Struggling with asset allocation as young retiree

[they_dont_know_me_son]

Hi all, new to this forum but lurker for a bit (and a lot in Bogleheads). I'm struggling with how to place my funds given that i'm FIRE and in my late 30s.

Some important notes:

* Taxable makes up 88% of my liquid assets, tax-advantaged the rest
* I have enough liquid assets to support a 3% withdrawal rate to sustain our yearly expenses
* FIRECalc says that at a 60 year time horizon, my amount of spending would have 0 cycles of failure.
* My taxable account is about 30% muni bond funds, 20% treasuries, and the rest in equities.

So, the two thoughts I have in conflict are:

"Don't play the game if you've already won" VERSUS "I'm young have a long investment horizon and so it's worth the risk of investing more heavily in stocks".

I'm not really sure which one should win out. My current AA supports the latter, but I'm wondering if I'm doing myself a disservice by being too heavily into munis and bonds in general.

Curious how others feel about this?

 

[Flyfish1]

Your taxable is 50% equities, but is 88% of total liquid assets. What is the other 12% invested in? In other words what is your overall AA? Off hand I would stay heavily in equities in my 30's.

 

[38Chevy454]

Welcome to the forum. Great job having a high amount of savings that you can consider a quite early retirement. I assume you will not have any other income sources, and living off your savings? If so, you can get a bit more aggressive than where you are currently. Maybe go up to 60-70% equities, and those equities being in wide diversified low cost funds. Not heavy into any one stock. The 30-40% in fixed income side is still going to last many years, such that any volatility on the longer term equity money will not create a problem.

Since you have so much in taxable, I understand why you have some munis for the presumed tax savings? Leave your pretax alone until later years, and I would suggest that 100% equities is probably good for that portion of your investment, being more than 20 years out. Your taxable can also support you easily until then, so no need to worry about the pretax until future. Depending on your needs, it might be worth considering using tax favorable LTCG rates as the source for income.

 

[Toocold]

This is similar to our situation where we have a set of assets that covers more than 100% of our living expenses plus some. The remaining assets are primarily in VTI and BND. I didn't know whether to go 100% VTI or 100% BND, because we had won the game.

I had multiple conversations with my (fidelity) financial advisor around this topic. At the end of the day, we agreed there isn't a bad answer, so I just stuck to 60/40... because it seemed like a good number.

 

[they_dont_know_me_son]

Thank you for all the responses. I really appreciate it. Being in this situation gives me great amounts of gratitude but can also be isolating!

My total AA across all accounts according to VG is:

Stocks 42% - -
Bonds 25% - -
Short-term reserves 33% - -

I'm utilizing a heavy amount of state-based muni money market, since the tax equivalent yield (given high state taxes) is close to 6%!

 

[Flyfish1]

Well this forum has been immensely helpful to me and I hope it will also help you feel more comfortable and empowered to move forward. Obviously there are a million ways to play the retirement asset allocation game. Money market rates are strong now so I don't disagree with that safe move (for now). Rates will change eventually and you will adjust as needed.
BTW: Congrats!

 

[MichaelB]

Once again, welcome aboard. A couple of comments.

FIRECalc is an excellent tool, but no one and no tool can look ahead 60 years and expect a reasonable forecast. So much will happen over that period that cannot be foreseen, and how you react to those unexpected events matters as well.

Congratulations on your financial achievements. You’ve reached a point where you can take some risk, and you should, and the 33% in short term reserves is a good source of funds for that.

As you think about how to invest your money, don’t forget to invest in yourself.

 

[OldShooter]

... "I'm young have a long investment horizon and so it's worth the risk of investing more heavily in stocks". ...

Make sure you understand Sequence of Returns Risk (SORR), but from that point realize that historically the longer the investment horizon the less risk there is in holding equities.

 

[Montecfo]

i think you need more equity exposure. Probably 60% or more. Just manage your bonds so that you are not having to sell equities into a down market. That should not be too difficult.

 

[pb4uski]

The optimal risk adjusted returns are a much lower allocation to equities.

https://www.putnam.com/dcio/content...ong-term-investment-case-for-stocks-and-bonds

... While a stand-alone look at each asset class provides some insight, investment managers must also understand how various asset classes interact with each other in a combined portfolio. Because stocks and bonds do not tend to move in the same direction over full market cycles, owning them together may provide a more efficient return than an investor could achieve by owning either asset class individually. Some investors call this the “free lunch” of diversification. Combining these two uncorrelated asset classes provides a more efficient portfolio return.

Again, using our 100-year sample, we examine various combinations of stocks and bonds to determine which allocation maximizes the portfolio’s risk-adjusted return. ...

Among the allocation combinations charted above, we observe that the point of maximum portfolio efficiency (or highest Sharpe ratio) is roughly 80% bonds and 20% stocks. ...

 

[HI Bill]

The optimal risk adjusted returns are a much lower allocation to equities.

Yes, but the goal of risk-adjusted returns is protecting the principal value of your portfolio. Over a 60-year period, I'd be far more concerned about inflation's affects on spending than preserving the original asset value at the cost of earnings.

 

[FREE866]

Hi all, new to this forum but lurker for a bit (and a lot in Bogleheads). I'm struggling with how to place my funds given that i'm FIRE and in my late 30s.

Some important notes:

* Taxable makes up 88% of my liquid assets, tax-advantaged the rest
* I have enough liquid assets to support a 3% withdrawal rate to sustain our yearly expenses
* FIRECalc says that at a 60 year time horizon, my amount of spending would have 0 cycles of failure.
* My taxable account is about 30% muni bond funds, 20% treasuries, and the rest in equities.

So, the two thoughts I have in conflict are:

"Don't play the game if you've already won" VERSUS "I'm young have a long investment horizon and so it's worth the risk of investing more heavily in stocks".

I'm not really sure which one should win out. My current AA supports the latter, but I'm wondering if I'm doing myself a disservice by being too heavily into munis and bonds in general.

Curious how others feel about this?

You have a VERY LONG investment time horizon. The fact that you can live on 3% of your current portfolio is great. If you want for the next 50 years to have a low risk low return on your money stick with the high bond exposure. That's not what I would do as history has shown us over long periods stocks do substantially better than bonds on a total return basis.

 

[JackJester]

A 60 year retirement is quite a long time to attempt to plan for. If I was in my 30s and considering punching out of the work force then I would be super ultra conservative. For example, assume things like a 6% average inflation over that 60 years vs 3+CPI%. And how do you even account for 35 years of paying health care before medicare? ... maybe take an ACA gold plan and times it by 2. Sure there is the definition of 'early' retirement ... i.e., more like in the late 40s and 50s. But 'EARLY' retirement in the 30s ...unless i had some serious inheritance or rich family it is hard to fathom. If the SHTF and after 30 years of not working you have to get a job to avoid being homeless, what are you gonna do with technology changing so much over that 30 years? Maybe you should work for 10 more years and help contribute to the SS fund .. joking. Good for you to be in this position, but please do some serious number crunching in FIRECALC with 'what ifs'. A couple of World Wars and a Great Depression can occur over a 60 year period.

 

[USGrant1962]

Another vote for more equities. Below 50% is not optimal for very long horizons, especially if you are able to live off only 3%. You have a lot of dead money that is not positioned to support you 30, 40, 50 years from now.

You might want to look at Michael Kitces work on rising glidepaths. While people debate if it is really better, it would give you a gentle strategy to move your AA to one more suitable for a 60-year retirement. Maybe raise your equity AA by 2% a year for the next 9 years to get to 60/40.

https://www.kitces.com/blog/should-...is-a-rising-equity-glidepath-actually-better/
and
https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/

I'm doing more of the bond tent approach, but I was a traditional early retiree at 55 (is a "traditional early retiree" now a thing?). I was almost all equities until around 50 years old, and then cut back substantially as ER approached. Now I'm "age in equities" until I get to 65 or 70 - haven't decided my final target yet (probably 67% as SS payout approaches).

Also consider your asset placement. Folks that are facing RMDs tend to wish they had more in taxable and less in tax deferred. I know I do but I was 75% tax deferred on early retirement after paying off the mortgage. You appear to only have 12% in tax deferred. That argues for you to be 100% equities in that space, and maybe even aggressive equities.

My wife's IRA is funded by her early-career 401(k)s - working only about 10 years out of college, then being a stay-at-home-mom. Because it was invested aggressively (a lot of Vanguard Health Care Fund in the 90s and 00s), her account is now worth about 75% of what my 33-years of high-to-max contribution 401(k) is. Yup, she worked 10 early-career years to have close to the same retirement account as my full-career 33 years. But I invested it for her . Anyway, with a long runway compounding is your friend.

 

[mathjak107]

Yes, but the goal of risk-adjusted returns is protecting the principal value of your portfolio. Over a 60-year period, I'd be far more concerned about inflation's affects on spending than preserving the original asset value at the cost of earnings.

there is no financial logic for using less capable assets like bonds in our accumulation stage .

bonds are for mitigating temporary short term dips . for a long term investor there is no sense in mitigating short term dips at the expense of permanently hurting long term returns.

in retirement if one is living off their portfolio i can see mitigating both the dips and volatility, but certainly not before at least pre retirement

 

[mathjak107]

Another vote for more equities. Below 50% is not optimal for very long horizons, especially if you are able to live off only 3%. You have a lot of dead money that is not positioned to support you 30, 40, 50 years from now.

You might want to look at Michael Kitces work on rising glidepaths. While people debate if it is really better, it would give you a gentle strategy to move your AA to one more suitable for a 60-year retirement. Maybe raise your equity AA by 2% a year for the next 9 years to get to 60/40.

https://www.kitces.com/blog/should-...is-a-rising-equity-glidepath-actually-better/
and
https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/

I'm doing more of the bond tent approach, but I was a traditional early retiree at 55 (is a "traditional early retiree" now a thing?). I was almost all equities until around 50 years old, and then cut back substantially as ER approached. Now I'm "age in equities" until I get to 65 or 70 - haven't decided my final target yet (probably 67% as SS payout approaches).

Also consider your asset placement. Folks that are facing RMDs tend to wish they had more in taxable and less in tax deferred. I know I do but I was 75% tax deferred on early retirement after paying off the mortgage. You appear to only have 12% in tax deferred. That argues for you to be 100% equities in that space, and maybe even aggressive equities.

My wife's IRA is funded by her early-career 401(k)s - working only about 10 years out of college, then being a stay-at-home-mom. Because it was invested aggressively (a lot of Vanguard Health Care Fund in the 90s and 00s), her account is now worth about 75% of what my 33-years of high-to-max contribution 401(k) is. Yup, she worked 10 early-career years to have close to the same retirement account as my full-career 33 years. But I invested it for her . Anyway, with a long runway compounding is your friend.

we used the rising glide path .

i was always 100% equities until a few years before i thought we would retire .

dropped to 35-40% entering retirement thru what kitces calls the red zone , now after 8 years in retirement we are back to 50-55%

 

[mrfeh]

Thank you for all the responses. I really appreciate it. Being in this situation gives me great amounts of gratitude but can also be isolating!

My total AA across all accounts according to VG is:

Stocks 42% - -
Bonds 25% - -
Short-term reserves 33% - -

I'm utilizing a heavy amount of state-based muni money market, since the tax equivalent yield (given high state taxes) is close to 6%!

I would rely on what input you've received from bogleheads. Lots of wisdom over there.

You also need to realize that the current interest rates are not going to last forever.

 

[Jerry1]

Thank you for all the responses. I really appreciate it. Being in this situation gives me great amounts of gratitude but can also be isolating!

My total AA across all accounts according to VG is:

Stocks 42% - -
Bonds 25% - -
Short-term reserves 33% - -

I'm utilizing a heavy amount of state-based muni money market, since the tax equivalent yield (given high state taxes) is close to 6%!

No one can say what you'll be comfortable with, but I don't think you should go any lower on your equity percentage. I'm 63 and kind of feel like I've won the game and I'm just over 30% in equities. I'm currently grappling with letting that percentage drift up by not rebalancing but I wouldn't feel comfortable going any lower. My advice to you based on your age is to see if you can get comfortable with a 50/50 AA. Remember, while assuming you've "won the game" is a strategy, so is "running up the score".

When you're running scenarios with FireCalc, add some expenses to see how much you can add before your success rate drops down to 90%. That will give you some insight into the cushion you have built into your assumptions.

 

[pb4uski]

there is no financial logic for using less capable assets like bonds in our accumulation stage .

bonds are for mitigating temporary short term dips . for a long term investor there is no sense in mitigating short term dips at the expense of permanently hurting long term returns.

in retirement if one is living off their portfolio i can see mitigating both the dips and volatility, but certainly not before at least pre retirement

Interesting that assets backing defined benefit pension plans and annuity contracts are predominately bonds (in accumulation phase too) so you can certainly teach those pension plans and insurance companies a thing or two.

 

[FREE866]

Interesting that assets backing defined benefit pension plans and annuity contracts are predominately bonds (in accumulation phase too) so you can certainly teach those pension plans and insurance companies a thing or two.

That's probably because they are afraid of getting sued. Not because they are smart investors.

 

[pb4uski]

No, it's not because they are afraid of getting sued. It is more because they are well regulated and have a fiduciary duty to pensioners and policyholders so they need to be conservative. That and at least for insurers, the required capital for common stock is much higher than the required capital for investment grade bonds. Another factor is that the rating agencies would not consider high investments in common stock to back their annuity obligations as prudent. While an individual can do whatever they want and take more risk, those with a fiduciary obligation managing other people's money cannot.

 

[NgineER]

* FIRECalc says that at a 60 year time horizon, my amount of spending would have 0 cycles of failure.

You should also run firecalc with a shorter time horizon so that you capture the worst year to retire which according to google was 1966.

Good job on acquiring enough assets to FIRE in your 30's. Does the 3% SWR support a barista FIRE or a FAT FIRE? If the former you don't have much leeway whereas you should be able to be flexible with a FAT FIRE.

Welcome!

 

[braumeister]

You should also run firecalc with a shorter time horizon so that you capture the worst year to retire which according to google was 1966.

Long ago when I was looking at a long time horizon, I was advised to run it with a short timeframe. Then run it again with the lowest portfolio value from that first run. Lather, rinse, repeat.

 

[mathjak107]

Interesting that assets backing defined benefit pension plans and annuity contracts are predominately bonds (in accumulation phase too) so you can certainly teach those pension plans and insurance companies a thing or two.

they need loads of short term money and many are only allowed certain investments which match their liabilities

that has nothing to do with personal long term investing

 

[pb4uski]

No, they don't need "loads of short term money"... I worked in finance at a life insurer for over a decade... a need for short term money was never an issue.