Asset allocation as we get closer to FIRE

[WorkingToUnwind]

We're about five years out from FIRE. Up 'til now, we've had all of our money invested in the S&P 500, VTSAX or something similar, depending on the account. We're also investing in our mortgage, I suppose. We're about eight years out from owning the home. As we're getting closer to FIRE, I'm wondering about a slightly more conservative asset allocation. I'm in my mid thirties and DH is early 40s. Should I switch some funds over to bonds or something else more conservative?

[ixtap]

In your case, if you do decide you are ready to add bonds, you might want to just switch where you put new contributions in traditional accounts, such as 401k.

We sat down and chose a more conservative allocation when we were within spitting distance of our minimal FI number. Just couldn't bear the thought of losing 40% at that point. I had hoped to convince DH to change his allocations to be more in line with mine, but he chose a slightly more conservative allocation yet, and we did go 70/30 overnight. Because we are relatively conservative, we put all new monies to stocks and rebalance twice a year. We will keep this allocation into retirement.

[Catbert]

Regarding changing you asset allocation, do it in way that eliminates/minimizes taxes.    Do it inside an IRA/401k, or just new money or have dividends and internal capital gains paid out rather than reinvested.   Or if you have anything in taxable accounts that currently have a capital lose, sell 'em now.

With regards to your house, I would aim to either slow down and ride that low percentage rate out as long as possible OR aim to have it paid off by ER.  Having it paid off facilitates ACA (and similar) subsidies because of low income. 

With regard to you actual question regarding asset allocation, plan what your income needs and sources will be for the first 5 years of ER.  What dividends/internal capital gains does your current allocation generate?  Do you have rental properties or other investments that pay out cash?  Any pensions, part-time jobs or similar that'll generate cash.a  At one point (when interest rates were higher) I had  zero coupon muni bond ladder with one maturing each year.  If you plan to do a Roth conversion pipeline, remember the first 5 years you'll need *double* income (and maybe taxes): what you need to spend for that year, plus a similar amount to convert for 5 years later.

[Saving in Austin]

This is a good website around asset allocation: https://portfoliocharts.com/

We used to be 100% VTSAX but have gotten more conservative approaching FI.

[WorkingToUnwind]

Thanks everyone. I'm going to discuss all with DH at our monthly finance meeting. :)

[LightStache]

I'm also about five years out from FI with an 85/15 AA. I consider myself moderately risk tolerant and with my current AA, I expect a maximum potential reduction in my portfolio of 35%.

If bonds weren't so richly valued, I'd probably allocate more (maybe 20%??) and will likely move that direction over the next five years. I could see myself at a 70/30 AA by the time I FIRE, but no more conservative than that.

Of course we've been on a 13 year tear of awesome returns. A repeat of 2009 could have me changing my tune!

[Malossi792]

If you haven't yet, take a look at the swr series at the earlyretirementnow website.
It's quite a read!

[cool7hand]

This is a good website around asset allocation: https://portfoliocharts.com/

We used to be 100% VTSAX but have gotten more conservative approaching FI.

We used the All Seasons Portfolio from the above list starting about five years out from FI and have used it since FIRE. We did so because it's a lower volatility portfolio.

[boarder42]

I have a unique situation in that 20% of our invested assets are sitting in a private ESOP that's avgd 25% since inception.  And I won't be paid out on it til 1.5 years after I retire. So I just treat that as my bonds and never ramped down equities pre fire.  In June 2023 I'll put that in long term treasuries which timing should be pretty great for too with all the large rate hikes this year and early next year the fed is predicting.

[reeshau]

I'm in my mid thirties and DH is early 40s.

Considering something more conservative is appropriate, since you will start to withdraw funds.  I just want to point out that you have 50 more years to live, so you also need to keep your investments growing, to combat inflation over that length of time.

The suggestions here are fine, as they are focused on early retirees.  I just hope you aren't looking at general retirement advice and thinking 60/40 or something.  Bill Bengen's original 4% rule was developed with a 50/50 assumption, but only a 30-year time horizon.  The Trinity study found 75/25 had the best "survivability" (scenarios with 100% chance of success) but still showed 100% stock allocations to have the highest potential return over long timespans.  (At the cost of some percent of failure)

Do what you need to do the sleep at night, both in terms of market volatility, and expectations into your old age.