A good net worth allocation is important to weather the consistent financial storms that tend to come every 5-10 years. The last thing you want is to have a net worth allocation mismatch with your risk tolerance and financial objectives. A savvy investor is congruent with thought and action.
The right net worth allocation by age and work experience will boost your chances of living a comfortable retirement life. The key is to stay on track by following a net worth allocation model. Life tends to get complicated as we age. Bear markets come around every so often. As a result, it’s easy to get off track.
Before we go through my recommended net worth allocation, it’s important to understand the baseline of American finances. When it comes to growing your net worth and getting ahead, everything is relative.
The Typical American Hasn’t Saved Much
The median 401(k) is hovering only around $110,000. The average 401(k) balance at retirement age 60 is only around $230,000. Therefore, many Americans will have a difficult time retiring comfortably, even with Social Security benefits.
Just do the math yourself. Add the average Social Security payment per person of ~$15,800 a year to a 4% withdrawal rate on $230,000. You get $25,000 a year to live happily ever after until you die.
$25,000 a year is OK if you’ve got your house paid off and no major medical bills. However, you won’t exactly be living it up in retirement. We need to do more to boost our wealth.
Can you imagine spending almost 40 years of your life working just to live off minimum wage in retirement? That doesn’t sound too good, especially with inflation continuing to make things more expensive. At least, hopefully, you were able to live it up during your working years.
What Percentage Of Americans Invest In Stocks?
Stocks and real estate are two of the main asset classes that have historically built the most wealth for Americans. Unfortunately, not every American owns stocks and real estate.
According to the Federal Reserve’s latest Survey Of Consumer Finances, only about 53% of all US families own publicly traded stock in some form. Although this percentage is up from 32% in 1989, it’s still not enough. The median stock value held among households in the market was $40,000 in 2019. It’s closer to $55,000 in 2022.
It is a shame that roughly 47% of American households haven’t participated in the largest stock bull market in history. A low stock investing participation rate has ensured the wealth gap between the rich and poor has gotten larger.
What Percentage Of Americans Invest In Real Estate?
According to the latest Census Bureau data, in the fourth quarter of 2020, there were an estimated 82.8 million owner-occupied households in the United States.
Roughly 65.8% of households own their homes as of 4Q2020, up from 65.1% a year earlier. The recent homeownership rate peak was in 2004, at 69.2%.
Although a 65.8% homeownership rate is better than a 53% stock ownership rate, that still means roughly 34.2% of American households missed out on the housing boom since 2010.
In fact, it was the housing bust from 2007 – 2010 that led to a decline in homeownership rates. Thousands of homeowners lost their homes through a foreclosure or shortfall.
As a result, there was a steady decline in homeownership rates until 2015, when credit reports for those who had lost their homes finally began to improve again. Note: A foreclosure usually stays on your credit report for seven years.
As a financial freedom seeker, your baseline goal is to own both stocks and real estate over the long run. If you do, you will likely outperform a large percentage of Americans who own neither.
Now the key question is how much should you own of each asset. Let’s discuss further.
Recommended Net Worth Allocation By Age
We’ve talked in detail about the proper asset allocation of stocks and bonds by age. In the post, I discuss three asset allocation models for stocks and bonds to consider:
- Conventional Asset Allocation
- New Life Asset Allocation
- Financial Samurai Asset Allocation
Therefore, to stay consistent, I will also discuss three net worth asset allocation models based on the Conventional, New Life, and Financial Samurai models here as well. Each net worth allocation model will incorporate the corresponding stocks and bonds asset allocation.
Stocks and bonds (public investments) are usually only one portion of your overall net worth. In addition to public investments, the average person should also invest in real estate. After all, owning a home will always be a part of the American dream.
In addition to public investments and real estate, some people may also want to diversify into alternative investments. An alternative investment is a catch-all term for everything other than stocks, bonds, and real estate.
For example, investments in art, music royalties, farmland, commodities, cryptocurrencies, hedge funds, and collectibles are all considered alternative investments.
Finally, some people may want to start a business while working a day job or take a leap of faith altogether. I call this the X-Factor.
With so many black swan events since 2000, more people are trying to diversify their income sources with side hustles or entrepreneurial activities, especially online.
The Average American Is Not Diversified Enough
To come up with recommended net worth allocation models, we also need to first understand the typical net worth composition of the average American.
Although I love real estate and believe the housing market will stay strong for years, the average American is either too heavy into real estate or has a net worth that is poorly diversified. The lack of diversification is because most of the average American’s net worth is tied up in their primary residence.
Let’s take a look at what happened during the last financial crisis. By 2010, the median net worth plunged by 39% 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 consisted almost entirely of home equity ($77,300 median net worth vs. $75,000 median home equity).
Put differently, 97% of the median American household’s net worth consisted of their primary residence! Thus, it’s not hard to understand why Americans were in such great pain between 2008 – 2010. With a diversified net worth that included bonds and risk-free assets, the average American would have faired better.
Take a look at this chart below by Deutsche Bank. It highlights how a record high 30% of American households have no wealth outside their primary residence.
That’s not good enough. Building more wealth outside your primary residence is a must.
Anybody who has lived through the 1997 Russian Ruble crisis, the 2000 internet bubble, and the 2006 – 2010 housing crisis probably has a good portion of their net worth in CDs, bonds, and money markets because they’ve been burned so many times before.
Investors who were heavy into stocks before the 32% correction in March 2020 have probably thought more about their stock and bond allocation and overall net worth allocation as well.
Thankfully, most asset classes have recovered and then some. However, that’s not to say another big correction isn’t right around the corner with valuations so high.
If you plan to retire right before a bear market hits, you might find yourself having to work for many more years instead.
Figuring Out The Proper Net Worth Allocation
The question we should 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 ages, intelligence, work ethic, and risk tolerance. Further, luck also plays a huge part in building wealth.
I will attempt to address this question based on what has worked for me and feedback from some of the millions of readers who’ve come to Financial Samurai since the site began in 2009. I believe following one of these three net worth allocation frameworks can help the vast majority of people looking to achieve financial freedom.
I’ve also spent over 40 hours writing and revising this post over the years. The goal is for every Financial Samurai reader to grow their net worth in a risk-appropriate manner. Let us make more money in good times and lose less money in bad times.
Finally, before we look at the charts, let’s go through the mental framework for investing and building wealth. When it comes to investing and growing your net worth, you must think rationally.
Mental Framework For The Recommended Net Worth Allocation
1) You are not smarter than the market
I don’t care by how much you’ve been able to outperform the stock market over the years with your stock trading account. Eventually, your performance will likely normalize over the medium-to-long run. Most professional money managers fail to outperform their respective indices. Don’t be delusional and think you can over the long run.
As you grow your assets to the hundreds of thousands or millions of dollars, you won’t be whipping around your capital as easily as before. Your risk tolerance will likely decline, especially if you have dependents and aging parents to consider.
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 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.
Take a look at the active versus passive equity fund performance yourself. It is shocking how many professional money managers underperform their respective indices. The below chart shows that 81%+ of equity mutual funds underperformed over the past 10 years.
2) You are not a financial professional
Even if you were a financial professional, your investment returns will likely underperform. I’ve been investing since 1995, and still regularly blow myself up. As a result, I’ve followed a net worth asset allocation model to minimize potential damage.
Know your expertise. If you are a software engineer, your expertise is in creating online programs, not giving investment advice. If you are a doctor, your expertise may be in giving a patient a catheter, perhaps not so much on real estate syndication. Then again, everything is the wild Wild West nowadays.
It would be nice to know the future. If I did, 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 5-minute presentation to a loved one about why you are investing the way you are, you might as well be throwing darts.
For the typical investor, I recommend no more than 20% of public investment capital go towards buying individual securities. 80% of public investment capital should be invested in passive index funds and ETFs.
3) You only have at most 110 years to live
Statistics show the median life expectancy is around 82-85 years old. Less than 0.1% of the 7.7 billion people on earth will live past 110 years old. As a result, you should 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 wellbeing. The bad thing is you might die too early or live too long. Whatever happens, planning your finances around various life expectancies is smart.
It’s better to plan for a longer retirement and have money left over to give to others than to come up short. This is why managing your finances consistently is so important. You need to predict the future, then spend, save, and earn accordingly.
4) 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 high. Even if you lose all $20,000, you can gain it back with relative ease. When you are 60 years old with $2 million and only five years away from retirement, your risk tolerance will likely be much lower.
When you’re young, you naively think you can work at your same job for years. The feeling of invincibility is incredible. Your energy is what can help make your first million.
However, the longer you live, the more bad (and good) things tend to happen. Your energy tends to fade and your interests will certainly change. The key is to forecast these changes by preparing well in advance.
Do not be deluded into thinking you will always be a certain way. Review your finances twice a year and assess your goals. Accept that life doesn’t go in a straight line.
5) Black swan events happen all the time
Hello, global pandemic! A black swan is supposed to be rare, but if you’ve been paying attention for the past couple of 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 that is not guaranteed by the government. It’s important to always have a portion of your net worth in risk-free assets.
Further, 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 the TV. Watch stations trot out bullish pundits when the markets are going up and bearish pundits when the markets are going down.
Not many people could have predicted a coronavirus pandemic would shut down the entire global economy for over a year and cause tens of millions of Americans to lose their jobs. Always be prepared for a black swan event, especially if you’ve already reached financial independence.
6) Take Advantage Of Bull Markets
Bull markets tend to last between 5-10 years. This is the time period when you can get incredibly rich. The goal is to know you are in a bull market and allocate your net worth accordingly. For example, I believe we will be in a housing bull market for years to come. As a result, I’ve invested 40% of my net worth in real estate.
The last thing you want to do is have most of your net worth allocated towards risk-free or low-risk investments in a bull market. Since 2009, I’ve come across many readers who saved diligently, but just let their savings pile up. As a result of not investing, they fell behind their peers.
The issue with getting rich is that you must take risks. Even if the NASDAQ closes up 43% again, as it did in 2020, you aren’t richer if everybody else is up 43%. To get rich, you must outperform various financial benchmarks.
In addition to investing during a bull market, you should also be more aggressive in your career. Ask for those raises and promotions when times are good. Look for new job opportunities that can immediately boost your compensation and title. In a bull market, demand for labor is high.
7) The Right Net Worth Allocation Will Be Responsible For Most Of Your Wealth Gains
Spending many hours trying to identify promising individual investments will likely be a waste of your time. We already know most professional money managers don’t outperform their target indices.
Therefore, instead of trying to pick the best individual security, focus on having the right net worth allocation first. Having the proper exposure to risk assets is the best way to build wealth over the long term.
Once you have the right net worth allocation, then you can slowly drill down to the types of funds, ETFs, individual stocks, and real estate investments you want to make.
Recommended Net Worth Allocation: Conventional
Let’s start with the Conventional net worth allocation model. The Conventional model consists of investments in Stocks, Bonds, Real Estate, and Risk-Free assets. It is the most basic net worth asset allocation model and also one of the most proven models over the decades.
For those of you who like to keep things simple and who are also fine with working until the traditional retirement age of 60+, the Conventional model is for you. Let’s go through some assumptions below.
Conventional Net Worth Allocation Model Assumptions
- The Stocks & Bonds allocations follow my stocks and bonds asset allocation by age. Please refer to the post and charts for details. The Conventional model suggests a 90%+ asset allocation into stocks in your 20s. Your 20s is a time to save aggressively and take maximum investment risk. Any losses can be easily made up by work income.
- At age 30, the Conventional model recommends buying a primary residence and having 5% of your net worth in risk-free assets. One of your main financial goals should be to get neutral real estate as soon as you know where you want to live and what you want to do. The return on rent is always -100%.
- By age 40, the Conventional model suggests having a larger weighting in Stocks & Bonds versus Real Estate. As your net worth grows, your primary residence becomes a smaller and smaller portion of your overall net worth. At the same time, you may also be interested in investing in rental properties, REITs, or private eREITs to get long real estate instead of just neutral real estate.
- By age 60, the Conventional model recommends having roughly an equal weighting in stocks, bonds, and real estate (30%-35% each) with a 5% risk-free allocation. By age 60, you should be financially secure and should no longer need to take as much risk in the stock market. Bonds and real estate will provide the lion’s share of passive retirement income.
- All percentages are based on 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, and structured notes. Bonds include government Treasuries, corporate bonds, municipal bonds, high yield bonds, and TIPs.
- If you just don’t want to own physical property, then you should consider gaining real estate exposure through REITs, real estate stocks, and real estate crowdfunding. As you grow older, you may not want to own as much physical real estate due to tenant and maintenance issues. Real estate is one of the proven ways Americans have built wealth over the century.
- Alternative investments and your X factor stay at 0%. It’s already hard enough to get people to save more than 20% of their income and buy a house. To then ask to invest in stocks and buy alternative investments may be too much.
Recommended Net Worth Allocation: New Life
The New Life net worth model changes things up around age 40. After living the Conventional way of life for years, you may want to experience a “new life” in the second half of your existence.
Since starting Financial Samurai in 2009, I’ve discovered many of us start wanting to do something new around age 40. Given you’ve had almost 20 years of learning, building wealth, and honing new skills, you may have a growing itch to try a new career, invest in different assets, or start your own side business.
Some call this a mid-life crisis. I like to think of this time as a period of discovery and excitement because you have a solid financial foundation. Therefore, you decide to take slightly more risk. At the same time, you can’t fully let go of the conventional way of life.
The New Life Framework essentially includes investments in more alternative assets like venture capital, private equity, building your own business, and consulting on the side.
New Life Net Worth Allocation Assumptions
- By age 30, you purchase your first property and allocate 5% of your net worth to risk-free assets like CDs now that you have a mortgage. 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.
- By age 40, your net worth has increased handsomely. Your real estate now accounts for a more manageable 40% of net worth compared to 90%+ for the typical American. You finally decide to diversify some of your risk assets into alternative investments like private equity, angel investing, art, farmland, and venture debt.
- Around age 40, you also start a side hustle while you still have a steady job. You’ve always wanted to consult on the side, start a blog, launch an e-commerce store, or teach music lessons online. Whatever your X factor is, you’re finally pursuing it under the safety of a regular paycheck. You’ve begun your new life!
- Also around age 40, you are beginning to wonder what else is there to life. You’re getting burned out after doing the same old thing for almost 20 years. Maybe you negotiate a severance before working in a different industry. Maybe you just take a long sabbatical and transfer departments. Or maybe you decide to join a competitor for a pay raise and a promotion.
- By the time you’re 60, you have roughly an equal balance between Stocks, Bonds, and Real Estate (20%-25%). Meanwhile, your Alternatives percentage rises to roughly 10% of your net worth. If all goes well, your X-Factor rises to about 20% of net worth because you’ve created a valuable asset.
- In your golden years, a diversified net worth provides stability and security as you plan to live until 110 years old. If you die before 110 years old, your estate will get passed down to your heirs and charitable organizations. You adopt more of the Legacy Retirement Philosophy.
Recommended Net Worth Allocation: Financial Samurai
The Financial Samurai net worth allocation model is one where you aggressively bet on yourself (X-Factor). You believe the traditional way of building wealth is outdated. You have no desire to work for someone else until your 60s. Instead, you want to build your own business and have more freedom at a younger age.
Despite your desire for more autonomy, you still diligently build your financial foundation in your 20s and early 30s. The 20s is when you’re learning so that you can start earning in your 30s and beyond. During this time period, you are also actively building your passive investment income streams.
Once your side hustle starts generating enough to cover your basic living expenses, you take a leap of faith and go all-in on your business or your desire for freedom.
Your financial goal is to build a new asset that makes up half or more of your net worth. Your lifestyle goal is to live life completely on your terms.
Let’s review some assumptions.
Financial Samurai Net Worth Allocation Assumptions
- The Financial Samurai model assumes you will have better control of your own financial future than other investments. When you invest in stocks, bonds, and real estate, you are a passive investor. You depend 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.
- One way to ascertain whether the Financial Samurai net worth allocation model is for you is to ask whether you can make a greater than 10% annual return from something you build. 10% is the average return of the S&P 500.
- By your late 20s, you get neutral real estate by owning your primary residence. You understand that it’s not good to fight inflation over the long term by renting. Your real estate and bond investments provide more stability as you seek to take more investment risks and work on your X factor.
- By your early 30s, you start aggressively going to work building your side hustle. After 10 years, you already know you don’t want to do the same job forever. You also know what you want to do after a decade of working. Your initial goal is to earn enough money from your side business to cover your basic living expenses. Once that is achieved, you will take a leap of faith.
- Before leaving your day job, you will negotiate a severance. There is no way you will leave money on the table after devoting years of excellence to your employer. With your negotiating skills and ability to create a win-win situation, you walk away from your day job with a nice financial buffer.
- Despite building your business, you are also focused on building as many passive income streams as possible through your Stocks, Bonds, and Alternative investments. Your goal is to build a large enough passive investment portfolio to cover your desired living expenses. In addition, you want a diversified enough portfolio to keep spitting out income no matter the economic condition.
- At the same time, you are also trying to generate profits from your entrepreneurial endeavor to either cover your desired living expenses, reinvest it into the business for potentially more profits, or reinvest it into more passive income investments. Your business income is essentially another income stream, albeit an active one.
- If you are wildly successful in building your own business, the X Factor column can easily dwarf all other columns. See the below chart from my post, Net Worth Composition By Levels Of Wealth. Notice how the X-Factor, the dark blue portion, grows as one gets wealthier.
The Proper Net Worth Allocation Is Well-Diversified
So there you have it financial independence seekers. Following one of these three net worth allocation models during your lifetime should give you a great chance at eventually achieving financial freedom. At the very least, you should be able to achieve an above-average net worth.
Of course, we must recognize that financial returns are not guaranteed. Your financial journey will be full of twists and turns. As a result, it’s best to keep a diversified net worth mix that can withstand economic downturns. At the same time, your diversified net worth will also benefit from multi-year bull runs.
When it comes to building wealth, I encourage everyone to plan for bad scenarios as well. Expect the occasional 30%+ decline in your risk assets. This way, you will increase your chances of staying more disciplined when it comes to investing.
Remember, the average American has 90%+ of their ~$110,000 net worth in their primary residence. Meanwhile, roughly 35% of Americans don’t even own a home. This lack of net worth diversification is dangerous. It means the average American is not actively investing in other asset classes.
I do not recommend having more than 50% of your net worth in any one asset class after age 40. Once you’ve built a significant amount of wealth, your goal should start tilting towards capital preservation. The last thing you want to do is go back to the salt mines when you’re old and tired to make up for lost wealth.
Perhaps my recommended net worth allocation guides are too conservative. Or maybe they are too aggressive. Whatever your beliefs, you must at least come up with your own net worth allocation framework to follow throughout your life. You can always adjust your net worth asset allocation over time.
Finally, remember to enjoy your journey towards financial independence. Even if you amass enough wealth to never have to work again, you won’t magically feel happier. Make sure you always have a purpose to provide your life with constant meaning.
Suggestions For Building Wealth
1) Diversify Your Real Estate Investments
Instead of going all-in on real estate with a mortgage, be more surgical. Take a look at Fundrise, my favorite real estate platform to help you gain exposure in a much less volatile way. You can earn income 100% passively and diversify your exposure across America with Fundrise.
If you are looking to invest in real estate more surgically, check out CrowdStreet. CrowdStreet focuses on mostly individual real estate opportunities in 18-hour cities where valuations are lower and growth rates are higher. I’ve met them as well and they’ve got an excellent platform.
Both are free to sign up and explore. I’ve invested $810,000 in real estate crowdfunding so far to diversify my investments and earn more income passively.
2) Stay On Top Of Your Finances
To grow your wealth, I recommend using Personal Capital’s free financial app. I’ve been using them since 2012 to track my net worth, analyze my investments, and plan for retirement. I even spent a couple years consulting with Personal Capital in their San Francisco office.
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I’ve spent years updating my recommended net worth allocation models to help the majority of people try to achieve financial independence. I’d love to hear your feedback on how these net worth allocation models can improve. I’d also love to hear what your net worth allocation breakdown is. There is no one size fits all. However, I do believe these three models are relevant for 80%+ of the population.
For more nuanced personal finance content, sign up for my free newsletter. Financial Samurai started in 2009 and is one of the top independently-run personal finance sites today.
The problem with the conventional model is that interest rates are at my lifetime low. I am 65 years old. When interest rates rise significantly people are going to get killed with 60% in bonds. This blows the conventional model (that I first saw when I was in college, and tried to live by for a long time) out of the water. With government spending and inflation going up, interest rates will eventually have to go up. Losses in bonds will be bad. As a result I have too much in Stocks, because I don’t believe in bonds right now. Then I have a lot in CDs and money markets but they are loosing value to inflation. I have asked many financial advisers why I should have 69% in bonds right now, and express my concerns. So far no one can logically support why I should be using the conventional model right now and be 60% in bonds. I would love others opinions here!
Sure. People have been afraid of bonds for the past 40+ years. Yet, bonds have continued to perform well ad we have become a more efficient and technologically savvy society with coordinated central banks.
Have you compared what bonds have done compared to stocks over the past 20 years? I think you might be surprised to learn how well bonds have done.
Here are some thoughts on why I think interest rates will stay low: https://www.financialsamurai.com/why-low-interest-rates-are-probably-here-forever/
At the end of the day, you’ve got to invest based on your beliefs and your risk tolerance. Don’t let anybody tell you otherwise.
I’m hoping that at age 65, you have enough to live comfortably for the rest of your life.
I agree with you Dayle. You buy a 10 year treasury at 1.3 percent, then give 40 percent away in taxes your left with .8 percent return and inflation is at 5%. If you buy bonds now you are guarantying a loss. I understand Sam’s point that bonds have done well over the last 20 years but at todays prices they simply do not make sense.
People keep saying how overvalued stocks are now but if the S@P earns $200 a share this year then stocks are trading at about 30 percent above historical averages. Bonds historically trade at the rate of Inflation. Even if you use a conservative 5% percent inflation rate right now that puts bonds trading at nearly 400% above their historical average. It is simply nuts to be buying bonds at these prices.
All that being said Sam’s “X factor” is more important than ever if you want to generate income.
I pulled out from all my bond holdings several months back. I’m about 15 years younger. It was about 20% of my asset allocation. My thinkin is the same as yours. I figure the yield I get just by having my money in an S&P 500 index fund is not far off from what bonds are paying right now. I’d rather wait until rates go further up in a couple of years before considering them again.
Very good article. I would say my current portfolio allocation is closest to the New Life allocation, although slightly more aggressive as I don’t have much in bonds. I’ve also begun my X-Factor work earlier than outlined, although I haven’t made a 5% financial commitment to it.
Side note – In the home ownership chart it shows that home ownership decreased from 2005 all the way to ~2015, well into the recovery from the Great Financial Crisis. I would’ve expected to see home ownership at least flatten in the early 2010s. A lot of wealth was created between 2010 to 2015, yet home ownership continued to decline. It makes me wonder if there are more individuals that have the financial capacity to purchase homes, yet make a lifestyle choice and don’t. We’ve seen an increase in home ownership since ~2015 as you point out due to credit scores recovering from the GFC, and presumably cheaper debt. But I wonder how big that contingent is of folks that have built wealth over the past five years and choose not to purchase, even though they can.
I have a friend with a net worth of roughly $100M, and he doesn’t own any properties – directly anyway. He currently is renting an East coast, West Coast and Tahoe house. And he just floats between them for business need and leisure. He said no reason to buy a house if he doesn’t need just one home base.
In addition to that I know several people in the DC area with incomes in the $250-500k range, and they all choose to rent as well.
So perhaps your thought process is correct.
Hello Sam,
Thank you for the great posts. In this one, I would suggest that you break out stocks and Bonds into Stocks and seperately bonds. This will be one of the largest determinates of success for your readers. This article highlight x-factor which can make millionaires and billionaires of some of your readers, but division between stocks and bonds will play as much real estate. Just a suggestion.
Thanks for the feedback. Although I have a section that explains the Stocks & Bonds column incorporates my stocks and bonds asset allocation by age recommendations from a previous post, I can see how you and other readers may have missed it in this very long post.
Therefore, I have added the three respective Stocks and Bonds allocation models to each net worth allocation section. Hope that is more clear for everyone.
Wow thanks so much for such a thorough article. This is so helpful! I’ve been overly weighted in stocks for a long time. And although I’ve benefited from the ride up, it’s time for me to diversify my allocation more especially now that I’m getting older and I don’t want all my eggs in one basket.
Being able to see your three different frameworks is really helpful too because I’m a visual person. I am going to try something close to your new life framework. Great name btw!
50YO, NW~$3M but about 2/3 is in a paid for home. Kids start college soon, planning to pay/cashflow 80%. Down to one income due to COVID. I could return to a regular job or I could tackle an X factor project (preferred) Any advice on does and don’ts? My take is, Bootstrap, don’t put assets at risk, target to replace previous income over 3-5 years, potential larger upside (blue bar on the color graph!) Alternatively, If striking out on my own I could buy an existing business and put at risk some of my current net worth (not ever going into debt again), or go 100% personal digital company where costs are minimal and it’s mostly my time investment, or somewhere in between, with the caveat that it doesn’t count to my net worth unless I can sell it. For our risk/lifestyle the Newco could never make money and we could probably retire comfortably with a rebalance into a cheaper primary residence. At age 50, would be interested in what you would do if you woke up in my shoes?
This is one of the best financial articles I’ve read in a long time. Thank you. One question though. When determining percentages of your net worth, how do you factor in retirement accounts? If someone’s net worth is heavily weighted towards retirement in 401k/IRAs that are built primarily out of mutual funds, does that mean you suggest diversifying those accounts so they’re more equally balanced across bonds, money market funds, etc? We’re heavily weighted in the stock category because of this, but unsure on how to reallocate into more real estate and risk-free areas.
Hi Sam, I’d really like to hear your thoughts on folks like me that have an unbalanced portfolio allocation. Currently, my wife and I have 90+% of our 401k in equities, 3x more than you! How does one go about a more balanced allocation when in this type of scenario when not having much flexibility with the type of assets in the 401k?
Without knowing what options you have within the 401k, it’s kinda hard to see your options wrt decisions inclusive of that program’s offerings. E.g., if the 401k has target date fund accounts and your are in a 2060, you’re probably at 90% equities. If the 401k offers other target date funds (one would assume so), you could shift or contribute to another offering that has a larger % bonds, such as a 2030 plan that is likely 65% equities/35% bonds. Either through future contributions or shifting your current holdings, that would begin to balance your allocation.
Alternatively, if you have no real controls or options within the 401k, ETFs such as AGG, BND, BNDX all offer excellent diversification within the bond segment. Buying those outside of your 401k in tax-advantaged accounts such as HSA or Roth or in non-advantaged accounts can help you diversify. Personally I’d say ‘no’ on the Roth — use it for potential high-reward plays, but that’s up to you.
Hello Everyone! I’m 22 years old, and I’m trying to figure out how to allocate my assets moving forward. Does anyone know if an emergency fund in a high yield savings account, counts towards the “Risk Free” column? Or since it is strictly for emergencies, should it be ignored when looking at asset allocation?
Yes high yield savings is risk-free category.
I wonder with interest rates low rising and the NAV able to fall on a bond fund, do you view bond funds as deserving the same allocation % as an actual bond one can hold to maturity?
Love your posts, and have read this specific one several times in the past. I realize your answer will need to have tons of asterisks associated with it, but am just curious – in the current US market, and pursuant to your note in this article on Bull Markets…would you generally recommend that people move money from stocks into bonds to ride out potential dips coming as there is a leveling from historic highs? Or would you leave money in current stock-based allocations? Total timeline/horizon before tapping into funds is 20+ years.. just trying to figure out how to juggle investments in this odd time.
Great articles Sam and thought provoking information, thank you. Curious about a statement above seemed to indicate equity in a primary residence was excluded in the model. While I agree that’s good conservative planning, home equity tax free profits have been an important, perhaps lucky, part of my growth. Bought home in San Jose in ‘09 for $560k, sold in ‘17 for $975k. This created a meaningful tax free profit to use for my next home purchase in Walnut Creek for $1.39 now valued $1.75. We have children raising in this home so *unfortunately* will likely exceed the $500k profit but are considering this when looking at primary residence planning. What are your thoughts on primary residence equity planning?
Feel free to count your home equity as part of your net worth. Just be conservative with the calculation.
Ive used Personal Capital for a couple years, as a suggestion from this site. I cannot express the value it brings as it really shows you what you have and your direction. The ability to link all of your assets and liabilities along with you spending has helped me cut unnecessary costs and dial in my direction.
I love all your posts Sam, they have truly helped me get closer to retirement.
Hi Gary, great to hear you’ve made so much progress! Let’s all pray that the coronavirus pandemic gets under control and that everything will get better over time. It’s more important than ever to stay on top of our finances!
Thanks for this article, I like breakdowns like this. I’m not sure if I agree for myself personally, particularly in this environment. I’m self-employed, I have only been investing since last summer since I learned about it. Povertyish (1-2x/fed limit- this year I’m at least 4x!!) until this past year, no regrets tho and a great lifestyle. I’ve gone from $0 net worth to $29k since 10/19 (it’s 7/20 now) so I’m pretty stoked.
I started late and feel ok to take more risk having a higher % of allocation in stocks, at least while I’m working on growth. My CoL is very low.
I don’t feel super confident in bonds in this current market. I also feel like keeping liquidity is good. I have my IRA from last year fully in ETF’s, about half foreign half US (small, large, emerging, REITs etc). I found out it wasn’t too late to open a SEP IRA for last year so I’ve got that 20% invested in gold and silver instead of bonds right now (in total, it’s about 10% of my total retirement accounts rn). Considering Mix of physical (mostly) and miners stocks/ETFs.
Also there’s a part of me that feels like I can get a higher RoR outside the market- my current plan is to keep cash on hand until I fund the retirement accounts each year. I have been doing bank bonuses for some years, and I’ve recently accumulated enough cash to start with Kickfurther, hoping to do some other opportunities like Groundfloor (I’ve only tiny money there, it’s been good so far), CrowdStreet, or even the Vinovest. The crowdfunding opportunities look good to me, more ability to choose? My REIT ETF has done terrible this year (still down 23%, yikes) so I’m hesitant on only it as a percentage of my RE. I live in my bf’s place and we are trending towards the M word, and he doesn’t want me to be responsible for paying off his mortgage (yes, I do contribute equally to household expenses and tiny amt rent. He’s close to paying it off anyway). So I don’t expect to have any of my net worth in any physical RE that I live in. I’d also like to have a small amount invested in crypto (<5%).
Also wondering if it's worth it or not to pay the extra $ to set up something with mysolo401k etc to include alternative investments, or to just keep with Schwab doing their version, and keep the alternatives in taxable accounts. We're not talking massive moneys but I guess every bit counts?
Solo401k is a terrific idea if your income is not of W2 kind
I was a 1099 contractor for defence industry.
Its fairly easy to setup
Open non-conforming account with Fidelity or other brokerage firms.
You pay no management fees.
You appoint yourself as a Administrator and a Treasurer.
You can invest in whatever you want, but the only limitation is no self dealing.
Another great benefit that you can contribute to your Solo401k much more than with the regular 401 k
Years ago when I contributed, I I coukd put away up to 54k
There is such a thing as a deffered compensation that makes this possible
I’ve always wondered about this statement (seen similar in other sites regarding 401k balances). “To start, the median 401(k) is hovering only around $100,000. The average 401(k) balance at retirement age 60 is only around $230,000. ”
Is this the combined 401k of a person across all accounts or just each account? A person changes jobs during his career and usually has multiple 401k accounts (or may have converted to an IRA). So wouldn’t his 401k savings (including those converted to IRA) actually be more than what this suggests? Thank you.
That is a good point. The average and median balances are based on Fidelity and Vanguard median and average balances per account.
So yes, the likely combined 401(k) balance per person is probably a little bit higher. However, I think most people will transfer the 401(k) to the new employer. For those who do not, they will roll it over to a IRA.
Since I started this site in 2009, I’ve received a lot of pushback from my 401(k) by age balance post, saying the numbers are too aggressive. But many of the same people 5 to 10 years later have said actually, they are just right.
What’s your situation?
The assumption that “most people rollover their 401(k) to their new employer” is a bit presumptuous.
I think there’s more likely three way even mix of (a) people who roll it over to the new employer, (b) people who roll it over to an self-directed IRA and (c) the people who have no clue and just leave it at the old employer because they can’t be bothered with a little paperwork.
To me the most adventitious is to do the self-directed IRA at a discount broker – so many more investment options available to insure your well-balanced portfolio.
It just makes more sense in the long run.
I’m glad you mentioned REITs. They’re especially useful for busy parents who want to get into real estate but don’t have the bandwidth to manage rental properties with a full-time job.
I’m not sure about the allocations. The stock allocation seem to be a bit conservative especially since people are living longer.
Also, historically downturns last only a couple of years then the market recovers (i.e., there are more good years than bad by far). So as long as people can stomach a couple of years of major losses, it seems like their portfolio should be fine.
REITs are a good alternative, however, REITs proved to be MORe volatile than stocks during the 1Q2020 downturn, so folks need to beware.
Do you consider the home equity the RE portion of your net worth or the full value of the home regardless of mortgage?
Yes. Although it’s good to value the equity conservatively.
Hi Sam,
I’m 51 and am very real estate heavy with just over $1.2 million in equity from 4 rentals and my primary home and have 200K in cash. I retired from the Army 5 years ago and receive two pensions (Army and VA disability, which is tax free) the two total 7K each month. I just started a Roth which I really will never have to touch with the pensions I receive each month. The rentals are all single families and always rent easily and total cash flow is $1500 a month in total. I live just outside Seattle. I am comfortable with them but I have been thinking of selling 1 or 2 in order to pay off 2. Any suggestions/advice is greatly appreciated.
Thank you
Big Sarge,
If you end up selling, let me know. I live outside Seattle as well.
MI,
Lol, you sound like a younger version of me!
I know if I sell, I will most likely regret it 3-5 years from now. As you know everybody around here is pushing south for affordability and the homes are in Yelm, perfect location for the military.
Thank you for your service Big Sarge. I’ve been hearing that the “rent to own” contracts allow for the owner to take a much larger deposit upfront and then rent it out for high prices. Typically, 90% of the time the renter doesn’t end up buying.
Hey Robert,
Thank you, it’s much appreciated. I have no idea about the rent to own subject. I have never looked into it and more than likely never will. I have property management. As I was promoted up through the senior levels I learned a very important aspect of leadership and business. “Keep one person between you and the task”. Property management is the way to go, especially when dealing w/multiple properties.
What’s your overall net worth?
If I had $1.2 million in real estate equity, my goal would be to have a total net worth of between $3 to 4 million.
Then again, you’ve got to do what’s most comfortable for you. As you pay off your real estate, the leverage decreases, and so does the risk.
Sam,
My overall net worth is 1.5 million. I know it’s more because of my life time pension, but it’s hard to factor in and put a value on it as the pension is for life. Like you I love real estate. I know I’m over leveraged on it, but I have a big cash reserve and made it through the real estate bust of 2007-2009 w/no issues of vacant rentals. I just started a Roth for both myself and wife that we will max out each month and won’t ever have o tap in to but will begin at mandatory age 70.
This is an excellent article for people to pay attention to regardless of their financial goals. Finding your net worth, keeping track of it, thats one thing. The underlying asset allocation and it’s actual risk tolerance is another. Warren Buffet once said, never lose money. This is very true the more you age where it becomes increasingly difficult to make that money back.
Really great insights in this post thanks! I’ve gone into savings mode for the rest of the year. My goal is to save up some cash to slowly deploy over the next 6-12 months, declutter my house, reuse as many things as I can, and only buy things that I need or that my kids will benefit from. The one minor snag is most of the donation places are still shut down so I’ve got boxes piling up. But it’s gonna be a great feeling when I can finally get them all out.
It always feels great to save up cash during times of uncertainty!
It also feels great to pay down mortgage debt and any type of debt there is.
We can almost treat this time. Like a game. Let’s make it fun and at the very least!
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.
Newkid,
Did you take advantage of the stock market dip in Feb/March 2020? If so, that would have been an opportunity.
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 :)
Chuck- I’m always interested in that question too!
From articles/comments that I’ve read before on Sam’s blog from past readers…I think 15-20% of your total net worth should be on your final housing. If you want to sleep at night….no mortgage obviously. So if your net worth is $1.7M- I’d only buy a $250-340K home. I’m curious to see what others think…
Sam- your advice?
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!
VS,
FinSam’s allocations are conservative for my taste, but they provide more stability and security in a volatile market. I would say invest based on your risk tolerance and invest what you can afford to lose. Here in the U.S. stocks, bonds, and real estate are three of the biggest investment vehicle investor rely on to achieve millionaire status and/or FI.
$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.
Yeah, really depends. TBH my FIRE number is about half that. Tho that means I still plan to do a touch of side hustle a month still- playing music, deliveries (aka getting paid to exercise on my bike), other misc one-off gigs. Maybe even something more passive eventually. Comments like $27k per year isn’t enough is very offputting to myself and the majority of people I know who would do amazing on that (especially if it included a neutral-RE situation (tho I know plenty of people doin ok who aren’t neutral-RE yet). I’m just glad to see someone else who can see things in a similar light to me, I’m not crazy.
Can you elaborate? Your FIRE number is half of $27K/year? So $13.5K/year is what you expect to live in retirement?
I’d love to get an idea of your expenses. Thanks
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
Personal Capital looks mainly/only at stocks, bonds, alternatives, cash in your public investment portfolio. Real estate is missing. So the overall number is different.
That’s the one thing digital wealth advisors have a tough time seeing, and therefore making pertinent recommendations: your entire net worth.
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.
If you are past age 70 and are childless, I wouldn’t change anything. Clearly, things have worked great for you guys. No need to complicate things.
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…
At 58, I don’t think it’s wise or worth it to get into debt/more debt. Enjoy debt freedom instead.
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 :)
The methodology is based on my own experience and what has worked for me and several other close friends who achieved financial freedom by 40 as well.
If you read each bullet point under each framework, it will explain the WHY.
And if you don’t agree, develop your own net worth allocation framework.
thx
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.
If your business has value (can be sold), it would be classified under X Factor.
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
Use $500,000 equity as your RE portion. Then discount it due to transaction costs and to be conservative.
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.
If I can get my CA home to 20-30 percent of net wealth by retirement I will be quite happy…
Goals….
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.