Author Topic: Asset allocation for barista-y FI?  (Read 867 times)

fell-like-rain

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Asset allocation for barista-y FI?
« on: May 08, 2018, 09:17:46 AM »
My current FI date, based on current expenses and income, is in about 9 years. I don't really dislike work as such, but I'd like to do something I enjoy more and that has more ability to take large chunks of time off. As of now, my rough plan is to downsize career-wise in 5-6 years and leave BigTech for hourly or nonprofit work. Ideally, I'd end up working 75% time and take maybe 1% in withdrawals annually to help cover expenses. (I live pretty cheaply, so I could probably make it work without withdrawing, but I don't want to rely on that assumption.)

When I started up my investment accounts (401(k), Roth IRA, and taxable), I just threw everything into the Vanguard target date fund for my age group, as I hadn't really thought about early retirement yet. However, with the possibility of beginning withdrawals inside a decade looming, the current 90/10 allocation seems a bit risky. Obviously, I have a lot of flexibility- if the market tanks, I could just stay in my current line of work or work full-time doing something else, and not touch the investments. Still, without a 40-year investment horizon, being so heavily exposed to equities doesn't quite sit well with me. Thoughts?

(Also, if anyone knows of good resources about which assets to put in taxable vs sheltered accounts, please let me know- the ones I've found haven't been super clear/sensible)

RichMoose

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Re: Asset allocation for barista-y FI?
« Reply #1 on: May 08, 2018, 09:32:30 AM »
My current FI date, based on current expenses and income, is in about 9 years. I don't really dislike work as such, but I'd like to do something I enjoy more and that has more ability to take large chunks of time off. As of now, my rough plan is to downsize career-wise in 5-6 years and leave BigTech for hourly or nonprofit work. Ideally, I'd end up working 75% time and take maybe 1% in withdrawals annually to help cover expenses. (I live pretty cheaply, so I could probably make it work without withdrawing, but I don't want to rely on that assumption.)

When I started up my investment accounts (401(k), Roth IRA, and taxable), I just threw everything into the Vanguard target date fund for my age group, as I hadn't really thought about early retirement yet. However, with the possibility of beginning withdrawals inside a decade looming, the current 90/10 allocation seems a bit risky. Obviously, I have a lot of flexibility- if the market tanks, I could just stay in my current line of work or work full-time doing something else, and not touch the investments. Still, without a 40-year investment horizon, being so heavily exposed to equities doesn't quite sit well with me. Thoughts?

(Also, if anyone knows of good resources about which assets to put in taxable vs sheltered accounts, please let me know- the ones I've found haven't been super clear/sensible)
The most important factor is not doing anything reckless during a market downturn. To be clear, with a 90/10 portfolio your investment accounts could drop in value by 50% in a larger market crash. Historically that type of downturn would take 5 or more years to fully recover (peak to new high with no withdrawals). If you are a solidly unemotional person when it comes to money, then an aggressive allocation is great. If you are prone to worry, then a more cautious approach would probably serve you better.

Also, don't be too fooled by the idea of going very stock heavy for big returns. A 60/40 portfolio only returns about 1% less annually over time than a 90/10 portfolio. From 2007 to 2018, a 60/40 portfolio would have grown at 5.5% annually. That's virtually identical to a comparable 90/10 portfolio. My point is not to argue that stocks don't perform better than bonds... they do over very long time periods. But rather to state that the cost of bad knee-jerk reactions to market corrections is likely to be much higher than the cost of allocating more to bonds.

As for tax efficiency resources, I think the Bogleheads wiki lays it out pretty clearly. https://www.bogleheads.org/wiki/Tax-efficient_fund_placement
« Last Edit: May 08, 2018, 09:34:01 AM by RichMoose »