Author Topic: pre-FIRE allocation question  (Read 975 times)

tmitchell

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pre-FIRE allocation question
« on: January 28, 2017, 02:03:22 PM »
I currently have 1MM saved at 75/20/5 allocation** and am trying to figure out a plan for the next 5 years or so. I have saved all of this over the past 9 years in the midst of a bull market working my butt off in a high stress job, but I'm not a cowboy when it comes to risk (likely because I accumulated my $ relatively late in life). While I know I can't time the market, I also know a correction is coming at some point. I am not ready to quit working just yet because I'm not miserable in my career and still have some savings to do if I stay the current course. But I'm also turning 50 years old and really don't want to see my nut suddenly disappear. So I'm thinking of a couple strategies for peace of mind and would like to hear your thoughts:

I live in a high COL area with about 60k/yr in expenses. While I'm not ready to pull the plug and quit working entirely, I have an eye towards downgrading to a lower stress/lower paying job in the next 1-2 years. If I were to stay in the same city I'd need 1.5MM minimum to actually FIRE, so I'd have that number as an overarching goal (even though I'm flexible since I'm not sure if I want to stay or eventually go to a lower COL place etc...TBD). Given that what would you say to the following options:

1) Keep the 1MM as is, 75/20/5. This allows for about one year living expenses in cash (50k), plus another 3 years or so fixed income (200k) in the event of a major correction, in which case I wouldn't have to touch equity portion in that event. This gives me the peace of mind knowing I could easily ride out an average bear market. As I keep working, keep investing into a 75/25 portfolio in the hopes that I'd be picking up some extra shares if/when the market declines.

or

2) Move the 1MM into a 60/40 portfolio for a better sense of security, and then continue to invest in a 75/25 AA going forward to gradually increase exposure (this was inspired by Wade Pfau's idea of increasing equites after retirement).

3? Maybe you have a better idea/perspective??

Couple caveats:

a)  **Appx 668k in taxable, 332k deferred
b) I have no pension, so this portfolio is it (+SS if that happens)

Love to hear your thoughts, thanks!

Classical_Liberal

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Re: pre-FIRE allocation question
« Reply #1 on: January 28, 2017, 02:10:33 PM »
Examine the drawdown possibilities for each of your allocations, and maybe some others.  Do some soul searching and put yourself in the situation of historical worst case drop for each allocation, would you hold the course?   Would you sleep well at night?  Is a legacy important to you?

https://portfoliocharts.com/calculators/

PS You dont have to keep the same allocation through your entire retirement.  The first 10 years (of a 30 or so year retirement) sequence of returns is at it highest.  If you hold up well through the first 10 years, then inflation becomes your primary enemy.

DavidAnnArbor

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Re: pre-FIRE allocation question
« Reply #2 on: January 29, 2017, 10:51:31 AM »
Maintaining a high percentage in stocks is historically the way to grow your portfolio the most.
Perhaps a strategy would be to have a sideline income so that when you retire from your main gig, if the stock market suddenly corrects, that sideline is there to assist you overcome the difficult market conditions.

ChpBstrd

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Re: pre-FIRE allocation question
« Reply #3 on: January 31, 2017, 11:31:37 AM »
I like your option #1, except that $50k is a lot to leave sidelined. You can earn 4-5% (i.e. 2k - 2.5k a year) in some lower-volatility funds of preferred stock (PFF) and/or REITs (VNQ). After 2-4 years, the cost of holding that cash on the sidelines will exceed the amount you would have lost selling low in a bear market.

In terms of better ideas... could you swing $35-40k in annual spending in a low-cost area? If so, you can retire right now.