Goals, Reality and Quirks // Our Asset Allocation

don’t let any of our more philosophical posts fool you — we’re still total nerds, and we love tracking every possible aspect of our early retirement plan as much as the next guy. but, we don’t share our numbers here (read this if you’re curious why not), which has sometimes made it tough to explain some of our more unique circumstances, like our need for a two-part retirement. bottom line: we have a lot in funds we can’t touch or don’t want to touch for a long time, and far less in the funds that will need to sustain us for the first 20 years of our retirement.

but, as the reading rainbow kids would say, don’t take my word for it! (anyone? bueller? — oh, wait — do millennials know ferris bueller??? please tell us you guys know ferris bueller, for the love of ben stein! and please say you know ben stein! wow, big digression. but please reassure us that 80s pop culture won’t go to the grave with gen x!)

back to not taking our word for it. you can take our pie charts for it. here is our current asset breakdown, crunched a few different ways, based on different definitions of net worth. at the end is our current allocation of new investments, which shows how we’re trying to balance things out.

AssetAllocationFull2015

the first chart is our full picture, including the equity in our home and in our rental property. but no matter how you slice it, you see that our 401(k) funds (invested in the limited number of mutual funds we each have available on our plans) make up a huge percentage of our assets. home equity is also a big chunk, which is meaningless if we stay put, but meaningful if we decide to downsize and convert that equity into a smaller home.

AssetAllocationNonHome2015

in the second chart, we’ve taken out home equity, but kept rental property equity because we could sell that property and get that equity back. we view that as a semi-passive income-generating asset, and plan to hold it and make money on it after the mortgage is paid off. but of course that could change.

AssetAllocationLiquidOnly2015

the third chart is the most accurate reflection of what we have to spend in retirement, with real estate equity taken out. and any two-year-old could see that one piece of pie is a lot bigger than the other pieces. we really got after our 401(k)s early on, and this chart is a nice pat on the back. except that there’s that whole matter of not being able to access that money until 59 1/2. we know all about roth conversions, and we may convert some of these dollars to roth so that we can spend them sooner than 2036, but we also like having a more comfortable cushion waiting for us when we get older. this suits our dirtbag dreams just fine: travel cheaply and live simply while we’re young and able-bodied, and then live and travel more comfortably when we’re older and have worn our our joints and backs. and — more importantly — we’re saving a lot more in our index funds right now than the 401(k) limit, and will have evened that imbalance out (well, almost) by the time we retire in two and a half years.

AssetAllocationCurrentInvestments2015

this final chart shows our current investment allocations each month. we’re still putting enough into our 401(k)s to get our full employer matches, and we’re close to maxing out. we’ve dialed back our 401(k) allocations just a smidge, though, to try to dial up our investments into our index funds, so that we’ll have enough in there to get us through the first 20 or so years of retirement. this chart shows how aggressively we’re getting after those index funds!

what do you think of our imbalanced pie? we’re not reflecting the full diversification of our mutual funds and index funds, though you can see that we prefer not to own individual stocks or commodities. and our cash balance gets drawn down to a comfortable emergency fund level each year as we dollar-cost-average that money over to our vanguard account. fun times. ;-)

Want extra Our Next Life content? Get the e-newsletter!

Anon-in-snow

Subscribe to get our bimonthly newsletter with tons of top secret info we'll never share here on the blog. It's like a whole extra post or two a month!

No spam or slimy sales pitches ever. Unsubscribe any time -- no worries! Powered by ConvertKit

27 thoughts on “Goals, Reality and Quirks // Our Asset Allocation

  1. The thing I love about this path to FI is that there are many paths. Everyone gets to choose, based on their own circumstances and affinities, where they put their money. And how much. And for how long. I might take a different approach from the one I am taking now if I were 50 or 60 years older. At the end of the day, there are probably several ways I could get to FI and gain wealth. If my goal was 10-20MM net worth, I probably wouldn’t be pursuing an academic career. But it’s not. I mean, I wouldn’t turn down an offer. It’s just not up there on my priority list. But income investing for the future flexibility to spend my time with my partner as I please: sign me up!

    (And yes, at least this millennial knows Bueller. And Mr. Stein :P).

    P.S. I like the charts!

    1. THANK YOU for restoring our faith in humanity, er, 80s movies. :-)

      We’re definitely on the index fund side instead of income/dividend investing, but it’s the same idea — don’t lock up your money into tax advantaged funds that force you to keep working until at least 60! It’s great you figured out at such an early age that you want to create a different path for your own life. :-)

  2. Have you looked into 72(t) withdrawals for your 401k?
    The saving allocation for early retirement is a bit of a mind boggle. Not only do you need to save enough to the end, but you also need to save enough to use before you hit 59.5. The system is not set up to escape early.

    1. We’ve looked into those, but honestly, given all the things we could have to deal with as older people (especially thinking about health care costs here), we’d rather keep as big a cushion as possible for our later years, and avoid touching that money altogether. Of course that means we’ll be living leaner in the intervening years, but we think we can handle it.

      As for the calculations, we’ll say this — it’s a lot of spreadsheets! The 401k piece is easy — simple 4% rule. But the first 19ish years require a set of assumptions, and projections about how much we’ll take out. We assume numbers close to the 4% rule assumptions — 3% inflation, 4-9% market growth. So if we hit our targets by the end of 2017, we’ll have enough to either scrape by until we reach 59 1/2, or we’ll have a decent cushion remaining, depending how the markets do. How’s that for Monday TMI?? :-)

  3. My net worth isn’t even as diversified as yours. Mine is 401k/IRA (index funds), brokerage account index funds, some individual stocks, and cash for the most part. I like my imbalanced pie. Index funds give me peace of mind. I don’t worry about them. I just buy them and let them grow. Sometimes they shrink, but that’s okay too – it’s part of the ride. Everyone is different and some would want 15 pieces of their pie but that’s too much for simple Mr. FF.

    1. We’re with you — simple is better! We have a few individual stocks in that tiny sliver, purchased long ago, but we get zero thrill from chasing individual stock gains. We just like the peace of mind of index funds, and that’s where we’re sinking almost all of our dollars now, except that little slice to 401(k)!

  4. Another millennial here, and yes, I know Ben Stein & Ferris Bueller :). Faith in humanity restored! I love that you plan to travel cheaply and widely as young and spry individuals first, and then scoot over to the (relative) lap of luxury travel when older.

    1. Thank goodness. :-) I like that — “young and spry.” That sounds so much cooler than we actually are! But we’re happy to camp in a tiny trailer for our 40s and 50s, and then have that cushion for health care costs once we get older and our bodies are worn out! :-)

  5. The where (401K/rental/…) of the assets is something I look less at. What is more important is the what (asset allocation : stock vs bonds / globally diversified).

    Next to that, Having a some equity in rental equity is less of a concern to me. In the end it comes down to having passive income that feeds your expenses. Hence, the second pie chart is my favorite one. It shows that quite some income has to come from renting out. It also shows that a lot of your net worth is tied up in a 401K, so you need so tricks to get money out of there.

    1. It would definitely be reasonable to pull some of that 401(k) money out through Roth conversion, but we like knowing that we’ll have a cushion when we’re older and have higher health care costs. And we’re saving taxable money fast now, so the overall allocation mix should look different next year, and even more so before we retire.

  6. I think our pies would look mostly like yours, a lot of index funds and very few single stocks. We don’t chase those, but aren’t above investing in some strong steady stocks. Anyway, Like MM pointed out, there are many paths to get to FI. Ours is different than yours and almost anyone else’s. We too hope to still be spry enough to go do things and share them with the kids before they’re gone and we get too creaky.
    I hadn’t even considered millennial’s not knowing Ferris Bueller, Gah!

    1. Reading your latest post and seeing that you can still FIRE on a reasonable timeline with only a single income made us see that you guys are in the big leagues. So whatever you’re doing, keep doing it! :-)

  7. Excellent job on asset allocation. Our pies would look slightly different where our housing value dropped, but we have about half in mutual funds (employer 401(k)s and the other half in individual equities. I started investing in equities when I turned 18 and it has outperformed the employer plans. I don’t believe in holding much cash and only keep a few years worth. Every dollar we make gets invested in individual equities. It’s like a chess game and I love controlling the pieces!

    1. So great that approach is working for you! We are definitely in the camp of not wanting to have to pay too much attention to the markets, so we put all our extra dollars into index funds, but we definitely see the appeal. of choosing exactly what you want to invest in!

  8. My net worth is pretty unbalanced as well. My pie chart looks even worse than yours: 50% condo equity, 20% pre-tax retirement accounts, 10% after-tax retirement accounts, 10% cash, and 5% index funds/I-Bonds/ESPP. My index funds account will take years before it will be a decent portion of my net worth since I have funded my 401(k) and condo equity so aggressively. I’m totally fine with that though as I’m still in my twenties. If I keep working at my current career for another 10 years, so until my late thirties, I would only get my index funds account up to ~1/3 of my net worth and then I could actually quite possibly live off of my taxable account forever, without dipping into my sizeable retirement accounts… And of course, my investments are well diversified with US and international stocks and fixed income :)

  9. I’m on a similar path, save the rental property. I’ve got the same lopsided 401(k)/taxable account pie. Like you, I’m quickly filling the taxable (index funds) side with lots of sweet, gooey goodness. My range is 1.5 – 2.5 years. But I’ve got some compensation variables somewhat outside my control.

    I suddenly have a strong desire to play hooky.

  10. Another great topic guys! I’m particularly glad you are drawing attention to the fact that anyone that really wants to retire early (prior to 59 1/2) has got to save considerable funds into non-retirement style accounts. Some of the mainstream financial folks seem to neglect this concept or maybe they just think that retiring at 59 1/2 is considered early. This realization was a big epiphany for my wife and I about 6 years ago and it has definitely made a massive difference now in our ability to realize our goals and have the freedom to step away from “working for the man” when we are young and nimble!

  11. I have about half my retirement fund in a traditional IRA (rollover from 401ks) and the other half in a Roth. I like the Roth concept, because I know that every dime in there is mine, i.e. I don’t have to worry about taxes. I also like that I can draw on it if necessary, but I don’t plan to do that, ever in my life. Since I am only 41, I also don’t like to rely on a certain bottom line ‘amount’ of money and hope it lasts. I like cash flow from rental properties and am working on other cash flowing business ideas. This way, I know that I have income to cover my expenses for the rest of my life. I also have a 2-year emergency fund just in case all my rental income went away all at once, which is really unlikely though. Also, since my rental income covers my expenses, any freelance or earned income goes right back into more investing… whether the Roth IRA, real estate or more business ideas. I definitely recommend to most people to have more diversity from the standpoint of cash flow over solely tapping into a dollar figure account. It doesn’t have to be real estate, but it is a great feeling to have a regular income and not tapping into retirement funds even after leaving the corporate world!

Comments are where the magic happens! Let's chat!