The Rule of 120 – What Should You Know About It for Retirement?

The Rule of 120 is a long-standing rule of thumb for financial asset diversification. Retirement planning is complicated, and some people find this rule useful as a starting point to evaluate the amount of risk that they have in their financial plan.

According to the Rule of 120, you subtract your current age from 120, then put the difference in stocks and other equities. The rest goes into ‘safe’ financial products, known as fixed-income assets such as fixed-type annuities, bonds, Treasury securities, and CDs.

In other words, if you are 20 years old, 100 percent of your money should be in stocks. On the other hand, if 70 is your age, then you would be at 50 percent in ‘risky’ assets, such as equities.

To be clear, the Rule of 120 is helpful when you are just beginning things. But it’s not the best rule of thumb for everyone and in every situation. Let’s go more over how this rule can be used – and what some limits may be.

How Does the Rule of 120 Work?

The Rule of 120 should be a starting point, not an inflexible rule.

For one, it’s good to think about how long you are going to live and factor that into your rule use. For example, women can generally expect to live five years longer than men. That means needing five more years of money.

In essence, the Rule of 120 looks at your pool of investible dollars. From there, it says that you need to balance the risk of losing that money by reducing your risk exposure in certain kinds of investments as you get older.

Why manage risk in this way? Because first, losses are hard to make up. If you lose 25 percent of your assets, you have to make a 33 percent gain on what remains just to get back to even. If you are age 70, you may not have enough time left to do that.

Second, you likely don’t have that regular paycheck at that point to top off your losses again. Say that retirement investment income is all you have. Then you might not want too much money in higher-risk assets.

With hard-to-predict risks like sequence of returns at hand, many financial experts advocate that as you mature in age, the percentage of your assets exposed to market risk should be shrinking.

Of course, everyone’s situation is different. This depends in large part on your risk tolerance, your personal financial situation, and other factors.

But since you are in the retirement red zone, or perhaps beyond, it’s good to explore how taking a “safety-first” approach over time can help your goals.

How Does Rule of 120 Differ from Rule of 100?

Before financial professionals started using the Rule of 120, they used the Rule of 100. It worked exactly like the Rule of 120, except that it used 100 as the underlying number. Thus, if you are 60, you would have 40 percent in more aggressive assets and 60 percent in safe assets.

The Rule of 100 still holds water for those with a very low tolerance for risk. However, it has some issues that the Rule of 120 is finding now.

First, in what was a low interest rate environment that lasted for decades, it was hard to use some safe financial products for the ‘safety’ portion. Compared to certain annuities and other similar assets, bonds, CDs, and other fixed-income assets were paying paltry interest rates.

While interest rates have gone up, the shortfall in interest income from these assets had to be made up somehow. Some financial professionals have used strategic blends of these assets with annuities and other lifetime income plays to cover the gap. Others turned to new rules of thumb, such as the Rule of 120.  

Further, the Rule of 100 doesn’t reflect, as well as it used to anyway, that we are now living longer. Risk is reduced for older folks in part because they won’t have time to make up losses.

On average, a woman today can expect to live to 81 while men can reach 76. If you retire at 62, that is nearly 20 years to cover for a woman. Keep in mind that those are just averages.

With the effects of inflation, taxes, and other factors, the Rule of 120 helps with planning for lifetime income over a possibly longer period.

Why Does Rule of 120 Matter?

The Rule matters because we are all living longer and spending more years in retirement. For many of us, that means planning for how we will cover our lifestyles over a long time without a defined-benefit pension. Being on our own means, the rule helps as a starting point in creating a balance between protecting and growing our retirement assets.

That being said, you shouldn’t rely just on a model like the Rule of 120. Research has shown that you will, in the end, have more money and peace of mind by working with a financial professional to help manage your assets.

Their experience can help you determine how much risk, protection, and other variables make sense for your personal circumstances as well as goals.

Using the Rule in Reducing Risk, Smoothing Volatility for Retirement

In the end, that is why you might want some portion of your assets in safe money like annuities.

Today, you can put money into a fixed annuity, or fixed indexed annuity, that will give you a guaranteed stream of income for a specific period. This income stream can go even for the rest of your life, if you choose it.

These guaranteed contracts tend to pay higher interest than many bonds or what you will find at the bank. Moreover, with a fixed indexed annuity, you can have some growth potential tied to an underlying financial benchmark. There, your money can earn interest when the index goes up, but be protected from losses when the index goes down.

As we deal with inflation, changing interest rates, and economic uncertainty, the Rule of 120 can be a starting point. However, it may need to be raised once again.

In the meantime, let your financial professional help you find the right spot between using the Rule of 120 as an absolute and letting it be a guide.

Final Thoughts on the Rule of 120 in Retirement Planning

Remember, any rule of thumb or model is just that, a model. Slavishly following them is never a good idea.

However, taking money from exposure to the volatility of the stock markets, such as we have seen in the 2020s, and putting it into guaranteed income streams like fixed or fixed indexed annuities can be a good idea. And that is with whatever model you use.

Are you looking for someone who can help you walk through your retirement “what-ifs” and answer these questions about risk, diversification, and lifetime income? No sweat, and for your convenience, many experienced and independent financial professionals are available at to assist you.

You can get started by using our “Find a Financial Professional” section to connect with someone directly. Feel free to request an initial appointment to discuss your goals, situation, and needs, and explore a potential working relationship. Should you need a personal referral, please call us at 877.476.9723.

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