Join Early Retirement Today
Reply
 
Thread Tools Display Modes
Hi! Asset allocation help for 39-year-old - managing risk if want to retire early
Old 02-22-2019, 07:43 AM   #1
Dryer sheet aficionado
 
Join Date: Jun 2018
Posts: 42
Hi! Asset allocation help for 39-year-old - managing risk if want to retire early

Hi, everyone! I am a long-time lurker but recently just started posting. I wish I had found this site much earlier in my life; you all are so knowledgeable and helpful!

I am requesting help with my asset allocation. I am 39, single, and plan to retire around age 50. My problem is that I am very risk-averse, which is compounded by my desire to retire early. I am unsure how much of my portfolio to put into VTSAX, versus my high-yield savings accounts, if I want to retire in about 11 years.

Here is my liquid net worth:

401K/Roth 401K: $365K
Equities 47%, bonds 23%, stable value 30%

High-yield savings accounts: $450K
2.22-2.40% APY

Roth IRA: $85K
VTSAX 86%, BND 14%

Taxable: $16K
VTSAX 100%

Gold (stored in safe deposit box): $100K

Total liquid net worth: $1.025M
Stable value 66%, equities 25%, bonds 9%

Debt, salary:
House is fully paid off; no debt.
Salary/bonus: $197K.

I ran the Fidelity planner, using very conservative numbers for expenses and savings rates; I can retire at age 50. If I continue to spend below my planned expenses and save more than projected (which is very likely), I could probably retire around age 46-47.

Given that my retirement date could be as soon as 7-8 years away, what changes to my portfolio do you recommend? I know I should move some of my stable value funds into an equities index fund, but I am not sure how much because I do not want a future downturn in the stock market to delay my retirement date. I am very risk-averse in investing. Despite my aversion to risk, I really regret not investing more aggressively between 2008-present. Now, I fear that I cannot invest much in a stock index fund because doing so might jeopardize my much-closer retirement date.

I consulted with a Fidelity planner, and he advised either exchanging the stable value in my 401Ks for equities, or just leaving my portfolio alone. His reasoning was that I am on track to retire on schedule, so it is not necessary to add risk. However, exchanging the stable value for equities has more upside potential, so if I did that, I could have more to spend in retirement. The idea of increasing my spending in retirement is appealing, since my current retirement budget is frugal. If I did exchange the stable value for equities in my 401Ks, I would probably dollar-cost average it (perhaps exchanging $600-$1000/week).

1. Given that my retirement date could be as soon as 7-8 years away, what changes to my portfolio do you recommend? What if my retirement date is 11 years away?
2. Do you recommend exchanging all or some portion of the stable value in my 401Ks for equity index funds (using the dollar cost averaging approach described above)? If so, how much should I exchange? Should I start now or wait?
3. I will probably save $60-70K (after-tax) annually (in addition to contributing the annual max to the retirement accounts). Should I continue to put those after-tax savings in high-yield savings accounts? I was thinking it would be better to put my after-tax savings in high-yield savings accounts, and put the higher-risk equities in my pre-tax accounts, since those accounts would have more time to recover from a downturn.
4. Should I keep the bonds (BND), if they have more risk than the stable value/high-yield savings accounts, yet have been yielding similar returns?

If there is any additional information needed, please let me know. Thank you in advance for your input!
akl432 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 02-22-2019, 08:07 AM   #2
gone traveling
 
Join Date: Oct 2015
Posts: 138
What are your currently targeted expense levels in retirement?
Share all 3 of them: low (basic), comfortable, luxury.

I don't need to know the answer, but you do. This will determine what you need (or not) to change in your portfolio.
joylesshusband is offline   Reply With Quote
Old 02-22-2019, 08:29 AM   #3
Dryer sheet aficionado
 
Join Date: Jun 2018
Posts: 42
Quote:
Originally Posted by joylesshusband View Post
What are your currently targeted expense levels in retirement?
Share all 3 of them: low (basic), comfortable, luxury.

I don't need to know the answer, but you do. This will determine what you need (or not) to change in your portfolio.
That is a good question. Here are my numbers (in today's dollars):

Comfortable: $36K/year. This is the number I used in the Fidelity retirement planner. I have a fair amount of buffer built into this number, because my current annual expenses are $21K.
Basic: $25K/year
Luxury: $42K/year

Sorry for the dumb question: now that I have these numbers, how do I use them to assess my portfolio?
akl432 is offline   Reply With Quote
Old 02-22-2019, 09:28 AM   #4
Recycles dryer sheets
Col. Klink's Avatar
 
Join Date: Jul 2011
Location: Citrus Hills
Posts: 235
Quote:
Originally Posted by akl432 View Post
That is a good question. Here are my numbers (in today's dollars):

Comfortable: $36K/year. This is the number I used in the Fidelity retirement planner. I have a fair amount of buffer built into this number, because my current annual expenses are $21K.
Basic: $25K/year
Luxury: $42K/year

Sorry for the dumb question: now that I have these numbers, how do I use them to assess my portfolio?
Your numbers for annual expenses seem to me to be low even for a no tax state. I suggest you download a spreadsheet budget template which are available online. Then, keep track over a number of month on what you are spending now. If that spending won't apply during retirement, make a note of that and adjust accordingly. Consider capital expenditures such as cars, fridges, and HVAC systems and amortize the cost over the useful life of the item. Remember as well, you need to have fun in retirement so consider the toys you may want to buy, travel, etc.
__________________
DISS-MISSED! work in Dec. 2018
Col. Klink is offline   Reply With Quote
Old 02-22-2019, 09:43 AM   #5
Thinks s/he gets paid by the post
Sojourner's Avatar
 
Join Date: Jan 2012
Posts: 2,581
Quote:
Originally Posted by Col. Klink View Post
Your numbers for annual expenses seem to me to be low even for a no tax state. I suggest you download a spreadsheet budget template which are available online. Then, keep track over a number of month on what you are spending now. If that spending won't apply during retirement, make a note of that and adjust accordingly.
+1

I'm 50, single, and retired, and my annual expenses for my fairly modest lifestyle in a moderately low COL area are significantly more than the "luxury" spending numbers listed.

Quote:
Originally Posted by Col. Klink View Post
Consider capital expenditures such as cars, fridges, and HVAC systems and amortize the cost over the useful life of the item. Remember as well, you need to have fun in retirement so consider the toys you may want to buy, travel, etc.
This is very important advice and is why you shouldn't rely on just tracking your current spending for a year or two to estimate your future spending over the next few decades. You have to figure in the large, "lumpy" expenses such as new car(s), new appliances, etc. to come up with an average yearly spend. I'd recommend reading Work Less, Live More by Bob Clyatt (along with its associated workbook) for more guidance on this.
Sojourner is offline   Reply With Quote
Old 02-22-2019, 09:45 AM   #6
Thinks s/he gets paid by the post
Qs Laptop's Avatar
 
Join Date: Mar 2018
Posts: 3,441
You are only 39 years old. You need to get more aggressive. You are too conservative.

I hope you are contributing the maximum amount into your Roth IRA every year. I'd convert the bonds in the Roth IRA into equities, maybe into Vanguards International stock index fund. You've got plenty of safe money elsewhere and you won't get taxed on capital gains in this account.

I would move a good chunk, at least $100K, out of your savings account into your taxable account. If you like index funds put some money in them. Maybe invest in some tax-free municipal bonds.

At the very least I'd build a CD ladder with some of the money in the savings account (if you haven't done so already.)

But, you're right--you are too risk-averse.
__________________

Age is a very high price to pay for maturity.
Qs Laptop is offline   Reply With Quote
Old 02-22-2019, 09:58 AM   #7
Thinks s/he gets paid by the post
38Chevy454's Avatar
 
Join Date: Sep 2013
Location: Cincinnati, OH
Posts: 4,344
Agree with Q, you should have more equity exposure. If you use the rule of "100 minus age", it would indicate 61% equities. Many financial pros even use 110 or 120 minus age as the factor. I personally would target 70% as you are in a long term horizon and in a buy and hold type status. That will be a stretch for you being at current 25%. Just don't panic if the market goes down, let it ride out the volatility and cyclic ups and downs. Over time the ups will be more than the downs, to your (long term) benefit. The issue with your stable value savings type accounts is that you are basically keeping up with inflation. So your money is not growing. You want growth so you have more total in the nestegg.
__________________
The problem isn't artificial intelligence, it's natural stupidity.

You can't spend yourself to prosperity.

Semi-Retired 7/1/16: working part-time (60%) for now [4/24/17 changed to 80%]
Retired Aug 2, 2017; age 53
38Chevy454 is offline   Reply With Quote
Old 02-22-2019, 10:00 AM   #8
Recycles dryer sheets
 
Join Date: Jan 2018
Posts: 229
There is risk averse, and then there is you. You're missing out on a lot IMO by being so conservative, but it's your $, not mine.

I'm only a year older, but plan on hanging it up at 50 as well. Being a decade out still, I'm 90% equities.

Even with no debt, your expenses seem unrealistically low unless you live on rice/beans, buy used clothes, etc.....
DFDubb is offline   Reply With Quote
Old 02-22-2019, 10:02 AM   #9
gone traveling
 
Join Date: Oct 2015
Posts: 138
Quote:
Originally Posted by Qs Laptop View Post
You need to get more aggressive. You are too conservative.
This is just silly.
You can not possibly assess whether the OP is conservative and whether he needs to get more aggressive without having any idea what his financial goals are in retirement.
Apparently, he does not know this either...
joylesshusband is offline   Reply With Quote
Old 02-22-2019, 10:04 AM   #10
gone traveling
 
Join Date: Oct 2015
Posts: 138
Quote:
Originally Posted by akl432 View Post
...my current annual expenses are $21K.
Really?
Do these include your portion of healthcare insurance premiums, the majority of which is paid by your employer?
Do these include any sort of federal, state, and local income tax?

You have long ways to go....
joylesshusband is offline   Reply With Quote
Old 02-22-2019, 10:16 AM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jan 2018
Location: Tampa
Posts: 11,198
What are the current returns in your Stable Value account? Is it an insurance wrapped product? This type of product, if it has decent returns can be a low risk portion of your bond allocation.
__________________
TGIM
Dtail is offline   Reply With Quote
Old 02-22-2019, 10:31 AM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
ziggy29's Avatar
 
Join Date: Oct 2005
Location: North Oregon Coast
Posts: 16,483
Quote:
Originally Posted by joylesshusband View Post
This is just silly.
You can not possibly assess whether the OP is conservative and whether he needs to get more aggressive without having any idea what his financial goals are in retirement.
True to a large degree. But I think we can assess that retiring at a young age generally requires enough growth in a portfolio to avoiding outliving the money.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
ziggy29 is offline   Reply With Quote
Old 02-22-2019, 11:13 AM   #13
Thinks s/he gets paid by the post
Qs Laptop's Avatar
 
Join Date: Mar 2018
Posts: 3,441
Quote:
Originally Posted by joylesshusband View Post
This is just silly.
You can not possibly assess whether the OP is conservative and whether he needs to get more aggressive without having any idea what his financial goals are in retirement.
Apparently, he does not know this either...
The poster makes $197K a year and is 11 years away from retirement. He's got almost one-half million dollars in a bank account earning peanuts. He's too conservative.

His retirement goals is to spend 20% of his current annual income.

It's not hard to figure out.
__________________

Age is a very high price to pay for maturity.
Qs Laptop is offline   Reply With Quote
Old 02-22-2019, 11:35 AM   #14
Thinks s/he gets paid by the post
 
Join Date: Nov 2013
Posts: 1,027
I think you are too conservative... Way too conservative.

Based on your expenses you can retire now, but you really need to increase equities in order to have an inflation protected retirement.

Check this calculator and the following blog post

If you are concerned about hitting your numbers, invest your savings going forward in equities until you hit 40:60 or 60:40 equities:fixed income. In five years you should be very golden IMO.
NgineER is offline   Reply With Quote
Old 02-22-2019, 11:45 AM   #15
Thinks s/he gets paid by the post
skipro33's Avatar
 
Join Date: Sep 2011
Location: Placerville
Posts: 1,788
If I were 39 again, I'd have EVERYTHING in equity index funds. Heck, at 62 I still have EVERYTHING in equity index funds.

My accounts are with Fidelity and use these two primarily;
FIDELITY 500 INDEX FUND FXAIX
FIDELITY TOTAL MARKET INDEX FUND FSKAX
one tracks the Dow and the other the S&P 500

I keep enough cash for 2 years worth of expenses if there's any reason to ride out a down period of $100,000 or if I lost my job while I was working. However, in the 7 years since I retired, I've never needed it and now that I'm taking SS, I imagine my investments will continue to grow faster with SS covering over half my expenses.
skipro33 is offline   Reply With Quote
Old 02-22-2019, 11:51 AM   #16
Moderator
Aerides's Avatar
 
Join Date: Nov 2015
Posts: 13,846
Quote:
Originally Posted by akl432 View Post
My problem is that I am very risk-averse, which is compounded by my desire to retire early.
Welcome - I could have written the quoted sentence when I was around your age, in a not-totally-different position. But that was right after 08/09 and so I had good reason to be very risk-averse. (You don't really go into your Why on that, so maybe examine that?) Anyway, I shifted my thinking and ER'd in 2016.

1) You are creating more risk by being too cautious. Your cash is earning you nothing, when adjusted for inflation. $450k in CDs is way way too much and you are watching money fly out the window on that.

2) You mitigate risk when ER'd by ensuring you'd never have to sell in a reasonable recession. So you bank (CD) 3 years of expenses. 4 if you're twitchy. 5 if you're super twitchy.

You have 10+, too much. I'd converting about $300k of that cash into equities. VTSAX and the like. Bonds if you want, but they are still too safe IMO with the rest of your stuff. Google Bogle Lazy portfolios for ideas.

I get it, I really really do. I remember looking at that cash in my hi-yield savings, seeing it grow, knowing it wasn't ever going to drop. Most of it went into bonds and lesser equities to start, with an FA helping for a fee. Gradually removed that, went to a simpler low-cost index based portfolio, to now self-managed on basically auto-pilot.

ER'd in 2016.
Aerides is offline   Reply With Quote
Old 02-22-2019, 11:54 AM   #17
Dryer sheet aficionado
 
Join Date: Jun 2018
Posts: 42
Thanks, all, for the responses. You have already given me a lot to think about.

Col. Klink, Sojourner - Thanks for your input on my expense numbers and for providing a frame of reference. Those are good suggestions about tracking and revising my expense numbers. I included new car costs, but not other appliances, and I underestimated the cost of other capital expenditures such as HVAC, roof. I need to revise my expense numbers, and I will look into the recommended book. I did include my expected travel costs.

The estimated annual expenses of $21K (current) and $36K (retirement) do not include income taxes (but do include property taxes). Perhaps I should have called these numbers my spending budget, not my total expenses. I did not include income taxes in my spending budget number of $36K because I thought the Fidelity retirement model subtracts out income taxes separately. I will have to confirm where income taxes are accounted for, and adjust my retirement budget if necessary.

Qs Laptop, 38Chevy454 - Thank you for the asset allocation ideas.

DFDubb - Your frame of reference is helpful. Thank you!

Joyless husband - Thanks for pointing out the tax piece; I just realized that the $21K current expenses do not include income taxes. They do include health insurance premiums paid by me, but not my employer.

The $36K budget assumption in retirement includes health care but not income taxes. It was my understanding that the Fidelity model accounts for taxes elsewhere; the $36K only my planned spending (i.e. my spending budget). I need to research how the Fidelity retirement projection model accounts for income taxes. The model asked for my federal and state tax rates, so I assumed taxes were accounted for; perhaps that was an incorrect assumption.

Dtail - The annual returns in the stable value portion of my 401Ks are about 2.3%. The names of the two funds are: Met Life Stable Value Fund (MLSVF; expense ratio 0.03%) and NGSP Stable Value Fund (could not find ticker symbol; expense ratio 0.29%). Given that these are lower-risk, should I keep the stable value funds and exchange the bonds for equities? (I know that bonds typically outperform stable value funds, but I am not sure whether bonds are still the recommended long-term approach (vs. stable value) because of the low interest rate environment.)

ZIggy29 - Thanks for the feedback; I am realizing I must force myself to take more risk in my portfolio.
akl432 is offline   Reply With Quote
Old 02-22-2019, 12:10 PM   #18
Dryer sheet aficionado
 
Join Date: Jun 2018
Posts: 42
NgineEr - Thanks for the links to the calculator and blog post!

Aerides, Skipro - Thank you for the advice - it is very helpful!

Aerides - Your comment #2 is the risk mitigation perspective I did not understand until now - thank you!

I became risk-averse during the 2008-09 downturn. I didn't have much then, so I didn't have much to lose, but I saw so many others lose so much of their portfolios. I decided at that time that I preferred not losing my savings, rather than having the potential for much larger gains. I even bought $100K in gold, thinking the market would collapse...still beating myself up over that gold purchase!

However, now that the market has rebounded, it is really hitting home how much I gave up by investing so conservatively. Now that it is a decade later (and I have saved so much since getting my first higher-income job a decade ago), retirement seems so much closer, and I guess the combination of those factors have caused me to realize the need to change my thinking.

I truly wish I would have reached out for help years ago, but I was paralyzed by the fear of losing my savings if I invested in equities.

It is so helpful to hear about others' asset allocations being so aggressive, even though you are close to FIRE or already there. This is such great perspective for me. I guess I didn't realize how aggressively FIRE'ers invest, just from perusing these boards.
akl432 is offline   Reply With Quote
Old 02-22-2019, 12:16 PM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
ziggy29's Avatar
 
Join Date: Oct 2005
Location: North Oregon Coast
Posts: 16,483
Quote:
Originally Posted by akl432 View Post
It is so helpful to hear about others' asset allocations being so aggressive, even though you are close to FIRE or already there. This is such great perspective for me. I guess I didn't realize how aggressively FIRE'ers invest, just from perusing these boards.
Depending on how early you retire, you may have to assume your money will have to last 30-40 years, maybe even longer. And you will need to do that keeping up with inflation.

I'm down to about 53% equities now, but may ratchet that up a bit after the next significant market hiccup (and there will be one, just don't know when). Of course, I'm 53 myself and my wife (50) is still going to be w*rking for a few years.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
ziggy29 is offline   Reply With Quote
Old 02-22-2019, 12:27 PM   #20
Dryer sheet aficionado
 
Join Date: Jun 2018
Posts: 42
Quote:
Originally Posted by Qs Laptop View Post
You are only 39 years old. You need to get more aggressive. You are too conservative.

I hope you are contributing the maximum amount into your Roth IRA every year. I'd convert the bonds in the Roth IRA into equities, maybe into Vanguards International stock index fund. You've got plenty of safe money elsewhere and you won't get taxed on capital gains in this account.

I would move a good chunk, at least $100K, out of your savings account into your taxable account. If you like index funds put some money in them. Maybe invest in some tax-free municipal bonds.

At the very least I'd build a CD ladder with some of the money in the savings account (if you haven't done so already.)

But, you're right--you are too risk-averse.

This is so helpful; thank you. I do have a question about tax-free municipal bonds. How would I go about doing this? Could I do it through Vanguard (is there a Vanguard fund), or where/how would I buy them?
Thank you!
akl432 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
24 year old feeling like a 44 year old wanting a 64 year old portfolio Stripes Hi, I am... 9 08-30-2018 05:28 PM
Kitces: / Managing Sequence Of Return Risk With Bucket Strategies Vs A Total Return macav933 FIRE and Money 21 12-06-2014 09:38 AM
How do you feel about this asset allocation in my 401k for a 59 year old? Floridatennisplayer FIRE and Money 8 06-19-2014 02:20 PM
Asset Allocation for an 84 year old BUM FIRE and Money 6 05-12-2008 10:18 AM
Asset allocation for 24 year old? drdavidge FIRE and Money 15 05-07-2008 09:17 AM

» Quick Links

 
All times are GMT -6. The time now is 05:47 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2024, vBulletin Solutions, Inc.