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

[Qs Laptop]

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Originally Posted by akl432 Thanks, all, so much great advice and insight! You have all been so helpful in articulating the downsides and risks of my existing portfolio. As I think further through how I am going to execute my asset allocation changes, I would really appreciate your recommendation: As I start to sell the bonds/stable value and put that money into equities, which part of my portfolio should I keep in bonds/stable value - the 401K or the taxable accounts?

Generally speaking you want income producing securities like bonds in a tax deferred account because dividends and interest is taxed at whatever tax rate you're in. In contrast, long term capital gains from selling equities are capped at a tax rate of 20%.

Don't let worrying about this stuff paralyze you, start moving your savings account money into your taxable account and invest it in equity funds. For now look for funds that don't pay dividends and don't pay capital gains distributions. Index funds are usually ideal in this regard. One way to tell if a fund pays capital gain distributions is to look at the fund's turnover rate. Low turnover rates, say less than 20%, means the fund manager doesn't buy/sell individual stocks too often within the fund, so doesn't create a capital gains event that could be passed on to you.

With your relatively high annual income it could be that you are in a particular tax bracket with a lot of headroom and income from dividends and interest won't push you into a higher bracket. In this case you wouldn't need to be super concerned about having income producing investments in your taxable account.

With your high income and higher balances in your accounts you're going to want to get some advice from a tax pro. A tax pro can look at your overall income and your tax bracket and help you strategize what accounts to put equities and bond investments to lower your tax burden.

But start making money moves now.

[akl432]

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Originally Posted by Qs Laptop Generally speaking you want income producing securities like bonds in a tax deferred account because dividends and interest is taxed at whatever tax rate you're in. In contrast, long term capital gains from selling equities are capped at a tax rate of 20%. Don't let worrying about this stuff paralyze you, start moving your savings account money into your taxable account and invest it in equity funds. For now look for funds that don't pay dividends and don't pay capital gains distributions. Index funds are usually ideal in this regard. One way to tell if a fund pays capital gain distributions is to look at the fund's turnover rate. Low turnover rates, say less than 20%, means the fund manager doesn't buy/sell individual stocks too often within the fund, so doesn't create a capital gains event that could be passed on to you. With your relatively high annual income it could be that you are in a particular tax bracket with a lot of headroom and income from dividends and interest won't push you into a higher bracket. In this case you wouldn't need to be super concerned about having income producing investments in your taxable account. With your high income and higher balances in your accounts you're going to want to get some advice from a tax pro. A tax pro can look at your overall income and your tax bracket and help you strategize what accounts to put equities and bond investments to lower your tax burden. But start making money moves now.

Thank you for pushing me -- I am setting up a transfer today to move funds from my savings account to my taxable Vanguard account, buying VTSAX. Updated: I made $80K in changes today (equities).

[akl432]

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Originally Posted by Aerides Healthcare can vary quite a bit, state to state, year to year, and as you age. In FL, we're on a subsidized plan for two this year of $450 per month, $6500 pp deductible, and we're pretty happy with that. No one can remotely project what the costs will be in 8 years, or what the laws will be, so for now, a swag placeholder in your budget in the range of $20k is probably smart, as a starting point. More if you'll retire with minor children. Same for taxes, so I'd probably add something like 15% to your budget for that (again swag, years out.) For housing, maintenance, repairs, I've seen someone say to budget about 1% of your house value per year. That sounds about right to me, realizing some years will be much lower, but then the new-roof-year balances things out. Don't get too worried about being precise this far out, but do cast a wide net for a good big picture.

This is very helpful - thank you!

[WhenIsItTime]

I agree that the significant holdings in gold and high-yield accounts are way too conservative for someone with >5 years to retirement and trying to support retirement for 30+ years. The time horizon allows for weathering a market dip.

If you have held the gold for 3 years, its value probably hasn't covered the cost of inflation. Meanwhile a simple S&P 500 investment would be up 50%.

[akl432]

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Originally Posted by Col. Klink Hi!, I've got an idea. After reading back through this entire thread, OP, you may be a good candidate for the Vanguard Advisor Program. You appear to be a Vanguard client already since you inquired about their municipal bond funds and also appear to be someone who may enjoy and benefit from professional advice and portfolio management. Information about the program is on their website. Basically they will do a financial (investment) plan for you and execute it on your behalf following an interview that they will do with you via Skype or Facetime. You can even go to their offices in person if you wish. They will consider your assets, goals, and tolerance for risk in the plan. Their fees for the service provided are among the best, if not THE best, in the financial services industry. I would at least call them and talk with them about the program.

Thank you! I will research this!

[akl432]

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Originally Posted by HNL Bill 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!

Could I ask what date you recommend for the "Include performance since" date"? It defaults to 1871.

[akl432]

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Originally Posted by Col. Klink Hi!, I've got an idea. After reading back through this entire thread, OP, you may be a good candidate for the Vanguard Advisor Program. You appear to be a Vanguard client already since you inquired about their municipal bond funds and also appear to be someone who may enjoy and benefit from professional advice and portfolio management. Information about the program is on their website. Basically they will do a financial (investment) plan for you and execute it on your behalf following an interview that they will do with you via Skype or Facetime. You can even go to their offices in person if you wish. They will consider your assets, goals, and tolerance for risk in the plan. Their fees for the service provided are among the best, if not THE best, in the financial services industry. I would at least call them and talk with them about the program.

Thanks for this recommendation. I have had two calls with them so far, and I am probably going to go with them. I don't have the skill and interest in doing the periodic rebalancing of my portfolio (I tried to do it myself and struggled). This is a good fit for me.


Also, I put a large portion of my savings account funds into VTSAX, so I took a huge step! I will invest the remainder after meeting with the Vanguard advisor again.


Thanks to everyone for your feedback and suggestions! I am on my way to building a more suitable plan. You all are the best!

[Qs Laptop]

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Originally Posted by akl432 Also, I put a large portion of my savings account funds into VTSAX, so I took a huge step! I will invest the remainder after meeting with the Vanguard advisor again.

Excellent! It's kind of an intimidating step to take but you are going to reap the rewards in the years ahead. Congratulations.

[akl432]

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Originally Posted by Qs Laptop Excellent! It's kind of an intimidating step to take but you are going to reap the rewards in the years ahead. Congratulations.

Thank you (and everyone else) for firmly encouraging me to take the steps!

[2177V]

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Originally Posted by 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. If there is any additional information needed, please let me know. Thank you in advance for your input!

I am already retired and I discovered that investment strategy is completely different during retirement.

I keep a portion of my portfolio into stock funds and a portion into bond fund. My bond funds portion are designed for liquidity and low volatility. My stock funds are designed for performance and less liquidity.

Liquidity becomes important "during" your withdrawal phase and Liquidity was NOT a major factor "before" retirement. A good liquidity and low volatility is VFSTX which is rated 4 star Morningstar. Review the quarterly returns and you will note the quarterly returns are small but the losses are also small. I do not look at the 10 years performance because this fund will be liquidated within 5 years or even sooner. I keep at least 5 years of retirement income in low performance but high liquidity bonds because any market crash "should" recover within 5 years and you need these bond funds to be liquid as your rainy day funds. If you are risk adverse, you can up this to 7 or even 10 years of retirement income.

My stock portion are designed for performance and diversification. As I liquidate my bond funds, i need to replenish it with my stock funds. Since i have a diversified portfolio of stock, I then select the stock fund that is higher in value than the other stock funds to maintain the "sell high" strategy. Your portfolio does not have sufficient diversification to play this game. I also do not like co-mingling funds with different asset classes because you also cannot play this game. Co-mingled stock funds works OK before retirement but they are problematic during liquidation because you may be selling low in some portion of that specific co-mingled fund.

Finally, after I liquidate a bond fund for my retirement income in January to fund my expenses for 1 year, I watch the market carefully before deciding which stock fund to liquidate. For example, I have already liquidated a bond fund but I am waiting for the China Trade agreement to be finalized which should cause the stock market to rise predictably. Afterwards, I will exchange one of my stock fund for a bond fund to maintain 5 years of liquidity in my portfolio.

I noted that you are 11 years away from retirement. You can be more aggressive since you are more than 5 years away from retirement. However, the 5 years is my personal opinion of a stock market recovery time and everyone's opinion is different. However, 11 years is a long time so i question why you have high liquidity in your portfolio. Once you understand how to manage liquidity then you will become a better investor.

Hope this helps.

[Oakster]

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Originally Posted by 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.

You only lose it if you sell

[2177V]

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Originally Posted by Oakster You only lose it if you sell

I agree with Oakster 100%. I strongly recommend investor google "Recovery times after a stock market crash" ...or after a bear market.

Beginner investors worry about market crashes and a bear market. They panick and then they sell. However, this locks in their losses.

Seasoned investors NEVER sell stocks because stock market crashes and bear markets comes with the territory. It is the recovery time that are more important because a stock market crash or a bear market "freezes" your stock investments and you cannot sell stock investment until the market recovers. However, the market ALWAYS recovers but it is the recovery time that should be considered in your strategy.

In order to hold you over until the stock market recovers, you need an asset class that holds it value such as cash or short term treasury bonds. After you read about the "Recovery times after a stock market crashes or bear market" on google......you will realize that a smart investor takes all of these factors into account.

This means "liquidity" becomes important during a stock market crash or bear market. If you do NOT have sufficient liquidity, you may be forced to sell stock assets at a loss. If you DO have sufficient liquidity as I discussed in a previous comment #50, then you avoid this problem.

This is why I stress liquidity and making sure some of your assets will hold their value during a crash or during bear market. You can then simply wait until the market recovers. i stating this as my personal opinion based on years of investment experience.

[kgtest]

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Originally Posted by akl432 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!

Oi, alot here but you nailed it, you are too risk averse. Although you've done quite well for having that stance. Your numbers make me bleed with envy. paid off house, 500k in cash, NO KIDS lol...yeah you actually just depressed my independent FIRE journey haha.