15 or 20 years of contributions and potential market growth ahead of you.
Retirement changes that equation because you’re no longer just waiting for your investments to recover. You’re also using those investments to pay for groceries, utilities, travel, property taxes, healthcare, and the rest of your lifestyle.
If your retirement account falls substantially and you don’t need the money, you may be able to leave it alone and allow time for the market to recover. But if you need $5,000 this month to live, you still need the $5,000. That may force you to sell investments while they’re down, meaning those shares are no longer invested when the eventual recovery occurs.
This is commonly referred to as sequence-of-returns risk, and it is one of the reasons market losses can have a much larger impact during retirement than they did while you were working.
Having a retirement safety net can become increasingly important once your portfolio starts helping produce your paycheck.
The Market Isn’t Necessarily the Problem
None of this means retirees shouldn’t own stocks. Retirement may last 20 or 30 years or longer, and inflation doesn’t disappear when you stop working. Growth still matters.
The more important question is which dollars are exposed to market risk.
If money you’ll need next month, next year, or even several years from now is completely dependent on what the market happens to be doing at the time, you may have created more risk than you intended.
That’s why we prefer to start with a different question: What does your lifestyle actually cost?
Start With the Income Gap
Begin by looking at how much money it takes each month to comfortably live your life, then subtract the reliable income already coming into the household. That might include Social Security, pensions, rental income, or other predictable sources.
For example, suppose your desired retirement lifestyle costs $8,000 per month, while Social Security and pensions provide $5,500. You don’t necessarily have an $8,000 problem. You have a $2,500 monthly income gap.
That gap is where retirement planning becomes much more useful. Instead of asking whether 60%, 65%, or 70% of your entire portfolio should be “safe,” you can begin asking how much money needs to be protected to reliably cover that gap.
Give Your Money Different Jobs
One of the mistakes people make is assuming their entire retirement portfolio has to accomplish the same thing. It doesn’t.
Some money may need to provide dependable income. Other money may need to remain liquid for emergencies. While some may be intended for long-term growth. And then some may ultimately be money you never expect to spend at all.
Those dollars can have different jobs and, because of that, different levels of risk. If the portion of your retirement responsible for paying essential expenses is positioned appropriately, you may actually feel more comfortable allowing another portion of your portfolio to remain invested for growth.
That’s why “safe” and “growth” don’t necessarily have to compete with each other. A well-structured retirement plan can contain both.
So, Does the Rule of 100 Still Work?
It can. The Rule of 100 is a useful gut check, especially if you’re approaching retirement and nearly your entire portfolio is still exposed to market risk.
But your age alone doesn’t tell us enough.
Two people who are both 70 years old can have completely different retirement situations. One may have a pension and Social Security covering nearly every dollar of monthly expenses. The other may rely heavily on IRA withdrawals just to maintain their lifestyle.
They’re the same age, but that doesn’t necessarily mean they should have the same investment allocation.
Your income needs, expenses, assets, tax situation, time horizon, and comfort with risk all matter.
Start With the Lifestyle
The Rule of 100 asks a simple question: How old are you?
A retirement income plan asks a more important one: How much does your life cost?
Once you understand how much income you need, where that income will come from, and which expenses need to be protected, you can make a much more informed decision about how much of your money should remain exposed to the market.
The goal isn’t to eliminate risk. It’s to make sure you’re taking risk where you can afford to take it, rather than with the money your retirement depends on.
