Hi! Asset allocation help for 39-year-old - managing risk if want to retire early

[akl432]

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!

 

[joylesshusband]

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.

 

[akl432]

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?

 

[Col. Klink]

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.

 

[Sojourner]

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.

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.

 

[Qs Laptop]

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.

 

[38Chevy454]

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.

 

[DFDubb]

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.....

 

[joylesshusband]

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]

...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....

 

[Dtail]

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.

 

[ziggy29]

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.

 

[Qs Laptop]

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.

 

[NgineER]

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.

 

[skipro33]

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.

 

[Aerides]

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.

 

[akl432]

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]

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.

 

[ziggy29]

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.

 

[akl432]

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!

 

[ziggy29]

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!

Vanguard has some muni funds, but only in a few states (usually those with high populations *and* high state taxes). They should be easily found on Vanguard's web site.

Otherwise if you have a standard taxable brokerage account, you can purchase individual bonds through your broker's bond trading desk.

 

[HI Bill]

Your aversion to risk is actually adding risk. Inflation risk, and sequence of returns risk. The reality is that if you're invested that 'conservatively', then you'll need a much larger nest egg (than current) prior to retirement. We don't know what your annual savings rate is, so it's hard to project your final investable assets.

Put your numbers into FIRECALC, and be sure to customize the retirement investments to match your portfolio. I think you'll find that with your AA, the chances of having your portfolio last throughout a 40+ year retirement horizon are low. Most of us here shoot for a 95-100% success rate in FIRECALC. IMHO, anything less than 85% means you need to change your AA, reduce your spending, or keep working. These are the three variables. Maintaining a very conservative AA means you need to save more!

I get risk aversion. If you're subject to panic selling, then maintaining a 'conservative' (inflation risky) portfolio means you'll need to save much more than 25x you annual living expenses. You can't have that low of an equity exposure and hope to FIRE at an early age, unless you're willing to live on ~2% withdrawals.

 

[ziggy29]

I get risk aversion. If you're subject to panic selling, then maintaining a 'conservative' (inflation risky) portfolio means you'll need to save much more than 25x you annual living expenses. You can't have that low of an equity exposure and hope to FIRE at an early age, unless you're willing to live on ~2% withdrawals.

One can also do this by maintaining a "buckets" approach if it makes them feel better about it (the math would be the same in terms of overall asset allocation). A very risk-averse person could seek to keep (say) 7-10 years of income in a safe bucket. Most years, when you rebalance you can mentally rebalance so that you maintain the next 7-10 years in "safe stuff".

Then when the market craters like 2000 or 2008, you can exclusively withdraw from your safe bucket for many years, giving the equity bucket more time to recover, which it almost always will in a timeframe that long. Once it has sufficiently recovered, then you can replenish that safe bucket and be ready for the next Ursa Major.

 

[Qs Laptop]

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!

For the best tax advantage, you want to buy municipal bonds issued within the state where you live. Like Ziggy29 has said, Vanguard has got some state issued municipal bond funds. I have an account at Fidelity and they have some state muni funds as well. Otherwise you can buy individual bonds from your brokerage house.

 

[akl432]

Qs Laptop, Ziggy29, HNL Bill - Thank you!