Author Topic: AA for 10-year early retirement horizon  (Read 557 times)

Jacobi

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AA for 10-year early retirement horizon
« on: January 25, 2019, 07:25:01 PM »
Let's say a young person is starting from scratch with a good salary, saving 67% of his/her take-home pay, and wanting to get FI as quickly as possbile. Let's say they're only going to invest in two funds: Total Stock Market and Total Bond Market. What asset allocation is ideal?

Should it be 100/0 because they're young and it will give them the best chance of growing the money quickly?
Should it be something like 60/40 to better protect their savings since the timeframe is short (10 years, let's say)?
Somewhere in between?

Andy R

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Re: AA for 10-year early retirement horizon
« Reply #1 on: January 25, 2019, 09:03:10 PM »
Make a spreadsheet and you will see that over very short periods like 10 years when starting with very little, 70/30 doesn't perform much differently than 100/0 using average expected returns of stocks and bonds because compounding simply does not have time to do much at all. The insignificance is important to see in real numbers.

Edit: attached one for you.

Tyler

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Re: AA for 10-year early retirement horizon
« Reply #2 on: January 25, 2019, 09:22:52 PM »
Let's say a young person is starting from scratch with a good salary, saving 67% of his/her take-home pay, and wanting to get FI as quickly as possbile. Let's say they're only going to invest in two funds: Total Stock Market and Total Bond Market. What asset allocation is ideal?

I have a feeling you'll find this Financial Independence calculator interesting as it explores this very topic.  You can set your AA and savings rate and it will calculate every accumulation timeframe since 1970 simultaneously to show the range of years it took to reach FI.

Different portfolios will have different spreads of returns, so maybe you can use this to find something you're comfortable with.  However, no matter what portfolio has the best numbers on paper, IMO the ideal portfolio is the one you'll be willing to stick with through thick and thin.  With a 67% savings rate, lots of asset allocations will serve you well.
« Last Edit: January 25, 2019, 09:34:35 PM by Tyler »

Jacobi

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Re: AA for 10-year early retirement horizon
« Reply #3 on: January 25, 2019, 11:02:36 PM »
Thanks for the input!

nereo

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Re: AA for 10-year early retirement horizon
« Reply #4 on: January 26, 2019, 08:44:05 AM »
Let's say a young person is starting from scratch with a good salary, saving 67% of his/her take-home pay, and wanting to get FI as quickly as possbile. Let's say they're only going to invest in two funds: Total Stock Market and Total Bond Market. What asset allocation is ideal?

Should it be 100/0 because they're young and it will give them the best chance of growing the money quickly?
Should it be something like 60/40 to better protect their savings since the timeframe is short (10 years, let's say)?
Somewhere in between?

Your age is as important here as your retirement date.  Someone who plans on retiring in 10 years at age 65 will have a different AA than someone who does the same at age 40.  A 40 year old will need his/her portfolio to survive 50+ years, whereas the 65yo might be ok with half this.