3 Years out - recommended allocation?

[NoRegrets]

Hello, first post here.

My current NW is approx $1M.  I am 55.  My plan is to FIRE in just under 3 years at $1.4M at age 58.5.

My assets are:
Home equity: 140K
401K\Roth: 700K
Taxable mutual funds:  150K
Cash: 35K

My question is about allocation.  Currently my funds are pretty much in S&P 500 index and and small\mid caps.  However, I'm real low on bonds.  With my time horizon being 3 years, should I move some percentage into VBMFX, perhaps in the taxable mutual funds?  Or, should I just throw start building the bond fund now with the additional 200K that I plan on adding in the next 3 years?

My withdrawal plan is roughly to eat up the taxable savings account in early retirement, balancing any 401K withdrawals to maximize lower tax bracket and staying within Obamacare subsidy limits.

Thanks!

[andy85]

i was just reading this thread yesterday...you may want to check it out. Talking about different glidepaths leading up to and immediately following retirement. There are some good articles linked in the thread as well.

https://forum.mrmoneymustache.com/post-fire/when-did-you-start-building-your-sequence-of-return-risk-stash/

[friedmmj]

I’m in a similar situation and have my retirement accounts at 60/35/5 stock/bond fund/money market allocation.  I’ve been moving the stocks down gradually the past two years.  Main objective at this time is to avoid having to delay retirement while at the same time protecting against inflation risk.

Your idea about plowing new money into bonds over the next 3 years is solid but you may also want to reallocate some of that 700k now in order to protect against a large drop in the market.

[mathlete]

100% bitcoin

Really though, congratulations on being so close!

My advice would be to pay a fiduciary financial adviser a few hundred bucks to get their opinion.

[NoRegrets]

Main objective at this time is to avoid having to delay retirement while at the same time protecting against inflation risk.

This is my objective as well.  I "could" continue to work if there was a big correction but I guess the entire existence of this movement is based on putting yourself in the position to NOT have to...

[SaucyAussie]

My question is about allocation.  Currently my funds are pretty much in S&P 500 index and and small\mid caps.  However, I'm real low on bonds.  With my time horizon being 3 years, should I move some percentage into VBMFX, perhaps in the taxable mutual funds?  Or, should I just throw start building the bond fund now with the additional 200K that I plan on adding in the next 3 years?

Thanks!

I'm not an expert at all, but I have read that bonds should be kept in the tax advantaged accounts and the non tax advantaged accounts should be stocks.

[HeadedWest2029]

I'm not an expert at all, but I have read that bonds should be kept in the tax advantaged accounts and the non tax advantaged accounts should be stocks.

I don't disagree, but smart people also argue the opposite.  It's complicated
https://www.whitecoatinvestor.com/asset-location-bonds-go-in-taxable/
https://www.bogleheads.org/wiki/Tax-efficient_fund_placement#Tax_efficiency_of_bonds

I've always enjoyed this AA calculator personally.  It hasn't been updated to reflect the new tax brackets, but it does a good job IMO
https://www.bankrate.com/calculators/retirement/asset-allocation.aspx

Also, Big ERN's SWR stock series would be great for determining your AA
https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/
In particular, this graphic for the TLDR version
https://i0.wp.com/earlyretirementnow.com/wp-content/uploads/2016/11/swr-part1-table1.png?resize=764%2C500&ssl=1

[FIREstache]

My current NW is approx $1M.  I am 55.  My plan is to FIRE in just under 3 years at $1.4M at age 58.5.

That's not too far off from me.  I'm 54 with a $1.4M stash and plan to retire by May 2020 at age 55 with  $1.4 to $1.5M (if the market doesn't drop off before then).

I was 80% equities until July 2018, dropped to 60% at that time, and I have dropped recently to about 45% equities.  The rest is in bonds, fixed interest, CDs, money market, and cash.

My stash is already high enough to provide a comfortable retirement at age 55, so I'm not needing to be aggressive with my investments now.

[PhilB]

I think a lot depends on what your plans would be in a downturn / how fat your FIRE is.  You need to decide that first and let that drive what your allocation looks like.  Personally, I'm happy with the idea of reducing spending by 20% if the markets are down 40% so I'm staying with global equities and just a year's worth of cash to take the edge off the swings.  Then again, I know we have pensions kicking in in 10 to 14 years which helps me be more sanguine about risk.  Basically find the strategy that works for you then build your portfolio to match.

[Laura33]

One option to consider:  rather than focusing on your overall asset allocation, use your new investments over the next three years to set up a bond ladder.  I.e., buy individual bonds with a three-year maturity - buy what you think will cover one year’s expenses every year.  So then when you quit, you have your first year’s expenses guaranteed as the bonds mature.  You can then sell enough of your investments to buy more bonds that mature in another three years to keep the ladder going - but if the market has crashed, you can just wait until it recovers to sell and replenish the ladder, because you know you can survive for three years without having to touch your ‘stache.

Note:  do this only with individual bonds and CDs, because the point is to ensure a guaranteed amount of money at a given date.  Individual bonds will mature and pay you back the stated amount on that date; bond funds will fluctuate, because the fund manager will buy and sell bonds and won’t hold them to their maturity. 

The benefit of this approach is that you can continue to keep all of the rest of your money in VTSAX, because you have sufficient guaranteed income to ride out any market dips.

[BTDretire]

My current NW is approx $1M.  I am 55.  My plan is to FIRE in just under 3 years at $1.4M at age 58.5.

That's not too far off from me.  I'm 54 with a $1.4M stash and plan to retire by May 2020 at age 55 with  $1.4 to $1.5M (if the market doesn't drop off before then).

I was 80% equities until July 2018, dropped to 60% at that time, and I have dropped recently to about 45% equities.  The rest is in bonds, fixed interest, CDs, money market, and cash.

My stash is already high enough to provide a comfortable retirement at age 55, so I'm not needing to be aggressive with my investments now.

First year in retirement.
 I've stayed away from bonds just because rates are so low at this time.
What kind of rate are you getting on your bonds and CDs? Is it even 4%?
How does it look when you run it in FIRECALC?
 My radio financial guru for the last 30 years, often said, once you reach critical mass don't put it at risk.
I'm not finding myself putting that into practice.
 I have an older friend with lots of bonds in tax advantaged accounts, but is getting eaten by RMDs, that put him
up near 25% tax rate.

[FIREstache]

My current NW is approx $1M.  I am 55.  My plan is to FIRE in just under 3 years at $1.4M at age 58.5.

That's not too far off from me.  I'm 54 with a $1.4M stash and plan to retire by May 2020 at age 55 with  $1.4 to $1.5M (if the market doesn't drop off before then).

I was 80% equities until July 2018, dropped to 60% at that time, and I have dropped recently to about 45% equities.  The rest is in bonds, fixed interest, CDs, money market, and cash.

My stash is already high enough to provide a comfortable retirement at age 55, so I'm not needing to be aggressive with my investments now.

First year in retirement.
 I've stayed away from bonds just because rates are so low at this time.
What kind of rate are you getting on your bonds and CDs? Is it even 4%?
How does it look when you run it in FIRECALC?
 My radio financial guru for the last 30 years, often said once, you reach critical mass don't put it at risk.
I'm not finding myself putting that into practice.
 I have an older friend with lots of bonds in tax advantaged accounts, but is getting eaten by RMDs, that put him
up near 25% tax rate.

I'm earning about 2.9% on average nominal on the non-equity investments.  A SWR of 3.6% gives me about $25K/yr discretionary over my base and long term expenses averaged out.  So, I should be plenty comfortable with that extra cash flow available (I won't necessarily spend that much due to my long term frugal tendencies).

I put my info into FireCalc for 36 years out and included SS beginning in 2030 at $22,400/yr, so the withdraws from the stash are reduced by that amount when SS kicks in to that spending remains consistent.  These were the results:

FIRECalc looked at the 113 possible 36 year periods in the available data, starting with a portfolio of $1,400,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 113 cycles. The lowest and highest portfolio balance at the end of your retirement was $1,080,281 to $8,792,969, with an average at the end of $3,087,890. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

I did some more tests.  FIREcalc still gave me 100% success at just over a 4.7% SWR.

Here is how your portfolio would have fared in each of the 113 cycles. The lowest and highest portfolio balance at the end of your retirement was $11,585 to $7,243,622, with an average at the end of $1,913,271. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 36 years. FIRECalc found that 0 cycles failed, for a success rate of 100.0%.

So FIREcalc says I could spend about $40K/yr on discretionary like entertainment, travel, dining out, and unnecessary "stuff", and I did subtract for higher taxes before getting to the figure.  That's considerably higher than the $25K/yr I'm currently budgeting.

If I use the Rich, Broke, or Dead web app, my maximum SWR is 4.3% to keep my success rate at 100% using a similarly conservative portfolio.  When I tried some different settings with more stocks and minimal cash, the best I could get was 4.5% in order to achieve 100% success.

I'm still planning around 3.5% to 3.6% SWR with some flexibility since $25K/yr for discretionary already seems like more than I will need or care to spend as a single guy with no kids who has a history of spending about 1/25th that amount on discretionary spending in a year over the last few years.

[BTDretire]

 I'm surprised to see such success rates when 65% of your portfolio is only earning 2.9%.
But I guess that is because there are no negative returns on bonds or CDs like you would have
with stocks. That's something I never put together, returns are lower with interest instruments,
but consistent with no negative returns, like stocks can have. So that keeps the long term success
rate up.
 If the portfolio survives, the end number (on average) will be lower with a large bond percentage vs
a large stock percentage.
 I learned something today, not sure it will change my aversion to low rates on bonds yet, but it's a tear in the cover.

[friedmmj]

For middle age retirees, I suppose a lot comes down to the value of peace of mind stemming from avoiding the sheer uncertainty of being heavy into equities.  Who needs the stress in their 60's and 70's of riding the market roller coaster unless you are so wealthy that you can just ride out the worst case scenarios. 

My personal plan is to stay around 50% invested into the market until I reach 67 and begin collecting SS.

[BTDretire]

I started this year with a plan of spending $50k on our living expense., Four months in I'm surprised to find I'm spending more than that.
There has been a complication thrown into keeping track of normal expenses, because we are still in hurricane repair mode.
I think I have separated repair expenses from living expenses, but probably not perfectly.
 I just have one account I take living expenses out of and another for kids tuition and hurricane repairs.

[FIREstache]

I'm surprised to see such success rates when 65% of your portfolio is only earning 2.9%.

Also note, that's 2.9% nominal, not a real return.  So that's not much over inflation.  You should be able to get a higher return with something like "total bond" but with some volatility.  Note that FireCalc does not actually let you enter the gain on your fixed investments.

But I guess that is because there are no negative returns on bonds or CDs like you would have
with stocks. That's something I never put together, returns are lower with interest instruments,
but consistent with no negative returns, like stocks can have. So that keeps the long term success
rate up.

Yes, even a 1.3% real return would allow a 4% SWR over 30 years if it was consistent year to year.   The more conservative investments I have planned work out best for shorter periods, not >20 years of the stash fully funding expenses.  In the example I gave, my portfolio only needs to fund 10 years at those SWRs, but after 10 years, my drawdown can drop to 2% to 2.5% because SS will pay about 45% of my total spending.  In FireCalc, when I increase equities to 50%, I get worse results than at 43% equities as far as success rates due to my timeline, although the higher equity profile does result in the highest possible portfolio balance.  I'm more concerned about success rates than having a chance at a higher possible growth over retirement.

I'll attach a graphic which shows how AA, years of retirement, and SWR correlate.

[FIREstache]

I started this year with a plan of spending $50k on our living expense., Four months in I'm surprised to find I'm spending more than that.
There has been a complication thrown into keeping track of normal expenses, because we are still in hurricane repair mode.
I think I have separated repair expenses from living expenses, but probably not perfectly.
 I just have one account I take living expenses out of and another for kids tuition and hurricane repairs.

I assume that $50K includes discretionary.  That's about what I'm planning for FIRE, although over half of it will be discretionary, and I'm not sure if I can really get myself to freely spend that much more than I've been spending in recent years, which is very little discretionary.

https://forum.mrmoneymustache.com/post-fire/cheapskate-to-spendypants-in-fire/

[BTDretire]

I started this year with a plan of spending $50k on our living expense., Four months in I'm surprised to find I'm spending more than that.
There has been a complication thrown into keeping track of normal expenses, because we are still in hurricane repair mode.
I think I have separated repair expenses from living expenses, but probably not perfectly.
 I just have one account I take living expenses out of and another for kids tuition and hurricane repairs.

I assume that $50K includes discretionary.  That's about what I'm planning for FIRE, although over half of it will be discretionary, and I'm not sure if I can really get myself to freely spend that much more than I've been spending in recent years, which is very little discretionary.

https://forum.mrmoneymustache.com/post-fire/cheapskate-to-spendypants-in-fire/

  The plan is/was to spend $50k total per year, then adjust for inflation each year. Because we never had a budget and never kept track of spending, (we were just frugal) I didn't have a good number on our spending/expenses. So this year, I put the yearly spending in an account and
just waiting to see if anything is left over or if we overspend at the end of the year. It not a big problem as Firecalc says we can spend over $80k and never drop to zero.
 Plus we are already older, I'm 64 and can collect SS anytime, probably wait until 70.
 We still have two kids in college, but I'm trying to keep those expenses separate from our living/spending/expenses.
I still pay all their health insurance and my son's rent. Hopefully less than 1 yr left with one and 3 years with the other and they will be on their own.
 If needed, we could cut back, but once the kids are on their own, I expect things will be fine.
 I haven't run Firecalc for a couple years, so that's something I need to do again.

[Catbert]

Here's another way to look at the issue.   Figure out where your spending money is coming from for each of the next 5 years and with less detail for the next 10 years.   "Sell stock regardless of the market" isn't a correct answer. 

For you, the next 3 years is taken care of (working).  But after that where?  CDs/Bonds maturing?  Interest/dividends?  Cash in a money market?  Real estate rentals?   Or??  If you look like you're coming up short use your new money for the next 3 years to fill in the future income holes (e.g., bond/cd ladder).