Age-based asset allocation is any rule that derives a portfolio's split between stocks and more stable holdings from how old the investor is. The familiar form is a subtraction: 100 minus your age, or 110 minus your age, or 120 minus your age, with the answer taken as the percentage held in stocks and the remainder in bonds and cash. They are rules of thumb circulated through investor education and personal finance writing rather than standards issued by a regulator, and the versions differ from one another only in the number they start from. A related but distinct idea is the glide path, which is a schedule for how a mix changes over time rather than a single formula, and which is what a target-date fund follows.
Age-Based Asset Allocation
Age-based asset allocation sets the stock-and-bond mix from the investor's age alone. The best-known versions subtract age from 100, 110 or 120 and hold the result as a percentage in stocks.
Last reviewed by Steven Fox, CFP®, EA
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Quick Summary
- The whole family is one formula with a different constant, and the constant is the entire argument. Nothing else about the investor changes the answer.
- At age 60 the three common versions produce 40, 50 or 60 percent in stocks, which on a $600,000 portfolio is a $120,000 spread.
- The idea it encodes is sound, because a shorter remaining horizon leaves less time to recover from a decline.
- What it leaves out is everything else that decides how much risk a household can carry, including pension and Social Security income, how large the portfolio is relative to the goal, and job stability.
Definition
Advanced Explanation
The rule survives because it encodes one true thing compactly. Time is what lets a portfolio recover from a decline, a shorter remaining horizon means less of it, and age correlates with remaining horizon. A mechanical rule also has a genuine advantage over no rule at all: it produces an answer, it can be followed without a forecast, and it is far better than the two defaults it usually replaces, which are holding everything in cash or holding everything in one employer's stock.
The trouble is that age is a proxy for remaining horizon, and a poor one. A 65-year-old's portfolio may need to produce income for 30 years, which is a longer horizon than most 40-year-olds face for a house deposit. The rule reads the age of the person rather than the age of the money, and those are different numbers whenever a portfolio has multiple purposes or a long distribution period.
The larger omission is everything the rule does not ask. Two 60-year-olds with identical portfolios can face entirely different amounts of risk they are able to carry. One has a pension and Social Security covering essential spending, so the portfolio funds discretionary spending and a decline is unpleasant rather than dangerous. The other has no guaranteed income and needs the portfolio to cover the grocery bill. Whether the portfolio is far larger than the goal requires or barely adequate changes the answer again, and in a direction people find counter-intuitive: a household with far more than it needs can afford more risk and has less reason to take it. The rule asks nothing about any of this, and it asks nothing at all about willingness to sit through a decline, which is what actually determines whether the allocation survives contact with a bad year.
The upward drift of the constant, from 100 to 110 to 120, is itself worth noticing, because it shows what kind of rule this is. Nothing in the subtraction derives the starting number; it is a judgment about how much stock exposure is appropriate, expressed as an arithmetic constant. The same is true of professionally designed glide paths. The Department of Labor, advising plan fiduciaries on how to choose a target-date fund, warns that "there are considerable differences among TDFs offered by different providers, even among TDFs with the same target date", naming investment strategies, glide paths and fees as the things that differ. When schedules built by teams of researchers disagree materially about the right answer for a given target year, that is evidence the answer does not follow from age.
For comparison, the Securities and Exchange Commission's own beginners' guide to asset allocation builds the decision on two inputs, time horizon and risk tolerance, and states that "there is no single asset allocation model that is right for every financial goal." It also places rules of this kind where they come from, noting that "How to" books on investing often discuss general "rules of thumb", and adding that the agency "cannot endorse any particular formula or methodology." No age subtraction appears anywhere in the guide.
How to Remember
The formula answers a question about arithmetic, not about the person. Two investors the same age get the same answer even when one has a pension and the other has a mortgage.
Used in a Sentence
“Ray had been running an age-based asset allocation of 110 minus his age, so at 62 he held 48 percent in stocks, until a review of his pension income suggested he could carry considerably more.”
How It Works
The calculation is one line, and the interesting part is what happens when the three common versions are run side by side.
A hypothetical example. Nadia is 60 and has $600,000 invested.
| Version | Percentage in stocks | Dollars in stocks |
|---|---|---|
| 100 minus age | 40% | $240,000 |
| 110 minus age | 50% | $300,000 |
| 120 minus age | 60% | $360,000 |
The spread between the most and least aggressive version is $120,000 of stock exposure, produced entirely by choosing a different starting constant. Nothing about Nadia entered the calculation, so nothing about Nadia can distinguish between the three answers.
Used as a starting point rather than an answer, the formula becomes more defensible. The usual adjustments run in these directions:
- Guaranteed income raises the answer. A pension and Social Security that cover essential spending behave like a bond holding the portfolio does not have to include, which leaves room for more stock in the portfolio itself.
- A short spending horizon lowers it. Money needed within a few years does not belong in stocks regardless of the owner's age.
- Portfolio size cuts both ways. A portfolio well above what the goal requires can absorb more risk and needs less of it; one that is barely adequate needs the growth and can least afford the loss.
- Unstable income lowers it, because a job loss and a market decline tend to arrive together.
- Willingness matters as much as ability. An allocation the owner will abandon in a bad year is worse than a more conservative one they will keep.
Pros and Cons
Pros
- Gives an immediate, unambiguous answer that requires no forecast and no software.
- Captures a real relationship, that a shorter remaining horizon leaves less room to recover from a decline.
- Produces a mix that becomes more conservative automatically as the investor ages, without anyone having to decide to make it so.
- Far better than the common alternatives it displaces, which are an unconsidered all-cash position or an unconsidered concentrated one.
Cons
- Uses age as a stand-in for time horizon, and the two diverge most in retirement, which is exactly when the rule is relied on hardest.
- Ignores guaranteed income, portfolio size relative to the goal, income stability, and other resources, all of which change the right answer more than age does.
- Ignores willingness to tolerate a decline entirely, so it can produce a mix the owner will not keep.
- The starting constant is a judgment with no derivation behind it, and the three common versions disagree by 20 percentage points at every age.
- Treats "bonds" as a single safe category, when bond holdings differ widely in interest-rate and credit risk.
People Also Asked
Answers to the most frequently asked questions.
Where does "100 minus your age" come from?
It is a rule of thumb from personal finance writing and investor education rather than a rule issued by a regulator or a standards body. The Securities and Exchange Commission's own investor guide points at where rules like it live, noting that "How to" books on investing often discuss general "rules of thumb", and saying the agency cannot endorse any particular formula or methodology. The later 110 and 120 variants were put forward as corrections to it, on the argument that longer retirements and the drag of inflation make the original too conservative. The disagreement between the three versions is the clearest evidence that the constant is a judgment rather than a derivation.
Is 110 or 120 minus your age better than 100?
Neither can be shown to be right, because the difference between them is a difference of opinion about how much stock exposure is appropriate, expressed as a number. A higher constant holds more stock at every age, which historically has meant more growth and larger declines. Choosing between them by picking the version that produces a mix you can live with is at least honest about what the choice actually is.
Does a target-date fund do this for me?
A target-date fund follows a glide path, which is a professionally designed schedule for changing the mix as a target year approaches, so it does handle the shift automatically. It is not the same as the subtraction rule: the schedule is designed rather than derived, and published glide paths for the same target year differ between providers. A target-date fund also knows only your target year, so it is subject to the same core limitation, that it has no information about your income, your other resources, or your tolerance for a decline.
Should the calculation include money outside my investment accounts?
The formula is silent on this, and the answer changes the result substantially. Cash held for emergencies is generally excluded, because it exists for a different purpose and counting it makes the portfolio look more conservative than it is. Home equity, a business, and expected inheritances are not part of the invested portfolio either, though they belong in the broader judgment about how much risk the household can carry.
What should someone with a pension do differently?
Guaranteed lifetime income that covers essential spending changes the role of the portfolio, because the portfolio is no longer what stands between the household and a shortfall. That generally supports a higher stock allocation than an age formula would produce, since a decline reduces discretionary spending rather than threatening necessities. The size of the adjustment depends on how much of essential spending the guaranteed income actually covers, which is a calculation worth doing rather than estimating.
Sources
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