Rob Carrick | October 5, 2013

Longer lifespans require sharper thinking about how you divide your money between stocks and bonds.

That means no more using the rule of 100 minus your age as the percentage you put into stocks, with the rest going into bonds. The results you get from this type of mix are too conservative for a world where people are living longer and thus putting greater demands on their retirement savings.

The Canadian Institute of Actuaries has issued data showing that a 60-year-old man today is projected to live another 27.3 years, which is 2.9 years more than previous estimates; the average woman of 60 has another 29.4 years - an increase of 2.7 years. The longer you live, the more you'll need the growth provided by long-term exposure to the stock market. Whatever percentage of your portfolio you've allocated to stocks, it may need to rise at the expense of bonds.

There's another argument for reconsidering your bond weighting and it was explained in the Portfolio Strategy of Sept. 21 ( It hinges on the view that a long bull market for bonds is coming to an end, which in turn would mean weak returns or even losses from bonds and bond funds in the next few years.

Cutting back on bonds and adding more stocks is worth considering, then. But by how much?

Before answering, let's take a quick look at traditional thinking on mixing stocks and bonds. While considered to be of the utmost importance in determining your investment return over time, asset allocation is totally subjective. There is no consensus on the proper breakdown of assets and, in fact, many people fall back on the old 100-minus-your-age rule.

"I've never been a fan of 100 minus your age," said Moshe Milevsky, co-author of Pensionize Your Nest Egg and a finance professor at York University's Schulich School of Business. "It's a very blunt instrument."

Nor does Prof. Milevsky like modifications of the 100 minus your age rule that use 110 or even 120 to get a higher level of exposure to stocks. He prefers to mix stocks and bonds according to personalized factors, such as whether someone has a pension, their health outlook in retirement, the value of their home, their debt levels and their interest in leaving money to others after death.

John DeGoey, a vice-president and associate portfolio manager at Burgeonvest Bick Securities, has come up with his own asset allocation formula to adjust for longer lifespans: Your age times your age divided by 100 equals the percentage of your portfolio that should be in bonds. For someone who is 50 years old, you'd multiply 50 times 0.50 and come up with 25 per cent in bonds. For someone at age 70, you'd multiply 70 times 0.70 to get 49 per cent in bonds.

Again, there's no science here. Mr. DeGoey said he randomly hit upon this formula and has been both writing about it and using it with clients for a while now. The appeal here is that investors get more of a tilt toward stocks and away from bonds than with traditional asset allocation, but within reason.

In fact, Mr. DeGoey's concern about longer lifespans and his bearish outlook for bonds make him comfortable with even higher levels of stock market exposure for retirees.

"I'm prepared to go 60-40 [stocks-bonds] or even 70-30 for someone who is in their early 70s and can tolerate some risk."

In Canada, bonds actually performed much better than stocks over the five years to Aug. 31. But long-term data support the idea of higher stock market exposure producing better returns. Over the past 10 years, the S&P/TSX composite total return index averaged 8.1 per cent annually and the DEX universe bond index made 5.4 per cent annually.

Making an average 8.1 per cent from share price gains and dividends before fees is a realistic expectation for the future. But bond returns over the medium term very likely will fall short of their recent levels. If interest rates rise steadily back to more normal levels, losing money in bonds in 2014 or 2015 is not unthinkable (bond prices and rates move in opposite directions).

Most investors are temperamentally unsuited to an all-stocks portfolio, which means they need bonds to provide stability in rough markets. This goes for both market crashes, and for passing bouts of volatility, such as the one we saw this week as a result of the partial U.S. government shutdown. Money flows out of stocks and into bonds at times like these, which rewards investors who have some of their holdings in bonds and bond funds.

Can you get this type of portfolio protection without bonds? In the Sept. 21 Portfolio Strategy, Mr. DeGoey offers some radical ideas on what to use as a substitute for bonds. Prof. Milevsky, the finance professor, has a thought of his own on what investors might do with their bond holdings in retirement.

Instead of holding bonds, he suggests buying an annuity. "When you ask me, how do we deal with a long life, my instinctive answer is annuities."

Consider the fixed annuity, which is basically a contract with an insurance company in which you hand over a lump sum of money and receive a predetermined flow of money for the rest of your life. A fixed annuity is a generator of income like a bond, but more permanent. You pay your money, you receive your monthly payments and that's that. You no longer have to worry about what's happening with interest rates or the bond market, and running out of money is not a risk.

The down side of annuities is that they're illiquid - you can't sell one and get your money back and, if you die early on in your retirement, some of the money you invested in the annuity would very likely be lost.

Add up the pluses and minuses with annuities and you have a serious competitor to bonds in a retiree's portfolio. But investors have been wary of annuities, mainly because of low interest rates. In fact, interest rates do influence annuity payouts, but they're not the only factor.

There's no one right answer for diversifying a portfolio so you don't outlive your money, but complacency seems ill-advised. The 100-minus-your-age rule is dead.



Here's a look at evolving thinking on mixing stocks and bonds in light of longer lifespans.

The underlying idea is to add exposure to stocks at the expense of bonds in order to generate higher long-term returns. Each example is for a 50-year-old.


100 - age = allocation to stocks, with the rest going to bonds

50% stocks / 50% bonds


110 - age = allocation to stocks, with the rest going to bonds

60% stocks / 40% bonds


120 - age = allocation to stocks, with the rest going to bonds

70% stocks

30% bonds


Age x age/100 = allocation to bonds, with the rest going to stocks

75% / stocks

25% / bonds