Ep 6: Rules Gone Awry – The Rule Of 100

Ep 6: Rules Gone Awry – The Rule Of 100

The Smart Take:

There’s a “rule” that says you should take 100, subtract your age, and the result tells you how much of your money you should invest in stocks. It would be awesome if retirement planning was that simple, but simple isn’t always effective and that’s the problem with the Rule of 100. Take a listen to find out about better ways to invest and plan for your financial future.

Prefer to read? See below for the transcript of the show.

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The Host:

Kevin Kroskey – AboutContact

Introduction:                     00:03                     Welcome to Retire Smarter with Kevin Kroskey. Find answers to your toughest questions and get educated about the financial world. It’s time to Retire Smarter.

Walter Storholt:                00:16                     Time for another edition of Retire Smarter and it really doesn’t need any explanation why we do this podcast. We want you to Retire Smarter. That’s why we chat each time with Kevin Kroskey, President and Wealth Advisor at

Walter Storholt:                00:26                     True Wealth Design. I’m Walter Storholt,  Kevin and the team serve you throughout Northeast Ohio with offices in Akron and Canfield as well and you can find them online at TrueWealthDesign.com that’s TrueWealthDesign.com. Kevin, we’ve been talking a lot in the past couple of podcasts about retirement rules gone awry and we’ve got another one to dive into today. This is an oldie but a goodie. I think it’s been described as the, you know, rule of 100. You’re kind of framing it here as the stocks that you should be in equal 100 minus your age. It’s one of these investing rules that people have probably heard somewhere in the media or in literature or a brochure or in a meeting with a financial advisor somewhere and some point in time along the line. I think we’ve maybe all run across this before.

Kevin Kroskey:                  01:17                     Yeah, it’s, I hear it probably weekly or read it weekly in the news media that’s out there. So I guess to put the simple example on it, you know, a hundred minus your age assume that your age is 60 and you’re on the doorstep of retirement. So a 100 minus 60 is 40 and thus you should have 40% of your money in stocks.

Walter Storholt:                01:39                     I like it because it’s simple, but is it accurate?

Kevin Kroskey:                  01:43                     I like simple and effective. This definitely meets the simple test. I think it would fall short of effective for several reasons. So whenever we have somebody that comes in and is kind of asking if they can retire, you know, it’s kind of like going into your doctor’s office after you see, you know, some advertisement for a drug and say, Hey, I want this drug. Or Hey, I want 40% in stocks. You’re asking the wrong question. You need to do the analysis, you need to go ahead and do some testing. You need to do some planning and figure out, you know, what do you really need to make your plan work? And as that relates to this rule specifically and where the rule falls short, the way that we think about it is you first need to measure the return that you need on your money to make your plan work.

Kevin Kroskey:                  02:29                     So that’s step one. Step two is you also have to measure your ability to take risk. So what I mean there is even though say the 60-year-old may be on the doorstep of retirement and may even need to start using the money they say in the next few months or few years to go ahead and replace the paycheck that they’re not receiving, they may have done really well. You know, they may have a lot of money relative to what they need to go ahead and live on. Or you know, they may have pension income or Social Security income that provides a lot of what they need. So they’re pulling very little from their investments and therefore, even though they’re 60 years old and on the doorstep of retirement, they still have the ability or this is what kind of us financial people call your risk capacity. And so they have a lot of capacity to take risk even at age 60 now the converse of that is, you know, for some people that’s not true for some people.

Kevin Kroskey:                  03:25                     And on a prior podcast episode, for example, we talked about Social Security and how deferring Social Security can often make sense for many people. Well, that’s true. However, the other side of the coin is if you’re deferring your Social Security and say maybe you’re not going to take it all the way up until age 70 your portfolio is going to have to do a lot more work in facilitating the money that’s coming out of the portfolio for your spending each and every year. So when you’re going to go ahead and do the plan and do a stress test and not only measure the return that you are required to earn over time to make your plan work, go ahead and preserve your lifestyle and meet your spending goals. But if you stress test the plan and you see that, Hey, you know, this doesn’t look good because if I get a bad sequence of returns, you know, similar to like a 2008, 2009, right on the doorstep of retirement. Well even though the market may rebound in a few years, I don’t have the capacity or the ability to take that risk without severe harm to my lifestyle and really having to cut back quite a bit.

Walter Storholt:                04:29                     So this rule of 100 takes into account not only the dollars and cents of the situation, kind of the cold hard cash facts, but also the emotional side. It’s kind of a mix of both of these things that end up determining really what your balance, what your allocation should look like.

Kevin Kroskey:                  04:45                     Well, so it’s a little bit more complicated than even what I shared so far. So you certainly have to measure your ability to take risk and you also have to measure the risks that you need to take. And when I say the risks that you need to take, what I really mean by that is, you know, you can expect a certain level of return from stocks over time. And historically, if you look in the US you know, going back about a hundred years, you know, it was about 10% from large US stocks that you could get. And this is just kind of an index, you know, certainly doesn’t include any investment fees or anything like that for bonds. I mean, most people know this at least intuitively, you know, if you leave your money in the bank, you can expect something a lot less. If you buy some bonds that you know are not FDIC insured, maybe you’re buying company bonds from, you know, Goodyear is here locally in Northeast Ohio, you’re buying a Goodyear bond.

Kevin Kroskey:                  05:33                     So now you’re taking some additional credit risk of that company, but you’re expecting a higher return. So there’s kind of this, you know, scale if you will, of what you can expect to earn and then how much risk that you’re going to take to get that. And that’s, you know, risk and return are related that old saying, right? So if you have a lot of capacity to take risks, and I’ll kind of give a concrete example here for a lot of clients over the last several years, go back to 2009. In 2009 in March, you know, the market had really bottomed out after having about a 50% decline. The stock market did. And interest rates were being cut. You know, they were still, I can’t remember exactly where they were at the time, but I know I had a lot of clients that had, you know, 5% CDs that they secured in 2007 and even in early 2008 and then the fed was kind of reducing rates over, you know, the next few years going into and throughout the great recession.

Kevin Kroskey:                  06:31                     So for those clients that may have even been in retirement or on the doorstep of retirement, and if you would’ve followed this role of, you know, 100 they would have very little on stocks at a time when stocks had already gone down by about half. Or you know, sometimes you hear people say that, Hey, the stocks went on sale. Well if you look at that and you just, you know, the basic rule of investing is you want to buy low and sell high. Right? I think everybody knows that role and that’s one I think that does hold true. That’s not a rural gone awry.

Walter Storholt:                04:29                     It’s good to know one rule out their works. Kevin.

Kevin Kroskey:                 07:05                     Yes. Yeah. That one. I think you can write that one in stone. But you know, after stocks go down by half for a lot of clients, even though maybe they didn’t need a really high return to make their plan work, but they have the capacity to go ahead and take risks, you know, certainly we would have wanted to go ahead and favor stocks because the expectation was, you know, over time, over time being bold and underlined that stocks would provide a much higher return than bonds.

Kevin Kroskey:                  07:32                     And you know, that certainly has proved to be the case about 10 years out from that time period. And so for a lot of clients over the last many, many years, we’ve just been having a higher stock allocation because the expectation was, you know, socks, we’re going to do a lot better than bonds because interest rates have been at historic lows for quite some time. Now here we are in late 2018 and interest rates have been moving up a little bit. And not only that, but stocks, at least the US stocks have been going up for about 10 years now, literally since 2009 so that buy low sell, high rule, well stocks have gone higher and who knows exactly when the market’s going to go the other way. However, stock prices are a lot higher now. So at some point, it is going to go the other way.

Kevin Kroskey:                  08:18                     And when we look at those expectations, even though we expect stocks to do better than bonds, if we look out over say like a 5 or 10 year period, we think the expectation is a heck of a lot less rosy than when we were looking back in late 2008 and 2009. Now you never know what’s going to happen in the short term and certainly, nobody knew that the bottom was going to be March of 2009 but whenever you’re doing this planning for somebody, you need to know where the dollars are coming from tomorrow. And as long as you go ahead and you know, have that kind of planned out over time and really match your portfolio to your goals and do those stress tests and keep having a prudent approach to it, then ultimately you’re going to be able to make better decisions. But you need to have that ongoing, in my opinion. You know, that regular stress testing, you know, looking at, Hey, what do I really need to earn? And then, you know, changing your expectations. Again, I just described how the expectations for stocks versus bonds are dramatically different today than what it was in 2009 and it’s probably going to be quite different five years from now than what it is today. So it’s always a moving target. So that rule is really kind of a set it and forget it and it’s overly simplistic and it really doesn’t apply.

Walter Storholt:                09:32                     Well. It’s nice to have simple and effective, but better to have a slightly more complex and effective than simple and not effective. I don’t know if anybody could follow that logic, but I think that all makes sense, Kevin, that we just need to make sure that we’re not trying to oversimplify some of these things. Something is important as the, you know, allocation, diversification of your plan. Sometimes simple is not better if it’s not the right way to do it. Maybe that’s an easier way to say all of that.

Kevin Kroskey:                  09:58                     Yeah, and I completely agree. I mean it’s, you may be right by just kind of following the role and it coincidentally who end up with the right portfolio, but we just don’t believe you know, something going by coincidence or just following a rule that really falls short of being logical is a great way to go ahead and make a retirement decision and manage your life savings to make sure it lasts your lifetime.

Walter Storholt:                10:19                     Well. If you have questions about how this all works, what the proper mix of assets might be for your portfolio of what are the right steps for you to take, we encourage you to reach out to Kevin Kroskey and the team at True Wealth Design. You can call them at (855) TWD-PLAN. That’s (855) TWD-PLAN or go online to TrueWealthDesign.com click on the “are we right for you” button and you can schedule your 15-minute call with an experienced financial advisor on the True Wealth team. Just go to True Wealth Design.com and click on the “are we right for you button.” If you found today’s information helpful and think it would be helpful to a friend or family member, a coworker or anybody that you know, send them the link to this episode, whether it be from Kevin’s page or if you’re listening on Apple podcasts or Google or one of the apps, you can hit the share button and send it to somebody that you know and they might find this information helpful as well.

Walter Storholt:                11:12                     And as always, don’t forget to subscribe to the podcast either on the website or you can do it right from your phone on Apple, Google, Stitcher. If you’ve ever heard of Tune In or iHeartRadio. We’re on all of those different ones. And if you’re a Spotify user, little, exciting news will be coming to Spotify within just a couple of weeks, so actually very soon we’ll be on Spotify, so if you happen to use that service you’ll be able to listen to the Retire Smarter podcast on there very soon. Kevin, thanks for joining us this week and for giving us all of this great advice and guidance on kind of that rule of 100 and how it’s another one of those rules gone awry.

Kevin Kroskey:                  11:50                     Oh, you’re welcome, Walter, and thank you for being here as well. Hopefully, we were able to help educate a few people today and help them Retire Smarter.

Walter Storholt:                11:57                     It’s always great information. We appreciate it. That’s Kevin Kroskey. I’m Walter Storholt. Thanks so much for joining us and we’ll talk to you next time on Retire Smarter.

Disclaimer:                          12:12                     Information provided is for informational purposes only and does not constitute investment, tax or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance reference is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.