Author Topic: What is an appropriate FIRE asset allocation at the time of early retirement?  (Read 8808 times)

mikejscott7

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We've begun the journey to FIRE, and I'm wondering if fellow Samurais can shed some light on how they've positioned their asset allocation at the point they decide to take the plunge and retire early.

One of my fears is that we will achieve a net worth of 25-30x annual expenses, but that we will have saved too heavily towards building home equity and maximizing our tax-deferred, or otherwise restricted accounts (401k, 403b, Roth, etc.). In short, I fear thinking we are on pace to retire at 40, but even after achieving our savings goals, find we aren't nearly liquid enough to retire.

How much of our net worth should we strive to have liquid (or relatively liquid) before retiring? Is there a generally accepted rule in this area? As it currently stands, ~60% of our net worth is in tax-deferred and restricted accounts. The remainder is mainly invested in an ETF-heavy brokerage account and "high yield" savings accounts. If we do decide to buy a home, a good chunk of that remaining 40% will become tied up in equity.

Thanks in advance for your feedback, anecdotes, and expertise!

Sam

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 I plan to write a post about what is the right ratio between after-tax and pre-tax investment accounts for early retirement.

 There’s only so much you can contribute to your 401(k) or IRA.

 But for the longest time, I’ve just looked at it based on how much passive income I can generate from my after-tax investments to allow me to survive comfortably in early retirement.

If you can get your base case expenses covered, and you are still relatively young, then I think you are good to go because there are a lot of opportunities that come at you after you decide to do things that you really want to do.

How old are you?
Regards,

Sam

mikejscott7

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Thanks, Sam. Great feedback - and it would be great to see a post on the topic!

My wife and I are 31. She maxes out her 401k. I am a state employee with a mandatory 10% contribution towards the state pension system. I max out a 403b on top of that. We also both fully fund our Roth IRAs (though we're likely to be income-limited out this year). Seeing our net worth skewing so heavily towards pre-tax investments is what had me wondering if there's an appropriate allocation and how much more aggressively we need to work for savings towards our unrestricted, after-tax investments. Appreciate your response, and of course, all the content you've provided through FS!

I plan to write a post about what is the right ratio between after-tax and pre-tax investment accounts for early retirement.

 There’s only so much you can contribute to your 401(k) or IRA.

 But for the longest time, I’ve just looked at it based on how much passive income I can generate from my after-tax investments to allow me to survive comfortably in early retirement.

If you can get your base case expenses covered, and you are still relatively young, then I think you are good to go because there are a lot of opportunities that come at you after you decide to do things that you really want to do.

How old are you?

EricNJ

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This is a good topic and is under-discussed in FIRE circles.

My thinking aligns with Sam's. It's easier to build taxable if you have a system (X% of salary goes to taxable, all commissions or annual bonus go to taxable etc.) or if you have a liquidity event, which is rare.

One thing it's also worth talking about is asset allocation between the various accounts. Some are adamant that tax-inefficient asset classes belong in tax deferred. However those - thinking REITS, etc. - can help throw off good passive income.

Jon Sharpe

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I'll be looking forward to Sam's article on this topic. I haven't looked into it a ton yet but if you find yourself with too much money in tax advantaged accounts, there are techniques you can use, e.g. substantially equal periodic payments, or Roth conversion ladders. I would definitely consult a knowledgeable accountant though so that you don't get inadvertently slapped with the 10% withdrawal penalty. I wrote a short piece on some of the options here, https://www.benetworthy.com/access-retirement-funds-early/. I'm sure Sam's will be more thorough! I also did not discuss the target tax vs. after-tax mix for your portfolio, so I'll be interested to read about that.

TigerUppercut

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It depends on how strong your FIRE is.

I personally wouldn't have more than 50% of my public investments in stocks, especially now that rates have risen and bonds, cash, and CDs provide a higher return

Once you FIRE, your goal is to never go back to work. Hence, you'll never need to go back if you never lose money.

Pennymenny

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A related question is how your asset allocation changes if you have young (10 yrs away from college) kids at the time of FIRE. Would welcome any input on this!

We are definitely not yet there. Currently trying to decide between funding 529s / contributing extra to paying down mortgage. Feels like it is always better to fund tax-advantaged accounts. Spouse says we should do all of the above but I have (irrational) love of watching our rainy day fund grow and grow even though it is earning ~ 2%.
Help me snap out of it please!  Am I thinking about the mortgage / 529 / savings fund decision correctly?