What You Need to Know
- It's a good conversation starter but not an approach that works for most clients, especially wealthy ones, the CFA says.
- Even wealthy investors are often unsure how to allocate assets and afraid to spend.
- When a client asks about a rule of thumb, Ferri suggests, help them unpack what their financial goals really are.
Taking to the social media platform X earlier this week, Rick Ferri offered up a leading question for the contemplation of his fellow financial professionals: “Is your-age-in-bonds a useful portfolio rule of thumb?”
The rule in question states that investors should direct a percentage of their portfolio toward bond investments that approximates their age, making regular adjustments toward safer assets over time to account for their shortening time horizon ahead of retirement or some other big financial goal. Thus, the rule would suggest that a 30-year-old should hold 70% in stocks and 30% in bonds, while a 60-year-old would have 40% in stocks and 60% in bonds.
Ferri, the founder and CEO of Ferri Investment Solutionsand a chartered financial analyst, stipulated in the extended post that he was “just thinking out loud” and welcomed other points of view. His own answer, though, is a pretty firm “no” — at least not for the vast majority of the wealthy clients that typical financial professionals serve.
“I think such rules are designed for the ‘average’ investor or retiree,” Ferri wrote. “But who is average? According to a 2023 survey by the Transamerica Center for Retirement Studies, median baby boomer households reported about $289,000 in retirement savings. I probably would recommend a high allocation to safe assets if a 65-year-old retiree with this amount in savings asked.”
But what if a 65-year-old retiree had $2.89 million in savings? Or even $28.9 million?
“Those are far greater than the $289,000 median,” Ferri pointed out. “Is the age-in-bonds rule useful for these people? My view is not as much for the first person — and not at all for the second.”
As Ferri and other commenters emphasized, different circ*mstances in the real world require different mindsets on asset allocation, such that clients with 10 times the median savings level require a hard look at the balance between spending in retirement and growing legacy assets. Those with 100 times the median, obviously, can focus even more on legacy, usually resulting in more growth assets.
In a follow-up conversation with ThinkAdvisor, Ferri said these dynamics are further complicated by clients’ behavioral tendencies, especially what he sees as a surprisingly common reluctance to spend confidently and fully enjoy one’s accumulated wealth after a lifetime of working and living below one’s means. This is why the job of the advisor is more than just dollars and cents, Ferri emphasized, and it is beholden on planners to keep such factors in mind while working with individual clients.
A Common Client Question
Ferri, who prides himself on his hourly approach to financial advice, said the motivation for his post came from the daily conversations he has with clients.
“Given my model, I speak with probably five or six individuals a day, and over time I get to talk to a lot of people about their financial situation,” Ferri explained. “One of my clients brought up the age-in-bonds rule just a few days ago, in fact. I hear about it a lot.”
In this particular case, Ferri noted, the client was a man in his early 40s who has been very successful at accumulating wealth, with a net worth around $5 million.
“So this is a guy who is doing great, financially speaking, but he had read on the internet about this rule and naturally assumed he needed to follow the ‘normal pattern’ of moving away from stocks,” Ferri said. “People who do their own retirement planning research online see this messaging all the time. It’s how target-date funds are designed, for example, and it’s really baked-in throughout in the industry. As you get closer to retirement, you should get more conservative.”
Ferri said that may be true for individuals at the median who face a genuine possibility of running short of funds in retirement and who don’t have big legacy-giving goals, but the spectrum of people who are trying to make sense of this rule of thumb goes way beyond that.
FAQs
Funny enough, Ferri said, the your-age-in-bonds approach can be sensible for managing the portion of wealth that clients plan to spend on themselves in their lifetime. This is often a far more modest amount than would be possible or even prudent.
Should you have your age in bonds? ›
Key Takeaways:
The 100-minus-your-age long-term savings rule is designed to guard against investment risk in retirement. If you're 60, you should only have 40% of your retirement portfolio in stocks, with the rest in bonds, money market accounts and cash.
What is the ideal stock bond ratio by age? ›
According to this principle, individuals should hold a percentage of stocks equal to 100 minus their age. So, for a typical 60-year-old, 40% of the portfolio should be equities. The rest would comprise high-grade bonds, government debt, and other relatively safe assets.
Is now a good time to buy bonds in 2024? ›
Investment advisers say now is a fine time for bonds. They are a good investment in 2024, experts say, for the same reasons they felt like a bad investment in 2022. That year, the Federal Reserve embarked on a dramatic campaign of interest-rate hikes in response to inflation, which reached a 40-year high.
At what age should I move into bonds? ›
The 50s and 60s: Almost There
Those close to retirement may switch some of their investments from more aggressive stocks or funds to more stable, low-earning funds like bonds and money markets. Now is also the time to take note of all investments and estimate a timeline for retirement.
What is the best investment for a 70 year old? ›
Here are some ways investors can incorporate lower-risk vehicles as part of a retirement strategy:
- Money market funds.
- Dividend stocks.
- Ultra-short fixed-income ETFs.
- Certificates of deposit.
- Annuities.
- High-yield savings accounts.
- Treasury bonds.
Financial experts generally recommend saving anywhere from $1 million to $2 million for retirement. If you consider an average retirement savings of $426,000 for those in the 65 to 74-year-old range, the numbers obviously don't match up.
How much should a 70 year old have in the stock market? ›
If you're 70, you should keep 30% of your portfolio in stocks. However, with Americans living longer and longer, many financial planners are now recommending that the rule should be closer to 110 or 120 minus your age.
What is the best stock bond mix for a 70 year old? ›
At age 60–69, consider a moderate portfolio (60% stock, 35% bonds, 5% cash/cash investments); 70–79, moderately conservative (40% stock, 50% bonds, 10% cash/cash investments); 80 and above, conservative (20% stock, 50% bonds, 30% cash/cash investments).
Should a 65 year old be in the stock market? ›
Charles Schwab recommends an allocation of 60% stocks, 35% bonds and 5% in cash for investors ages 60-69. Some investors may instinctively feel that this is too high of an allocation, as they've been told for years that they should reduce or even eliminate risk from their portfolios as they approach retirement.
Since bond ETFs own a basket of fixed-income investments, they are not immune to interest rate risk. Increasing interest rates put downward pressure on the prices of bond ETFs, which can exasperate investors who turned to these assets, hoping to preserve their capital while generating a stream of income.
Should I move my 401k to bonds in 2024? ›
A good rule is to invest more in safer options if you're nearing retirement, depending on market conditions. On the other hand, younger investors can afford to take more risks. You can move your entire fund to bonds if you want to.
Are bonds a good investment for seniors? ›
Bond funds are typically a good fit for retirement investors seeking capital preservation because they tend to be much less volatile than stocks. Bonds make up the foundation of most successful retirement portfolios.
What is a good portfolio for a 75 year old? ›
But now that Americans are living longer, that formula has changed to 110 or 120 minus your age — meaning that if you're 75, you should have 35% to 45% of your portfolio in stocks. Using this formula, if your portfolio totals $100,000, then you should have no less than $35,000 in stocks and no more than $45,000.
What should an 80 year old portfolio balance be? ›
Less money = more planning
The less money you have, the more important it is to have a good plan.” A common, dated rule is that the equity portion of a portfolio should be 100 less your age. So if you're age 80, you would have 20% in equities.
How much money do I need to invest to make $3,000 a month? ›
Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.
Should you cash in bonds when they mature? ›
Depending on the interest rate of your bond and your own financial needs, it's generally beneficial to wait until full maturity to redeem them.
Should I invest in bonds in my 30s? ›
Investing in your 30s
Money for those short-term goals may be better off in bonds, US Treasuries and cash vehicles (especially given how high interest rates are now and how much you can earn on your cash). But because you're decades from retirement, “Equities are still going to rule the roost,” Landsberg said.
What is the 10 5 3 rule? ›
The 10-5-3 rule can be used as a general principle for diversifying your investment portfolio. It suggests that 10% of your portfolio should be allocated to high-risk, high-reward investments, 5% to medium-risk investments, and 3% to low-risk investments.
What is the 120 age rule for bonds? ›
The 120-age investment rule states that a healthy investing approach means subtracting your age from 120 and using the result as the percentage of your investment dollars in stocks and other equity investments.
