The rule of 100 might have been explained to you if you are a retiree and have worked with an investment adviser. If you have never heard of it before, listen up, it could be the difference between retiring comfortably or having a difficult time in retirement. It’s a simple idea but few follow the advice and some may never recover for retirement when the stock market declines dramatically.
So what is the rule of 100? It is simple really, this general guideline explains how you should allocate your retirement and investment accounts, how much at risk in the stock market and how much should be in fixed non risk assets. You take the number 100 and subtract your age this will tell you how much of your retirement assets you should have in equities or stocks and how much you should have in safe money non-risk alternatives.
Let’s look at an example. Let’s say you are 60 years old and would like to retire in 5 years at age 65. You have $100,000 in your 401k from your employer, how much of this $100,000 should be invested in stocks or equities? Well, you take 100 and subtract your age 60 and that leaves 40, so you should have no more than 40% in stocks or equities. 60% of your retirement assets should be in safe non-risk alternatives, such as fixed instruments like CD’s, savings accounts, Bonds and Fixed annuities.
This formula will protect you from big swings in the stock market like the one that occurred late in 2008. If the markets went down 50% or more and you were invested 100% in the stock market then you would loose 50% of your retirement account but, if you only had 40% of your account in the markets then you would have lost much more less.
It’s all about your time horizons and your plans for retirement. It’s a simple idea, but most people tend to get greedy when they have too much in the stock market looking for big returns or an adviser that might have his own interests in mind and not yours.
Stick to this basic formula and you can retire comfortably. Don’t forget about the rule of 100.