As of 2Q2020, with the average savings rate hovering around 5%, a median 401(k) of only $110,000, and an average 401(k) balance at retirement age 60 of around $230,000, many Americans will have a difficult time retiring comfortably.
Just do the math yourself. Add the average Social Security payment per person of $18,000 a year to a 4% withdrawal rate on $230,000 and you get $27,200 a year to live happily until you die at 85. That’s clearly not enough!
Let’s think about this some more. You spend almost 40 years of your life working just to live off minimum wage in retirement. Hopefully you were able to live it up during your working years, otherwise, how else can we explain a national sub 5% savings rate?
Blowing lots of money for fun is fine if you expect to live like a pauper when you’re old. The better way to do things is to smooth out your spending across your expected life expectancy to reduce stress and live a much steadier lifestyle.
We’ve talked in detail about the proper asset allocation of stocks and bonds by age. Just know that stocks should be a minority portion of your net worth by the time you are middle age. If you so happen to have 100% of your investment allocation in stocks before retirement and 2009 happens, well then you are out of luck.
Calculate how much you lost, equate your loss to how many years it took you to save the value of the loss, and expect to work that many more years of your life. Now that’s depressing.
We also found out that the median net worth for 2010 plunged to $77,300 from a high of $126,400 in 2007. Meanwhile, the median home equity dropped from $110,000 to $75,000. In other words, the median American’s net worth almost ENTIRELY consists of home equity!
Take a look at this chart highlighting how a record high 30% of American households have no wealth outside their primary residence.
Finally, despite a massive rebound in stocks since the bottom of the crisis a lot of people missed out on the recovery as evidenced by a tremendous amount of cash still sitting on the sidelines due to fear.
Anybody who has lived through the 1997 Russian Ruble crisis, the 2000 internet bubble, and 2006 – 2010 housing correction probably has a good portion of their net worth in CDs, bonds, and money markets because they’ve been burned so many times before. With the bear market returning in 2020, I’m sure many conservative investors feel good with their positioning.
The question we must all ask ourselves is, “What is the right net worth allocation to allow for the most comfortable financial growth?” There is no easy answer to this question as everybody is of different age, intelligence, work ethic, and risk tolerance.
I will attempt to address this question based based on what has worked for me, and what I believe will work for anybody who is serious about building enduring financial wealth for the long run.
I’ve spent over 30 hours writing and revising this post in hopes that every Financial Samurai reader can build a rock steady net worth portfolio to make money in good times and lose less in bad times.
THE MENTAL FRAMEWORK FOR NET WORTH ALLOCATION
* You are not smarter than the market. I don’t care how much you’ve been able to outperform the stock market over the years with your $10,000 stock trading account. The fact of the matter is your performance will normalize over the medium-to-long run. As you grow your assets to the hundreds of thousands or millions of dollars, you aren’t going to be whipping around your capital as easily as before because your risk tolerance will change.
The most dangerous person is one who has only experienced a bull market. They think they are invincible, confusing a bull market with their brains until the next inevitable downturn comes and wipes them out. Get it in your head that you will underperform and you will lose money at some point. There is no risk-less investment unless you are putting less than $250,000 in CDs, money markets, or buying US treasuries.
* You are not a financial professional. If you are a software engineer, your expertise is in creating online programs not giving investment advice. If you are an artist, your expertise may be in painting portraits, not recommending a pair trade with Apple and Google stock. If you are a Major League pitcher, your expertise is throwing a nasty cutter, not investing $50 million in a gaming company and going broke like Curt Schilling did of the Boston Red Sox.
I’ve spent the last 27 years investing my own money since opening up a Charles Schwab account in 1995. I worked in equities on Wall St. for 13 years and I received my MBA in finance. Regardless of my credentials, I’m still going to make suboptimal financial decisions because I don’t know the future.
If I knew the future, I’d probably be on a mega yacht in the South of France getting a massage right now! The only thing I can do is come up with rational expectations, and invest accordingly. If you can’t come up with a coherent 10 minute presentation to a loved one why you are investing the way you are, you might as well be throwing darts.
* You only have at most 110 years to live. Statistics say the median life expectancy is around 82-85 years old. Less than 0.1% of the 6 billion people on earth live past 110 years old. As a result, you must plan for roughly 80-90 years of life after secondary school. The good thing is you have a time frame to plan for your financial well being. The bad thing is you might die too early or live too long.
It’s better to plan for a longer retirement and have money left over to give to others than come up short. This is why managing your finances easily in one place is important. Personal Capital makes staying on top of your net worth easy and free. The internet has made things free and easy to track your net worth, analyze your investments, and run various retirement scenarios.
* Your risk tolerance will change over time. When you’ve only got $20,000 to your name and you’re 25 years old, your risk tolerance is likely going to be higher than when you have a net worth of $2 million and are five years away from retirement at 60. When you’re young, you naively think you can work at your same job for years. The feeling of invincibility is incredible until something happens.
Do not forget to give yourself a thorough financial assessment at least once a year to make sure your net worth allocation is appropriately dispersed. Ignoring your finances is not the way to financial prosperity. If you gamble with your finances during the latter stages of your life, you will have a much lower chance of recovering.
* Black swan events happen all the time. A black swan is supposed to be rare, but if you’ve been paying attention for the past couple decades, incredible financial disruption happens all the time. Nobody knows when the next panic induced correction will incur. When Armageddon arrives, practically everything gets crushed which is not guaranteed by the government. It’s important to always have a portion of your net worth in risk free assets.
Furthermore, you should consider investing your time and money in things that you can control. If you want evidence of people not knowing what they are talking about, just turn on CNBC and watch them trot out bullish pundits when the markets are going up and bearish pundits when the markets are going down.
* Bull markets can make you incredibly rich. Not everyone got crushed in the dot com bubble. Plenty of people sold their Webvan stock at the top! Bull markets generally last in 4-7 year upward cycles. The direction is almost always up and to the right over a long enough time period. It often times feels worse missing out on a huge gain than losing money. Therefore, it’s important to have at least half of your net worth exposed to an improving market. The power of inflation cannot be underestimated. If you are a price taker without inflating assets, you are losing.
NET WORTH MIX RECOMMENDATION – BASE CASE FRAMEWORK
Assumptions
* All percentages are based off a positive net worth. If you have student loans right out of school, or a negative net worth due to negative equity, use these charts for the asset side of the balance sheet equation. Systematically look to reduce non-mortgage debt as you build your wealth building assets.
* Stocks include individual stocks, index funds, mutual funds, ETFs, structured notes. Bonds include government treasuries, corporate bonds, municipal bonds, high yield bonds, and TIPs.
* For the first eight years of work, the majority of your net worth is in stocks and risk free assets such as CDs, higher yielding online savings accounts, and money market funds. Online banking is the best place to park your cash and it’s very convenient to deposit or withdraw money. Don’t let traditional banks get away with paying you nothing in interest as you fall way behind due to inflation! At the age of 30, you should have some idea of where you want to live, and what you want to do for a living. With this confidence, you shift a major portion of your net worth into buying your first home.
* Risk Free assets also start off high given you’ve first got to save money to build a financial foundation. It’s not wise to dump all your savings in the stock market if you don’t know what you’re doing. Gradually leg in the more comfortable you become with investing. Stocks have proven to be the most straightforward way to grow one’s net worth over the long run. You’re also not that interested in bonds because your risk tolerance is high and interest rates are so low. The Risk Free column can also be called the “Emergency Fund” column if you like.
* The return on rent is always -100%. After 40 years of renting, you have nothing to pass on, nor do you have a place to live rent free in retirement. As long as the government is subsidizing homeownership, and as long as people don’t have the discipline to save and invest the different, renting is discouraged if you can afford to own. If you just don’t want to own property, then you should consider gaining real estate exposure through REITs or real estate crowdfunding across lower value, higher yield parts of America. I’ve personally invested $810,000 in real estate crowdfunding to gain exposure to the heartland of America.
* Alternative investments stay at 0% given it’s hard enough to get people to save more than 20% of their income, come up with a downpayment for a home, consistently invest in stocks and bonds, and pay off debt.
* The ultimate goal is to have a roughly equal balance mix between stocks, bonds, and real estate with a 10% risk free buffer in case the world comes to an end. In a difficult economic environment, stocks and real estate will decline (60% of net worth), but at least 30% of your net worth (bonds) will increase, while your 10% emergency fund remains intact.
NET WORTH MIX RECOMMENDATION – NEW LIFE FRAMEWORK
Assumptions
* After five years of savings, you purchase your first property and reduce your Risk Free percentage down to 10% from 30%. If you own the property you live in, you are neutral real estate. The only way you can make money in real estate is if you buy more than one property. If you are a renter, you are short real estate.
* After 13 years of saving and investing, your net worth increases handsomely. The decline in stocks as a percentage of net worth doesn’t mean a decline in the value of your stock portfolio. Rather, due to the increase in your overall net worth, the absolute value of your stock portion increases despite a decrease in the percentage of total.
* With a larger net worth, you invest some of your savings into Alternative asset classes by age 35. Alternative asset classes may include: private equity, venture capital / angel investing, or starting your own company. You’ve got stocks, bonds, and real estate down pat. With free liquidity, you dable into the unknown because you never want to look back and say, “what if.”
* After the age of 40, you’re looking for a more balanced mix in your net worth. As a result, you purposefully invest less in stocks and more into bonds and alternative investments. Your real estate equity also holds steady, market willing.
* By the time you’re 60, you have a wonderful net worth balance that is practically implosion proof. Your Risk Free percentage increases along with your Bond percentage because you enjoy the feeling of stability and security as you plan to live until 110 years old.
* I’m currently following the New Life framework, but plan to work towards the Self Belief framework below. In order to do so, I need to aggressively grow a business.
NET WORTH MIX RECOMMENDATION – THE SELF BELIEF FRAMEWORK
Assumptions
* The Self Belief Framework assumes you have better control your own financial future than other investments. When you invest in stocks, bonds, and real estate, you are depending on someone else and favorable macro conditions to make you money. When you invest in You, you believe you have a superior ability to build wealth.
* The Alternative column’s name changes to the X Factor. The X Factor assumes you no longer invest the majority of your savings in stocks, bonds, and real estate, but in building a business that may one day grow to be an enormous percentage of your net worth. The X Factor can also include creating anything of financial value.
* You don’t have to own real estate in the Self Belief Framework given you’d rather use the downpayment capital on your own business. Feel free to increase the X Factor column percentage by the Real Estate column percentage if this better fits your goals.
* After decades of building your X Factor, you take some risk off the table and increase your Risk Free percentage. By this time, your net worth has grown large enough where you can live off interest rates as low as 2-4%.
* If you are wildly successful in building your own business, the X Factor column can easily dwarf all other columns.
THE PROPER NET WORTH ALLOCATION IS WELL DIVERSIFIED
As we discussed in the Mental Framework portion of this post, financial returns are not guaranteed. Given there are no sure things, it’s best to keep a diversified net worth mix that can withstand the hits of severe economic downturns, while benefitting from multi-year bull runs.
When it comes to building wealth, I encourage everyone to focus on a realistic worst case scenario where all assets except for the risk free portion goes to zero. This way, you’ve addressed your biggest fears so you can move on with your quest. Imagining a realistic best case scenario is fine as it’s always good to dream. There just has to be a balance with your wealth building approach as to not come up short when you can no longer work.
I’m confident that if you follow any one of these net worth allocation recommendation charts, you’ll do just fine and achieve an above average net worth. Remember, the average American has over 90% of their ~$100,000 net worth in real estate. This is absolutely preposterous because it means that the average American either is buying more house than they can afford, is no longer saving after they buy a house because they think a house is savings account, or is not actively investing in other asset classes. Beware of having the large majority of your net worth in any single asset class.
My goal is to help every reader achieve financial peace of mind in order to do whatever your heart desires. Good luck everyone! Please share your current net worth mix and your desired mix if interested.
Recommendation To Build Your Wealth
The best way to build wealth is to get a handle on your finances by signing up with Personal Capital. They are a free online tool which aggregates all your financial accounts on their Dashboard so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 28 different accounts (brokerage, multiple banks, 401K, etc) to track my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing, how my net worth is progressing, and where my spending is going.
One of their best tools is the 401K Fee Analyzer which has helped me save over $1,700 in annual portfolio fees I had no idea I was paying. Their Investment Checkup tool is also great because it graphically shows whether your investment portfolios are property allocated based on your risk profile.
Finally, utilize their Retirement Planning Calculator, which uses real data to come up with various financial scenarios based on Monte Carlo simulations. You can input multiple expenses to come up with as realistic an assessment of your finances as possible.
How is your retirement outlook doing? PC’s Retirement Planning Calculator
There is no better free online tool that has helped me stay on top of my finances more than Personal Capital. It’s important to aggregate all your accounts to get an entire overview of your net worth to make proper changes. It only takes a minute to sign up.
Updated for 2020 and beyond.
I just turned 50 years old expat living and working outside of USA, $2M in US real-estate investments fetching me cashflow of $5K per month. Saved $450K thru 401k+IRA mostly in 2030 vanguard retirement mutual funds. Zero debt. One kid starting college another two in middle school.
Should I be investing in alternative, stock and bonds? or stick to real-estate? I can save upto $5 to $10K per month depending on my work. I plan to work another 5 to 8 years. I spend over 20K per year on international vacations with family before kids go to college which I would like to continue.
It’s really what you’re most comfortable with. Stocks and bonds provide more passive income. However, stocks are much more volatile.
I think you’d enjoy these posts:
Ranking The Best Passive Income Investments
Why Real Estate Will Always Be More Attractive Than Stocks
The Proper Asset Allocation Of Stocks And Bonds By Age
I will share my situation. Nearly 30 years old with net worth of 110k.
I have 30k in stocks and 80k in cash. I intend to keep at least 50k as an emergency buffer.
I want to double exposure in stocks but seems not ideal in the current market. It may take a while, I thought of adding 1k every month, and more if market drops.
Maybe I will start to think about owning a house/appartment but right now, renting is the way to go for my situation. I also considered buying reverse mortgages as a “cheaper” way to have ownsership but I´m not an expert.
One aspiration would be, as others wrote as well, is to own several income-producing properties to retire early.
I retired 20 years ago at age 42. I own triple net commercial real estate and it’s paid the bills and allowed me to save other funds. In addition to giving me a good income, it’s gone up in value more than I expected which has caused my portfolio to be a bit lopsided:
Real Estate 80%
Stock 7%
Bonds 1%
Cash 12%
The stocks, bonds and cash are $600K.
I’ve been thinking of selling some of the real estate and doing a 1031 into DSTs to avoid tax and add diversification, but with the great cash flow, it’s just easier to do nothing.
i retired at the same age as you, but followed a different path to financial security… your approach appears to work well for you (especially if your real estate generates income through housing rentals – there will always be a need for housing no matter what market conditions exist [it’s local government that can make being a landlord unprofitable])…
we all have comfort levels… some folks need to spend $50,000 a month, while others are quite happy with $50,000 per year…
we’re happy to have no debt, enough money for any financial hardship, a roof over our heads, food on the table, but most important – good health… we swim 1200 meters in the morning, walk several miles each day, cook healthy and nutritious meals, don’t smoke, and tipple moderately… life is good!
it’s heartening to read here of folks doing well for themselves and exhibiting financial common sense
That is a very sensible approach to live off rental income. But I imagine the beginning might have been difficult.
My plan would be: pay rent and, (pay mortgage+rent property). That way, the mortgage would be paid with the rent and I may be able to go after the next property.
Worst case scenario: I would pay rent and mortgage. That´s why I would need spare cash.
Enjoy life!
Sam, I am 64 and retired. I will be selling the family house next Spring and will buy a house in a lower property tax location. After selling the house, my net worth will be $1.7 million.
How much house would you say I can afford?
I’m assuming my new house will be my last. I’m just looking for some directional input…
From experience, other advisers would just use maths on this one.
How much do you need to live the rest of your life till say 100?
Make sure you have access to that figure.
Balance goes on the house as a maximum.
Enjoy retirement :)
Hello!
I am a young 28 year old attorney, and I have been working only for 2 years. Can you explain on what bases you would recommend following the base allocation or the new life allocation?
My net worth is currently about 71k (I payed my small student loan right away after I started working as first priority, and saved as a result more than $5,000).
This is my current allocation, and I would like to know if I should follow the base or the new life guidelines:
36k low risk (cd/yis, etc.) this is high as I want to save cash as a safety net and in wait for a market downturn.
7,5k real estate crowfunding
16,2k in Stocks
2k P2P lending
1,5k alternative investments
8k in 401k and ROTH IRA (I know this is low, my first job offered 401k and I was making contributions, but then I changed jobs and I could not make contributions anymore, then I got married and was not eligible anymore for Roth IRA contributions).
Thank you! I am from Europe, not from the US, but I learned much about this system and importance of savings through your website!
$27k per year isn’t enough? Where the hell do you plan to retire? Unless you are still renting or paying a mortgage at retirement age, that’s plenty to live comfortably, not in luxury, but you won’t be suffering either.
So, 27K per year? This is a VERY personal thing, this number.
My number is closer to 27K per month, not per year. Seriously. I have zero debt, and if I spend 27K per month, I’ll still leave millions to charity when I croak. I’m 60 now.
I live a very good lifestyle and I can afford it. I owned a business for 30 years and sold it for very good money.
Don’t imagine that you can pick a number for anybody but yourself.
Heck, my social security payments will be well in excess of 27K per year before tax, which I will pay on 80% of the payments because my dividend and interest income is high (yay).
All that said, I don’t know a lot of folks that would want to live on 27K per year. That’s a VERY low number.
But then, I don’t know you or your lifestyle, so I won’t judge. 27K might be a fine number for you, and you might die and leave millions to charity too.
I suppose if I’m married, with children that are still dependent, $27k a year is definitely not enough. But even just double, lets call it $50k a year, that is an amount that 10’s of millions of American families live off of. Wish I had learn to go into business on my own, or learn more about investing earlier on, else I’d be close to where you are financially.
Sam,
Why, ideologically, is your asset allocation so far removed from Personal Capital’s? No snark, just curious – I utilize them, somewhat adhere to their Monte Carlo scenarios for my allocation, but always feels it’s too stock heavy.
Thanks,
Mark
It’s striking how my asset allocation matches this list pretty well. Longtime lurker here, for the last 6 years since I graduated. I had negative assets first 6 months out of school and decided to pay off my 30k of student loans before the grace period expired and the usurious interest rate of 6% hit in. Then I focused on building a cash pile of about 25k and maxing IRA (did not qualify for 401k since my employer did not offer). This came in handy when I was fired from a new job 2 years into my career and was unemployed for 5 weeks (thankfully 1 month severance so I didn’t need to file for unemployment). Being fired made me more risk adverse so I doubled my cash pile (also was saving in case I needed to do an MBA but ended up deciding against it). It was also a blessing in that I switched from asset management into tech, where employment prospects seem much more stable for the time (there’s a wage floor of 100k+ if you know how to code and are willing to live in a high cost of living city). Thus I could afford a higher risk tolerance. After that, each year I’ve been dumping money into 50/50 international and US equity ETFs, mainly through 401k/IRA and Robinhood. Now heading into year 7 I’m thinking about liquidating some of my equities and using my cash pile for real estate. I still have roomates and am renting but if they move out and I lived on my own, mortgage + maintenance would actually be about equal to or lower than than rent for a 1 bedroom or studio.
Thank you so much for this article. It took a long time for me to find it but it was just what I needed and couldn’t quite describe. Well worth the effort.
About real estate: for a childless couple, both past age 70, who will never own any real estate directly: Would you think that buying a few REIT ETFs would do the trick? And would you tweak the 30% target (base case framework) at all?
Sincerest thanks.
I am in a somewhat strange position, I have my home which increased dramatically in value to about 1.5 million from the purchase price of $500,000 , and I was lucky to inherit the family home that is worth about 1.8 million. My cash and stocks are only about 250K and my income isn’t very high, but I get rental income on the house I inherited.
So over $2 million in realestate and a 1/10 in stocks and cash…..
Should I get a mortgage on the inherited rental property and try to buy more property or invest that cash some other way?
i feel more confident in managing property than in managing stock investments.
But houses can fall in value, need to be repaired, tennants can sue you etc….
i am 58 and work as an artist. Once I am 65 I might be able to get by on the rental income and social security but not with much cash to spare…
Hi Sam,
I re-read this old post from your newsletter. Question- the real estate column in the charts. Should I be adding up my equity in my primary house, rental property equity, and REITs together?
Regards
Todd
Yes, that makes sense Todd.
Thank you for sharing this. I find it helpful because I have difficulty finding this kind of information elsewhere, especially when it comes to asset allocation between stocks and real estate (rental property). Could someone explain how these net worth mix recommendations were created? Are there any good literature references that would help me understand how to modify these recommendations for my needs?
Elliot did you get an answer on this? I like the breakdown but didn’t understand the methodology behind it.
Unfortunately no. If you find out please let me know! Thanks :)
I have a question about the self belief framework….For example, at age 35 you have 25% toward “X Factor” which I believe is your own business in most cases. Here is my question – What if someone has their own business selling stock options? Would that fall under the stocks category or X-Factory category? I would assume stock but I could also see an argument for x-factor being that it would be run as a side business.
Hi Sam, I have been your reader for a few years. While calculating my asset allocation today, I was thinking what exactly I should count as my RE allocation. I will explain. For example, say I have a house currently worth $800,000 with a mortgage balance of $300,000. I have been using my equity of $500,000 as my allocation in RE. But today I was thinking, I should use the entire $800,000 as RE and a -$300,000 as Bond for this property, since when house price fluctuates, the only moving part is the house value. The load balance is not going to change, except we are paying down the mortgage. What are your thoughts on this?
Did you ever get an answer on this? I have the same question/issue. Thank you
Thanks for the helpful article.
I’m 34, have very little investments, but my wife and I have been saving for three years and I’m ready to allocate our money into different areas. My plan is to invest and save for two to three more years and then buy our first home.
Here is my asset allocation plan for now:
40% stocks
25% REITs
15% bonds
10% student debt repayment
10% savings account
We are a bit risk averse but I still want to have a decent yield which is why 65% will be in stocks and real estate funds.
Is this too conservative, or sounds like a reasonable plan?
dunno about you, but i’d knock that student debt out right away, then go 70 percent equities in indexed funds – cash at 10-20 percent is always good (6-12 months living expenses will cover any emergencies)
but i’m not expert… however, life is good in retirement with no debt whatsoever (nada, zip, zilch, zero, etc.)
:-)
willie
Thanks Willie:
I don’t have enough savings to allocate any imvestment money after paying off student debt. Therefore, the way I see it, I can put cash in index funds to get the 10-20% as you said but keep paying consistently our student which is at 3-5% interest. If I pay off student debt now it feels nice but then I have no principal left to invest and get those nice returns. I might increase the percentage of debt payment to pay it off quicker though. :)
Best,
Alex
61, retired engineer with pension and wife 53 with real estate business.
We use the bucket approach strategy for allocations. We have 4% cash, 20% Bonds, 25% Stocks, 33.5% Real Estate Equity, and 17.5% Rental Equity (X-Factor) with a 40% net profit.
Concerned about too much of our net worth is in Real estate due to our rental. Reading your article, is our allocation diversified enough?
Our long term goal is to sell the rental in 20 to 25 years but have seen the combined rental and home equity becoming 51% of our net worth. Thoughts?
We feel fortunate but fell into this position somewhat by accident and luck in the right market and place at the time.
Would you recommend the same asset allocation at 35-40 for a physician who only started making good money around 34 years of age?
No. I’d follow more the work experience column.
So I was making some money as a resident and fellow (total of 7 years), up to $120 one year. But have been doing very well the last four years. You would put me in the 10% risk free, 40% real estate, 50% stock bracket of the New Life Framework? I already own a home. I’m thinking of increasing my real estate holdings using Realty Shares.
Thank you! Great article, read it twice.
Hi Samurai,
I’ve been reading your blog for several months now but first time commenting. I’m a recent early retiree(age 53) and came across this earlier post and found it timely for me. I would most likely feel the base case framework would make most sense for me. If I was invested this way now it would probably provide adequate income without using principal. My goal is to basically live off dividends,etc. One thing about this allocation is it would leave me with such a large cash/bond allocation that it alone could cover my lifestyle for roughly 20 years. This seems a little heavy to me. If you were lowering this somewhat, would you move it evenly to stocks and real estate? Also I must say I’m not allocated according to the base case framework yet. I’m still cash heavy as I keep thinking the market is too high. Should I just bite the bullet and get properly allocated or do you think there is merit to doing it slower at this point? It seems when looking back the last few years I’ve regretted not putting more money to work. At the time(like now) I thought the market was expensive. Your insight would be appreciated. Thanks for providing us FIRE folks your experience in the FIRE life.
enjoy your Web site…
it is so sad to see so many of our neighbors in our retirement community who still have mortgages and sons and daughters living with them… i have always followed the philosophy of diversification and asset allocation in lifestyle, investing, and savings… the old adage of not putting all one’s eggs in one basket seems to have held me in good stead for the last 25 years…
moving from a saving mindset to a spending situation in early retirement four years ago was not easy – but i also realize that even in my 60s i still have a 20-year investing horizon… my approach has always been (for net worth and investing):
10 percent cash
50 percent investing (60/40 mix of equities/bonds with 15 percent in tax-free ROTH IRA)
25 percent real estate (our downsized retirement home is free of any mortgage)
15 percent life insurance (Vanguard variable annuity – no eating dog food in our dotage)
in addition, a military pension…
we’re still at least five to 10 years away from SS FRA… i guess we’re OK? our needs are modest… i wish the best of luck to the millions of Boomers behind me… the ‘pig in a snake’ is moving to retirement, and i fear it’s not going to be a pretty situation for many, many folks!
p.s. investing in one’s health is the best investment one can make – i’d rather be fit as a fiddle and poor as a church mouse than have billions of dollars and be in bad health
Hello Samurai,
Even though you wrote this article four years ago, it’s still very relevant! I have a question about the ‘Real Estate’ category. You stated in one scenario “If you own the property you live in, you are neutral real estate. The only way you can make money in real estate is if you buy more than one property. If you are a renter, you are short real estate.”
Does this mean if i own and live in my own home, it’s value should be excluded from my net worth and if I rent, I need to enter some negative percentage (presumably offset by investment property or REITs)? Thanks!
Hi Brian,
Actually, I update all my articles for the current year, including this one for 2017!
If you own your primary residence, and that’s it for real estate, you are indeed neutral real estate b/c you have to live somewhere. You can conservatively exclude your primary home from your NW calculation, or you can include its conservative equity value. Up to you.
See:
Buy Real Estate As You As You Possibly Can
It’s Fine To Include Your Primary Residence As Part Of Your Net Worth Calculation
Real Estate Crowdsourcing Review – A More Surgical Way To Invest In Real Estate
Sam,
I have about 15% of my net worth in real estate which is my paid for home. I’m not interested in owning rental property but could I buy a REIT fund instead to diversify? The remaining asset base is 60% broad based stock funds, 20% bond funds and 5% cash. Have a seven figure net worth and mid-fifties. I would be grateful for your wisdom please?
Hi TR,
Well done paying off your home and having it only account for 15% of your net worth! I’m assuming you are over 40? If so, you’re basically like me now where you want a simplified life with income. I’m not interested in buying more physical real estate.
After interest rates rose post Trump election victory, bonds and REIT funds got hit by 3% – 10% mostly. I think the space looks good. REITs like ticker: O and OHI look attractive to me. I’m building a tax free municipal bond portfolio myself.
But what I’m most interested in real estate crowdsourcing and investing in the heartland of America now that Trump will be president. Cap rates/returns are much higher in places like Utah, Nebraska, Tennessee, than SF and NYC. Check out RealtyShares. They are the largest real estate crowdsourcing platform based in SF. You can peruse through all their deals for free. I plan to surgically invest $10,000 or so in various cheaper parts of the country to try and earn a 8% – 15% return.
Sam
Thanks so much! Your work on this blog is so valuable and greatly appreciated!
TR
I don’t have enough money for a down payment on a house in the bay area and won’t for a long while. Even if I did have enough, given your recommended asset allocation, I would need that down payment to be, at most, 35% of my portfolio. Would it make sense to buy real estate in another part of the country to start out in real estate or is owning your primary residence that important. I’m under rent control at the moment and some of the rent vs. buy calculators are showing that I would need to own a place in the bay area for 8 years before I break even. I’m guessing this is because the price to rent ratio is so high here in the bay. Wondering what you think about this.
Hi Robert,
If you are under rent control, you’ve got time to really think things through. The housing market is softening now with higher rates and a slowdown in the high end. BUT, I think it will reignite after Uber, Pinterest, Airbnb, etc goes public. There is huge pent up demand to buy from those 10,000+ employees. I’ve interviewed probably around 100 of them on what they want to do w/ their money, and almost all say buy a place.
I think it’s worth check out real estate crowdsourcing in HIGHER income yielding areas of the country. The coastal cities are out of whack with rental yields/cap rates at only 2% – 4% versus 9% – 15% in the heartland of America. My favorite platform is RealtyShares b/c they are based in SF, and I’ve met all their management including the CEO, who went to Berkeley for his MBA like me.
Check out the platform. You can invest in deals for as little as $5,000… unlike a $200,000+ downpayment here in the Bay.
Sam
Thanks for the quick reply. It appears that I’m not an accredited investor so I can’t use the platform. I’ve been looking at data taken from Zillow and found some properties with around a 40k down payment (I could swing this pretty soon) which would mean around a $1000 monthly mortgage (with taxes and insurance). I could possibly get $1300-1500 a month in rent from one of these properties which would mean that after a year, I’ve gained almost half of what I put down on the property in equity. I’ve been looking at properties in areas of Charlotte and Miami Beach since I’m familiar with the areas and I have family there. Disadvantages of this approach include 1. not being able to take advantage of the tax write-offs because it’s not my primary source of residence and 2. I can’t live in the property because I would be renting it out and 3. I’m still paying crazy high rent living in SF (I pay around $2600 so it’s not so bad). I really like the idea of actually owning a place vs the REITs because it’s tangible and I could always sell it later and pocket the 250k tax-free.
Would you consider REITs as part of the Real Estate bucket or Stocks bucket?
Good question.
Thanks
Sam,
I am 23 and I have just bought a house that was at the higher end of my mortgage limit. I am very excited to have 3 roommates as well who will be paying me about 85% of my monthly payment. You don’t necessarily recommend having real estate in your investment portfolio by 23, however, I only plan to live in this house maybe 2-3 years and then rent it out. What do you think of this idea? In 3-4 years time, hopefully I will be making enough at work to comfortably handle a mortgage payment and other various expenses (right now it would be about 60% of my post-tax income), so I’m not at all worried, but just curious.
Thanks for your time,
Erik
Hi, how did it turn out? Hopefully, it went as planned!
This is great work!
I have been looking for a long time to use something along the Self Belief table. Little did I figure to be nearly allocated there (a bit conservative). With the market still at all time highs and once a real correction occurs, we plan on ratcheting up the Equity allocation and minimize the Bonds to 10%. Our plan is to Semi-Retire @60/58 to spend our time as we see fit both leisure and in the business. Currently allocated as such in 2015 at Ages 32/30:
31% Equities (Ultimate Portfolio by Paul Merriman)
22% Bonds (US Govt., Corporate High Yield, International)
36% Real Estate (CA Primary Residence with 254K 19yr Mort @3.5%)
4% Risk Free (Cash)
7% X Factor (Side Business 25% Owner, business is reinvesting small profits)
We are debating currently whether to stop max 401k contributions (currently all equity contributions). I would like to build the Side Business into a Self-Employed position (3yr proposition) and 40% Ownership. I would love to live out of the business, as would my partner.