Ep. 213 – Does The Rule 100 Work in Retirement?

In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss how Rule 100 applies to retirement planning risk management. The conversation around risk is extremely important for you to have an investment structure you’re comfortable with.

Listen in to learn why investment risk is subjective and should be looked at as an individual. You will also hear us perform an exercise to help you understand our numerically driven system that measures risk comfort.

In this episode, find out:

  • Understanding why risk is an individual affair, plus why rule 100 may or may not work.
  • The numerically driven system we use to measure your comfortability with risk.
  • We go through a thought-provoking exercise to help you understand what risk looks like in numbers.
  • How we develop an investment plan that will achieve growth without an uncomfortable risk. 
  • The importance of understanding the risk potential rather than words like moderately conservative.

Tweetable Quotes:

  • “We want you to understand rule 100 and how it’s applied in retirement planning.”– Murs Tariq
  • “Risk of how much we take in investments is really subjective; it’s one of those things we have to look at as an individual.”– Radon Stancil 


If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s the full transcript:

Radon Stancil:Welcome to Secure Your Retirement. Today, Murs and I are going to really talk about a rule of thumb around risk. And is it the right way to do it? What is the right way to think about risk? And let me just kind of give a little bit of a setup here. I mean, risk of how much we take in investments is really subjective. And it’s one of those things that we just have to really kind of look at things as an individual. And we’re going to illustrate that today, and kind of walk you through our conversation that we have with a client, or anybody who is talking to us about how much risk they want to take. Because a lot of times in our industry, somebody might come in, and they would say, “You know, I think I’m moderately conservative.”  
 And I say, “Okay, well what does that mean to you?” And the reality is the person could have been told by their current advisor that they’re invested moderately conservative, or moderately aggressive, or aggressive, and they still don’t have a real good understanding of what that means. Because if we break it down to numbers, which is what we’re going to do today, where you would say, “Okay, what would that look like if I were in a growth portfolio? What would my potential of loss be?” And that’s really where we take that conversation. It can be different. Sometimes people say, “Well, what should my risk be based on my age?” And that is really the theme of what we’re trying to say. We think that rule of thumb is not the right way to do it.  
 There is a rule of thumb. It’s called the rule of 100. It’s all age-based. And the way it works is, is you would take 100, and then you would subtract your age. So again, let’s think if I were 50, right? Simple start. I got a hundred. I am now 50 years old. So I would subtract my age. And the bottom number is the most, according to that rule of 100, that I should have at risk. The other 50% should not be at risk. Well, I’m going to tell you I am 50, and that is not the way I believe today. That’s not the type of risk the way I would want my exposure. I feel like, hey, I’ve got plenty of working years left. And so, I would never say I’m going to take 50% of my money and put it in a hundred percent safety. It just doesn’t fit my personality.  
 Now, I still want to have good risk controls on what is actually invested. But in that part of the portfolio, I don’t want to go put 50% of my money in complete safe vehicles. Now, imagine this, as I get older. So now, let’s say, I’m 70. You take a hundred, subtract my age. So I’m 70, a hundred minus 70 says 30 at the bottom. So no more than 30% of my money should be at risk. 70% according to that rule should be safe. Now, that might work for people. But there’s a lot of people they go, “Wait, I don’t understand why, or how, or what’s the math behind that? Because I’m not necessarily like everybody else.” I always tell people, there could be two people at the table, same assets, same income, everything the same.  
 And one person might say, “You know what? If I just earn 4% a year, I’m golden. I don’t need to worry about risk. I don’t want to think about it. Let’s don’t take any risk.” I can have another person who says, “I’ve got more than enough money. I could afford to lose a little bit. Let’s go ahead and grow the assets. Maybe it’s going to be for the kids. All right, two different mentalities, same age, same everything. One person will take more risk than the other. So what I wanted us to do in order for you to help you to really understand how this works is we’re going to do a little role play. Murs is going to be the advisor. I’m going to be the client, and we’ll kind of walk you through. So Murs, if you don’t mind, can you kind of set up the way we would have this conversation for somebody as to how we’re going to think about risk, not doing some simple rule of thumb?  
Murs Tariq:Yeah. So we adopted this method of establishing risk a while ago. If you go back and think about the first time you started investing or working with someone, the way to assess risk was based off of a set of questions that are very subjective. Questions like, if you go to Vegas, do you go all in on a certain type of bet? Or do you play the penny slots? Or what do you do? Very subjective questions like that that are supposed to give the advisor some sense of how do you view and feel about risk. And while that can work, what we like about this system is that it’s very numerically driven. So it says, how do you feel about risk also in a six-month window? So we’re talking short term. How do we feel about risk in a six-month window?  
 And rather than asking open type of answer questions, it’s more of, hey, let’s put your dollars to it. And let’s assign a potential loss to it and a potential gain to it. So it’ll ask a question of, say, you have a million dollars. And now, we’re going to add risk to that, those million dollars. So if it loses 10%, well, we’re not just saying 10%. We’re also saying 10% means losing a hundred thousand dollars in a six-month window. Sometimes when the person says, “I can handle 10%.” But we say, “By the way, 10% is a hundred thousand dollars of that million.” It starts to get their mind thinking a little bit more about, well, am I truly comfortable with losing a hundred thousand dollars? And so, that’s what this role play that we’re about to go through is.  
 And so, I’m just going to start it off, Radon. And I’m going to say, “Okay, let’s go through this. Radon, you’ve got a million dollars to work with, and we want to set you up for retirement. But we want to take risks, we want to earn some money, but we also want to set up a profile of a portfolio that is going to have things in place, so that you’re not losing sleep at night.” And so, we need to understand what that number is for you. Everyone’s a little bit different. And so, if you look at the screen, Radon, you’ll see that where we put your million dollars here, and we’ve got a slide rule. And the slide basically says, we’ve got the potential to now assign risk to that million dollars. And it starts somewhere in the middle, just to give you an idea.  
 In the middle on a million dollars is around 14%. You have an equal chance to lose 14%. By the way, that’s $140,000. You have an equal chance to gain that 14%, so a nice gain. And so Radon, I’m going to take the slide all the way to the left. The left is a negative 4% loss. Negative four on a million is $40,000. And so, what I want you to do is as I start moving this slide to the right, you tell me. Again, this is a gut reaction to risk. You tell me where you think you are on the scale of saying, “Once I get to this point, I’m getting uncomfortable.” So we’re at 7%. 7% is around $68,000 of loss. And I’ll just keep moving it. As we approach 10, we’re at around a hundred thousand loss.  
Radon Stancil:So I’m going interrupt you. I’m going to answer this the way a lot of our clients will answer this, and kind of walk you through the mentality as I give the answer. A lot of times in this part of the conversation when Murs is doing this with a client, they start relating how they did, say, last year or the last time they lost money, right? So right now, a lot of people say, “2022, I lost about 20% of my money.” Because that’s what the market was down. So they go, “That didn’t feel very good at all. I didn’t like that.” And then, they start trying to talk to themselves about saying, “Yeah, but I don’t want to lose that much more on top of this.”  
 And so, they’re weighing their risk based off of what happened last year. We do try to say, “Look, let’s don’t it that way. Let’s just look at it going forward, but you got to do it yourself.” He just made it to 10%. Most people kind of say, “Look, I’ve lived through 10% pullbacks.” I will say of our clients, the vast majority, once we go back and forth, they’re going to kind of stop it around this point right here. And they’re going to say, “You know what? 10%, a negative a hundred thousand, would not like it, wouldn’t be happy necessarily, but it wouldn’t make me lose sleep. I understand the markets have to breathe a little bit, so I’m going to stop right here at 10%.”  
Murs Tariq:And I say, “Okay.” So we’ve established our baseline. 10% is our initial gut reaction of how we feel about risk. We start to get uncomfortable once we’re at that 10% threshold. Now, what we want to do is hone it in a little bit further. And if you could see the screen, what you’d see is, on one side on the left, we have one option. In the middle, we have the one that we just chose, which is at 10%. And then on the right, we have another option. And this is typically where someone in the room or the client would typically say, “This is kind of like an eye exam.”  
 You know when the eye doctor puts the screen in front of your face, and says, “Hey, which one looks better? A or B?” We’re doing something very similar, but with numbers involved. And so now, Radon, so you just told me that, “I think 10% on the downside is kind of my threshold.” Now, I’m going to say, “Well, what if we can make that better? What if we can improve that?” And I’ll tell you, it’s different for different families. So one person, and this would be the left side of the choice says, “Well, what if I can make the same reward?” In this case, the reward is 10%, while reducing my risk.  
 Reducing my risk from a 10% loss potential to a 6% loss potential. So going from a hundred thousand to about a $60,000 loss potential, that’s the left. That’s saying, “I like making what I was going to make and I want to be able to reduce that risk.” So less risk, same reward. The right side says, “Hey, I think I’m comfortable with that 10% downside. I’m not comfortable with much more than that. So what if I can increase my reward and take the same amount of risk?” So I have a 16% gain potential while keeping my downside of 10% the same. So Radon, which one looks better to you? The left, which is less risk or the right, which is more reward?  
Radon Stancil:Yeah. I think in this case, I’m comfortable with the risk. I think that that 10% down, I understand that. That makes sense to me. And if I have more reward, I would move to the right.  
Murs Tariq:Okay. And it’s funny, sometimes people say, “Well, that’s a no-brainer. I would go to the right because I can earn more.” And what I tell that person is that, someone else could say, “Well, that’s a no-brainer. I would go to the left because I can reduce my risk.” It’s a thought-provoking exercise that we’re going through here. And so now, I’ll take you back to where we are with Radon. So Radon said, “10% is kind of my downside.” So let’s keep it there, and let’s see if we can maximize the return a little bit, but not taking our risk any higher.  
 Now, the software is saying, okay, we have two options. We can stay where we are at that negative 10% downside. Or to sweeten the pot, we can actually go for a higher rate of return. In this case, going from 16% growth to 19% growth. But in order to get a better return, we have to realize that we have to take a little bit more risk. We have to add some more risk to the table. So taking it from a 10% risk factor to a 12%, which is going from a hundred thousand potential loss to 120,000 potential loss for a little bit better gain. So Radon, which one looks better? The middle, where we were? Or do we want to take a little bit more risk to earn a little bit more potential?  
Radon Stancil:So the rationale that I’m looking at right now is that I get quite a bit more upside with a little bit of extra risk. It’s still kind of within my range. Again, I’m starting to get a little bit nervous around that. I feel like though I could take it a little step higher in order to get those returns, because I feel like I got a little bit behind from 2022, and I want to catch up. I don’t want to get myself in a place where I don’t get some of the upside that might be coming. So yeah, let’s take it up one more notch.  
Murs Tariq:Okay. So we take it up one more notch. So now, we’re at a negative 12. We started at negative 10. Now, we’re saying we’re comfortable pushing it to a negative 12. And now, our last one here, and then the eye doctor goes away. The last one is, well, what if we could earn better? Again, with the same premise of, in order to earn better, we have to take our risk up. So going from a negative 12 now to a negative 14% potential downside in a six-month window. Which one looks better, Radon, the left or the right?  
Radon Stancil:Yeah, I was already pushing it to go to 12. And so, I’m going to just stick with where I was.  
Murs Tariq:Okay. So with that, with four or five questions, we’ve really put some numbers to what’s going on. Really in the clients, this would be more of the behavioral side of finance and understanding how they look at risk and the potential of loss. We’ve realized now that Radon’s downside in a six-month window is around that 12% down potential of loss.  
 So now, what we do with that is we have some guidance as to how are we going to set up an investment plan that’s going to do two things for Radon. One is we want it to be within a risk category. So we want it to earn as best as it can, but we also don’t want to take too much risk to make that return. And so, that’s now the next step of, how do we put a plan together that’s going to achieve growth, but also not too much risk for what Radon is comfortable with?  
Radon Stancil:Yeah. And so, what this does is it really gives us a way to now have a very simple plan for the client, right? We talk about our three bucket strategy. We’ve got cash, we’ve got money that we could put in our income, a safety bucket, and then we’ve got money that’s in the growth bucket. And when we combine that together, we’re trying to put it into an investment plan now that fits that overall risk tolerance. And so now, we know how to split that up. And then, we can build out what we call our one-page investment plan or a strategy that the client goes, “A hundred percent, I’m on board with this.” And now, we’re never sitting in front of a client going, “Wait a minute.” Because in their mind, go back to what I said earlier.  
 We have it all the time. A person says, “I told my advisor I was moderately conservative. And last year I lost X, and that was way more than I wanted to lose.” What that tells me is, is that they did not understand the risk exposure of whatever that advisor’s moderately conservative portfolio was. Because again, that wording doesn’t mean anything. And so, just keep that in mind. You’ll see that all the time on even mutual funds. They’ll call themselves a conservative mutual fund or a moderately conservative mutual fund based on their mix of stocks and bonds. But the reality is, we want to know what the loss potential is. And that’s going to really help us have a very happy, non-worry retirement plan.  
 And that’s really what we’re trying to achieve. So if you listen to this, I know it’s a visual. We talked about a visual that you couldn’t see. Maybe you’re thinking, “Man, I’d like to run through that myself.” Feel free to set up a call with us. You can go to the website, top right-hand corner, and just schedule a call. We’re glad to walk you through this. Either come in the office or on Zoom, and we’ll walk you through this, and you can see all the things that we were just talking about, and help you understand what your risk exposure is once you take and go through that exercise. We hope this has been helpful. We’ll talk to you again next week.