Explained: The 120 Rule for Allocating Your Investments

The topic of allocating retirement assets is a frequent source of questions. How much should you put into stocks, bonds, cash, and other asset classes?

There are a number of investment frameworks that can help you decide. You may be familiar with one, called the 120 Rule. This rule holds that you should subtract your age from 120, invest that percentage in stocks, and invest the rest in bonds. A 55-year-old would allocate 65 percent (120 minus 55) to stocks and 35 percent to bonds, for example.

The 120 Rule is based on a few key ideas. First, equities have a higher potential return than fixed income, which you need for growth, but also come with higher potential risk. When you are younger, you can tolerate this risk, so you can invest more in equities.

That changes as you age. So, as you age, you lower your equity allocation and move money to fixed income. (Interestingly, the 120 Rule used to be the 100 Rule, but was changed as the typical life span increased.)

Does the 120 Rule work? No investing “rule” is perfect, but even without more details about your individual financial goals and risk tolerances, it provides a guideline. Ideally, however, your investment plan would be more nuanced.

For example, the 120 Rule might specify a 65 percent allocation to stocks at age 55, but if you plan to retire within a year, you might want to dial down that allocation to minimize risk in your portfolio.

This is where an experienced financial professional can help by creating a portfolio that is customized for your situation.

How Couples with an Age Gap Can Plan for Retirement

From Humphrey Bogart and Lauren Bacall to Michael Douglas and Catherine Zeta-Jones, marriages with age gaps have transcended generations.

In many marriages, spouses are aged one year apart or less. According to the 2013 U.S. Current Population Survey, this is true for roughly one-third of marriages. In around 10 percent of marriages, however, one spouse is 10 or more years older than the other. That may not seem significant, but some sources say the number of May-September romances is increasing, and with this increase comes the need for better financial planning.

When spouses have significant age differences, the question of when to retire becomes more important. Will the couple retire at the same time, or will the younger spouse continue to work while the older spouse retires?

This can affect the psychological dynamics of the relationship as well as the couple’s finances. Couples with an age gap, for example, may have different income levels and investment needs (with one spouse working and one spouse retired). How should assets be allocated to protect the spouse who needs a growing nest egg as well as the spouse who is worried about market volatility? A balance must be found to keep the older spouse’s current needs with the younger spouse’s extended time horizon.

Additionally, these couples must understand the rules for withdrawing assets. For example, required minimum distributions (RMDs) from retirement accounts are typically calculated based on the Uniform Lifetime Table. But if your spouse is 10 or more years younger, instead you must use the Joint Life and Last Survivor Expectancy table, which will result in smaller RMDs (and lower your taxable income).

There is also end-of-life planning to consider. If the older spouse has children from a prior relationship, it is important to have a strong estate plan that balances the younger spouse’s financial needs with the desire to leave children an inheritance.

To strike a balance among all of these needs, consult with your financial professional to develop a personalized retirement plan.