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Construct a hypothetical ER portfolio.
Old 01-21-2014, 02:56 PM   #1
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Construct a hypothetical ER portfolio.

I was wondering if you could help me construct a hypothetical early retirement portfolio. Here's the situation, you and your spouse are 30 years old and want to retire at 40. You currently live in a high cost of living area and spend $50k per year, once you retire though you plan on moving to a lower cost of living area and reducing your spending to $40k. You have good jobs and live frugally and can save $150k per year. You have access to 401k x 2, IRA x 2, joint taxable account, I bonds, CDs and whatever additional account/asset types are generally available. How would you construct a hypothetical portfolio for this couple? Thanks for your input.
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Old 01-21-2014, 03:02 PM   #2
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This Vanguard Asset Allocation/Portfolio tool will help you construct a very low cost portfolio. It is (arguably) as good as anything alse.

https://personal.vanguard.com/us/fac...rresults.xhtml
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Old 01-21-2014, 03:30 PM   #3
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Thank you for your replies. I suppose what I'm looking for are suggestions geared more specifically towards someone looking to retire at an early age like 40. I understand the basics of asset allocation and tax efficient fund placement, but am wondering how portfolio construction and management might differ for someone retiring at 40 rather than say 65.
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Old 01-21-2014, 04:27 PM   #4
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Quote:
Originally Posted by John3754 View Post
Thank you for your replies. I suppose what I'm looking for are suggestions geared more specifically towards someone looking to retire at an early age like 40. I understand the basics of asset allocation and tax efficient fund placement, but am wondering how portfolio construction and management might differ for someone retiring at 40 rather than say 65.
Not sure what you're expecting and maybe another poster will offer some silver bullets, but there wouldn't be any big difference in accumulation portfolios to me. If you want to retire early, you simply have to spend less and save a higher % of your income during your working years than someone planning on retiring at 65. The easiest way to save more is to focus on increasing your income while working.

You could invest more aggressively with 80-100% equity or riskier assets and/or stock picking-market timing, but your risk tolerance is what it is.

You could dramatically reduce spending when you retire, but that might require a test run before retiring to make sure you can do it, without regrets.

Probably not telling you anything...
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Old 01-21-2014, 04:51 PM   #5
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Originally Posted by John3754 View Post
Thank you for your replies. I suppose what I'm looking for are suggestions geared more specifically towards someone looking to retire at an early age like 40. I understand the basics of asset allocation and tax efficient fund placement, but am wondering how portfolio construction and management might differ for someone retiring at 40 rather than say 65.

I think the number 1 thing would be to have higher percentage of equities than a 65 year. Eyeballing the FIRECalc results you'll retire at 40 with portfolio in the 2 to 2.5 million (in today dollars) most likely which would easily support a a $40K withdrawal and and 60-70K spend would also be likely. Even maxing out your two 401K 70-80% would be taxable. So I would recommend almost all of your fixed income be in the 401K. A heavy emphasis on index fund while in the accumulation phase and possibly tax free muni and/or tax efficient funds. I would think your AA should be in the range of 65-80% (as recommended by FIRECalc for 40+ year retirement.) FYI, I retired at 39 and my equities has varied from 65% in 2000, to 85% in 2009.

Once you retire you'll need cash flow so start spending dividends, and possibly start shifting some of the portfolio to funds with a higher current yield. Most people recommend maintaining a cash "bucket" of 2-5 years expense. In general I think this should be a CD ladder but it really depends on the interest rate environment.
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Old 01-21-2014, 10:32 PM   #6
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Just dump it all into a Vanguard Target Date type of AA set over all your accounts....or do a 3 fund couch potato portfolio with maybe 70% or 80% equities and use stable value/CDs/short term bond for fixed income.
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Old 01-21-2014, 10:45 PM   #7
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I'm basically at the end of the path you described (planed er this year @41, wife is a little older) and I don't think there's really anything much different that needs to be done versus somebody still accumulating and planning to retire later. Basically we had a high equity portfolio (~80% or more) until we were getting close and then spent the last little bit of time shoveling money into fixed income (cash/bonds/etc). We are now at 73% equity and 27% fixed income and plan to stay at this level.

If you can save 150k a year, you'll be well above the IRA limits. I think a couple decisions you'll have to make are (1) if you get company stock through options or grants do you plan to hang on to them or sell them as you go along and (2) do you plan to buy a home to last you during your 10 year stay.

You'll also have to think about your exit plan. I.e., if you are leaving the area and ever want to buy a home/condo etc you may want to have enough cash/bonds in taxable to do so. Some posters have said they were able to get a mortgage after retirement by showing a steady stream of income through withdrawals from retirement funds (I haven't looked into this closely).

One thing I wish we had done differently is prepared for the housing crash/recession. We responded by just putting more money into equities, but we could have also bought a retirement home at bargain prices.
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