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120 Rule vs. Target Retirement Funds | money.co


120 Rule vs. Target Retirement Funds


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Have you ever heard of the120 Rule? The 120 Rule is abasic asset allocation rule. Take your age and subtractit from 120. That is the percentage you should be invested in stocks and the balance should be in bonds.If you’re 40, then you should have 80% in stocks and 20% in bonds. If you’re 50, then 70% stocks and 30% bonds. It’s one of those age old “rules of thumb” that can be a good starting point for deciding asset allocation but bad as an end point. As a retiree atthe age of 65, do you reallywant the majority (55%) of your investments in stocks? Maybe, maybe not, but your reasoning should go beyond the 120 Rule.
When it comes to Target Retirement or Lifecycle funds, not all funds are created equally.
Let’s compare the funds from Vanguard, Fidelity, TIAA-CREF, and … Each broker has a fund that ends in 0 or 5 until 2040, orthirty years from now. We’lllook only at the 0′s, just for simplicity, and compare how each one’s assets invested in stocks will change over the years. We are making one big assumption, that each of the fund families will changeits asset allocation the same way. In other words, the allocation of the Vanguard Target Retirement 2030 today will be the same as the Vanguard Target Retirement 2035 in five years. And we’ll use the 120 Rule as our benchmark,even though we can agree that in general it’s a bad idea to end there.
Finally, we assume that the year of the fund corresponds to the investor’s retirement age of 65.

Rakesh khudia


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