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.