The classic rule was 100 minus your age in stocks. A 40-year-old would hold 60% stocks, 40% bonds. The logic: as you get closer to retirement, dial down risk.
That rule aged poorly. Life expectancy has increased, bond yields spent years near zero, and a 60-year-old today might need their portfolio to last 30+ more years. The updated version most financial planners use is 120 minus your age. And even that's a starting point, not a prescription.
Why the Old Rule Fails
A 65-year-old with 35% in stocks (100 minus 65) would have seen anemic growth during the 2010s bull market. More importantly, with retirement potentially lasting until 95, that person needs 30 years of inflation-beating growth. Bonds alone won't get there.
The 120 minus age rule gives a 65-year-old 55% in stocks. That feels aggressive to some people, but the math supports it when you factor in a long horizon.
Suggested Allocation by Age
| Age | Stocks | Bonds/Fixed Income | Notes | |-----|--------|--------------------|-------| | 25 | 95% | 5% | Maximum accumulation phase | | 35 | 85% | 15% | Begin modest diversification | | 45 | 75% | 25% | Shift starts to matter | | 55 | 65% | 35% | 10 years to retirement | | 65 | 55% | 45% | Still need 25-30 years of growth |
These assume average risk tolerance. Adjust based on your specific situation.
Breaking Down the Stock Allocation
Stocks doesn't mean one index fund. A diversified stock allocation for a 35-year-old might look like:
- US large-cap (S&P 500): 50%
- US small/mid-cap: 15%
- International developed markets: 15%
- Emerging markets: 5%
- Total: 85% equity
The bond side at 15% could be split between short-term Treasuries, intermediate-term investment-grade bonds, and a small TIPS (inflation-protected) allocation.
Risk Tolerance Adjustments
The formulas are defaults. Real allocation depends on three things:
Time horizon: A 55-year-old planning to work until 70 has a longer runway and can hold more equity than the formula suggests.
Income stability: A tenured professor with a pension can afford more equity risk than a freelancer with variable income.
Emotional tolerance: If you sold during the March 2020 crash, you have lower risk tolerance than you thought. Build a portfolio you can hold through downturns, not one that looks optimal on paper.
Rule of thumb adjustments:
- Conservative: subtract 10% from stock allocation
- Aggressive: add 10% to stock allocation
- Pension or significant Social Security: can hold 5-10% more equity
What Bonds Actually Do
Many investors under 40 ignore bonds entirely and feel justified when stocks outperform. The issue is sequencing risk near retirement. If stocks drop 40% in your first year of retirement and you're 100% equities, you're selling shares at depressed prices to fund living expenses. Bonds provide a buffer. You draw from them while equities recover.
The bucket strategy formalizes this: keep 1-2 years of expenses in cash, 3-7 years in bonds, everything else in stocks. You never need to sell stocks at a loss.
Target-Date Funds as a Benchmark
If you use a Vanguard Target Retirement 2040 fund, here's how it's allocated in 2026: roughly 78% global stocks, 22% bonds. That aligns closely with the 120 minus age rule for a 44-year-old.
These funds are reasonable. Their main limitation is they don't account for your specific pension income, real estate holdings, or risk preferences. They're a good default, not an optimal custom solution.
Rebalancing
Allocation drift is real. If you set 80/20 stocks/bonds in 2022 and didn't rebalance, you're probably sitting closer to 85/15 after equity gains. Rebalance annually or when any asset class drifts more than 5 percentage points from target.
The simplest rebalancing method: direct new contributions into the underweight asset class rather than selling anything (avoids triggering taxes in taxable accounts).
Run the Numbers
Model how different stock/bond splits affect your long-term returns with the CalcMoney Investment Return Calculator. Run scenarios for conservative, moderate, and aggressive allocations to see the range of outcomes.
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