What is the 100-minus rule, and how does it work for a senior citizen?
A Strategy for Indian Seniors
In India, where the concept of a traditional family-supported retirement is gradually giving way to self-reliance, senior citizens must navigate the complexities of managing savings and investments post-retirement carefully. One of the strategies that have gained popularity among Indian retirees for managing investment risk is the “100 minus age” rule. This rule helps determine the proportion of one’s investment portfolio that should be in equities, with the balance in more conservative assets like bonds or fixed deposits.
Understanding the “100 Minus Age” Rule
The “100 minus age” rule is straightforward: subtract your current age from 100 to find the percentage of your portfolio that should be invested in equities. The rationale behind this rule is that as you grow older, your investment horizon shortens, necessitating a reduction in risk and an increase in income stability. This approach ensures that exposure to volatile markets decreases as one’s ability to recover from financial setbacks diminishes with age.
- Your age 35 means 65% can be invested in equity and 35% in debt funds
- Your age 40 means 60% can be invested in equity and 40% in debt funds
- Your age 45 means 55% can be invested in equity and 45% in debt funds
- Your age 50 means 50% can be invested in equity and 50% in debt funds
- Your age 60 means 40% can be invested in equity and 60% in debt funds
- Your age 70 means 30% can be invested in equity and 70% in debt funds
- Your age 80 means 20% can be invested in equity and 80% in debt funds
Example: If a retiree is 60 years old, according to the “100 minus age” rule:
- Equity allocation = 100 minus 60 = 40%
- Fixed income allocation: 60%
This allocation suggests that the 60-year-old should hold 40% of their portfolio in equities and the remaining 60% in safer investments such as bonds or fixed-income mutual funds.
Application of the Rule in India
The application of this rule is particularly relevant in India due to several factors:
- Increased Longevity: With life expectancy rising, Indian seniors need their retirement savings to last longer, possibly 20–30 years post-retirement.
- Market Volatility: Indian stock markets can be volatile, and having a significant proportion of one’s retirement savings in equities can be risky as one ages.
- Evolving Pension Landscape: Unlike many Western countries, India lacks a robust universal state pension system, placing greater responsibility on individuals to manage their retirement funds effectively.
Benefits for Indian Seniors
- Risk Management: This rule helps in managing the risk by gradually reducing exposure to equities, which are more volatile and can be detrimental to the portfolio during downturns.
- Income Stability: By increasing investments in fixed-income securities, seniors can secure a more stable and predictable income stream through interest earnings, which is essential for managing day-to-day expenses.
- Simplicity: The rule offers a simple formula that can be easily understood and implemented without the need for complex financial knowledge or frequent monitoring of the financial markets.
Limitations and Considerations
While the “100 minus age” rule provides a good starting point, it does not account for personal circumstances such as:
- Health expenses: Higher medical costs might necessitate more liquid assets.
- Inflation: With rising costs of living, especially in urban areas, the rule might not fully address the need for growth in the investment portfolio to cope with inflation.
- Personal Risk Tolerance: Some seniors might be more comfortable with risk than others, depending on their financial background and personal experiences.
Adapting the Rule for Indian Context
Given India’s specific economic and social environment, some adjustments might be necessary:
- Consider “110 minus age” or “120 minus age”: Given lower expected returns from debt instruments and longer lifespans, a higher equity exposure might be more suitable for some.
- Incorporate Other Assets: Real estate and gold are popular in India and can be part of the retirement portfolio, providing diversification and potentially offering inflation protection.
Practical Example in the Indian Context
Let’s consider two retirees in India:
- Mr. Sharma (Age 70): Following the traditional rule, he invests 30% in equities and 70% in fixed income. However, considering his good health and family support, he opts for a “110 minus age” adjustment, investing 40% in equities to achieve higher long-term growth.
- Mrs. Iyer (Age 65): She prefers a more conservative approach due to her health issues and opts for a 25% equity allocation. She increases her investments in government bonds and senior citizen saving schemes that offer better security and regular payouts.
The “100 minus age” rule is a valuable guideline for managing investments in old age in India, helping seniors balance the need for income with the risk of capital erosion. However, given the unique challenges faced by Indian retirees, including economic volatility and inflation, it is important to tailor this rule based on personal circumstances and perhaps consult with a financial advisor. Customizing the strategy to fit individual needs and adjusting the portfolio regularly in response to changing economic conditions and personal health can help secure a financially stable retirement.
