120 Rule vs. Target Retirement Funds

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Have you ever heard of the 120 Rule? The 120 Rule is a basic asset allocation rule. Take your age and subtract it 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 at the age of 65, do you really want 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, or thirty years from now. We’ll look 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 change its 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.

Broker Income 2020 2030 2040 2050
120 Rule 55% 65% 75% 85% 95%
TIAA-CREF 39.30% 65.54% 81.58% 88.93% 88.87%
Vanguard 29.75% 67.33% 82.22% 88.92% 88.89%
Fidelity 19.45% 59.91% 73.98% 79.22% 84.49%
T. Rowe Price 40.97% 73.04% 84.40% 88.58% 88.53%

For the visually inclined:
Asset Allocation by Retirement Fund

My thoughts:

  • I wouldn’t put too much stock in the difference between each broker’s allocation and the 120 Rule for the Income column. Income funds are meant for people in retirement, whether they’re 65, 75 or 85, so comparing it with the baseline isn’t going to be that interesting. Comparing them to each other, now that’s very intriguing. T. Rowe has nearly 41% in stocks while Fidelity, who overall is more conservative, has less than 20%.
  • Fidelity, in green, is very conservative compared to the other three. Is this a good or bad thing?
  • On the flip side, T. Roe, in blue, is slightly more aggressive than its peers, though they all seem to converge at the 2040 and 2050 funds (excluding Fidelity).
  • The farther we are from retirement, the more these funds agree, though they have a bit of an identity crisis. There is very high agreement in the 2040 and 2050, when you exclude Fidelity, but it’s weird that some of the funds have fewer stocks in 2050 than 2040. This could be the result of underlying factors and not strict asset allocation decisions.
  • Clearly, not all funds are created equal. Besides looking at expense ratios, which we didn’t, you need to look at the underlying asset allocation to make a good determination of which one is right for you.
  • I wonder if asset allocations are less aggressive because the funds don’t want to take as much risk as the rule says you should. Or, is the rule simply a gross simplification? Rules of thumb are supposed to be easy, compact, but accurate… but it doesn’t appear to be accurate. Or maybe it’s too much of a simplification? One thing is clear, each of the allocations follows a similar curve.

There are two big lessons from this exercise:

  • Rules of thumb are meant to be questioned. There’s a reason why I like writing Devil’s Advocate posts that question conventional wisdom. What worked twenty years ago may no longer apply and periodically we need to review our assumptions and question whether these rules are still accurate enough to be used as shortcuts.
  • Not all funds are created equal. It’s now been drilled into our heads that we should review expense ratios but with the advent of these bite-sized retirement funds, where you pay someone to do the thinking for you, you might fall into the trap of thinking they’re all the same. They’re not.

I’m curious if you have any observations about the data and if so, please share it. I’m eager to get a discussion on this as I’m not a seasoned data analyst so there might be easy patterns I’m missing!

{ 17 comments, please add your thoughts now! }

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17 Responses to “120 Rule vs. Target Retirement Funds”

  1. billsnider says:


    I undertood the rule to be slightly different.

    120 (and 110) means that you are a very optimistic person who believes you can beat Las Vegas at the craps table. You are willing to take large bets.

    100 means that you have reasonable expectations and 90 means you are pessamistic (your financial situation has other constraints other than normal market forces).

    As an example, at 65 and using 100, you should be no more than 35% percent into stocks. You can be less.

    Also it does not have to be bonds. It can be CD’s, money markets, T Bills etc. Anything that is liquid and somewhat safe.

    I have personally used 100 as my rule and it worked for me. I sleep at night.

    Bill Snider

  2. “Rules of thumb are meant to be questioned.”

    Question: Dare you trust asset allocation and diversification as the primary method for risk management?

    My answer is ‘No.’ Too many assets are correlated these days. Better risk management is necessary. For me, that’s using options o protect an investor portfolio.

    • billsnider says:

      This is an allocation rule – it says nothing specifically where to put it.

      Bill Snider

  3. Interesting post. To me it illustrates forcefully that the rule-of-thumb is a starting point. Investors need to take into account goals and risk tolerance. Bill Snider has obviously come up with a different rule-of-thumb that he has determined will get him where he needs to go with his nest egg.
    I have to say that I was surprised at the difference between Fidelity and TRowe. I think an interview with the managers of the funds would be interesting.
    Overall I have to say that the data shows why I am not a fan of target date funds. They are better than nothing and are useful for those seeking an easy way out. Again,asset allocation is different for every investor depending on goals and risk tolerance.

    • cubiclegeoff says:

      I agree. This is a starting point for anyone, and then each individual needs to decide their best course of action from there.

      I think the target-date funds are good for individuals that don’t know what they’re doing and have no interest in finding out, but still want to invest, or for individuals that are automatically enrolled in retirement accounts when they are hired.

  4. zapeta says:

    I’ve been using 120 minus my age. When I was picking funds for my retirement portfolio I examined the target retirement funds but found they were more conservative than I’d like in the 2040-2050 target dates. I have a lot of time before my retirement so the risk is not a big deal to me right now but I will be re-evaluating the 120 minus age rule as retirement gets closer.

  5. cubiclegeoff says:

    I’ve heard variations of the 120-rule, including using 100 (like Bill uses). I just do what’s comfortable for me, and that is pretty much all in stocks, since I tend to be more aggressive.

    I find it interesting that Fidelity is so conservative. I saw another comparison a couple of years ago just between T Rowe Price and Vanguard and Vanguard was significantly more conservative, so I expected them to be more than others. It doesn’t surprise me that T Rowe Price is the most aggressive, although interesting that they generally converge for the 2050 fund.

  6. Greg says:

    I suggest you vary the 120 rule based on your risk tolerance. For example:

    High risk tolerance: 120-Age
    Moderate risk tolerance: 110-Age
    Low risk tolerance: 100-Age

  7. jsbrendog says:

    the target date fund i currently have is not as aggressive as the 120 rule would have me be. The 120 rule would have me at 94% stocks…

    • mikestreb says:

      You are young and there is plenty of time for ups and downs in the market for you. Hope you are putting away into a Roth. I don’t see taxes going any lower.

      • billsnider says:

        On the contrary. At 94% js is quite vulnerable to rapid drops in the market. If js has low costs and lives with his parents or something like that, okay. If he has a family and a high mortgage, js would be destroyed.

        Bill Snider

        • cubiclegeoff says:

          Assuming this is retirement savings, js’ current living situation is irrelevant since the money is unavailable anyway. Over the long-term, js is better having significant stock assets.

  8. I have actually not heard of this rule, but this seems to be fairly aggressive. Even though I should be close to 100% in stocks, I would rather be on the safer side and still have a slightly larger portion of bonds in my portfolio than the rule states. In terms of the funds, I tend to stay away from the target funds since they tend to have higher fees.

  9. cdiver says:

    A good starting point for the average person.

  10. daenyll says:

    I don’t mind the more agressive T. Rowe 2050 plan, as what I have in it at the moment is actually smaller than my emergency funds that are stashed in low interest CDs. I also have some nonretirement funds in more risky peer lending at Lendingclub. I have not had any problem loans as of yet and I’m making decent interest. I feel that with my long time horizon and the EF safely in CDs I can afford to take some risk, though I specifically filter and then choose which loans I will fund. As I pay down my student loans and move to a more stable fulltime position I plan to take more time to learn more and be a bit more hands on with my investing, but for now I know the target date allocated fund for my retirement will be adjusted to reasonable risk without causing me too much trouble.

  11. eric says:

    I definitely think this rule of thumb has been called into question in light of the recent meltdown. I remember John Bogle saying your bond allocation should match your age (which is more conservative but something I expect of Bogle).

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