Financial Tracking, Asset Allocation & Withdrawal Rate(s)

2016-08-22 - Asset Allocation

This is the post that I haven’t had much interest in writing, but one that quite a few people have asked about.  If you look at early retirement forums and financial planning sites, everyone seems to love to talk about portfolio tracking, asset allocation, and withdrawal rates.  More than anything, people are concerned about running out of money in retirement and so they are searching for insights on what makes the best withdrawal rate.

I haven’t written about it because: 1) I personally find these kinds of articles boring to read; 2) we are off to a great start this year so I haven’t thought about it too much; and 3) our annual budget has a lot of discretionary spending in it, so it may not be the most comparable for other people.

That said, I know that many people like to get in the numbers and see the detail of others’ FIRE plans.  In the interest of giving you a real life benchmark or example to compare against, here are the headlines of our FIRE plan on these three dimensions:

PORTFOLIO TRACKING

The year 2016 is a big one for us in a number of ways financially. I quit working, our son is heading to college, and my wife and I are both turning 50 years old.  With so much going on, my biggest fear was that all of these milestones would coincide with a sudden market collapse due to some unexpected geopolitical crisis or economic bubble burst.

The good news is that none of these ugly scenarios have come to be (so far) and our investments are looking pretty rosy with our portfolio up a bit more than 16% this year.  (I covered our portfolio drivers in this POST)  Even the sleepy S&P 500 seems to be shaking off the doldrums and is now up 6.5% year-to-date with some nice gains in July & August.

As a result, we are WAY ahead of our modest projections for the year.  I had hoped to grow our portfolio by 4%, even as we stopped working and moved into spending mode.  Yet, with the portfolio up almost 16%, you could say that we are as much FOUR YEARS ahead of where we expected to be in our early retirement model.

ASSET ALLOCATION

Our asset allocation is probably a bit conservative.  You can see from the chart below how I think about it.  I think of anything to do with the stock market is risky, bond funds are OK, and our real estate, pension, & cash holdings are pretty safe.

Screen Shot 2016-08-08 at 5.30.11 PM

Over the years, I have been using the old rule of thumb that you should have the same % of your portfolio “safe” as matches your age.  I’m 50 now, so perhaps no surprise that the red allocations are pretty close to 50% of the total.

Since volatile stock options still represent a quarter of our portfolio and we need them to bridge us to our pension years (age 55 or older), I feel like it is good to be conservative at this point.  Similarly, we are holding a good deal of cash – equal to 3 years spending – as a cushion against any stock market unpleasantness.

In our latest round of portfolio planning with our financial advisor, we’ve begun to make some decisions to put more risk into the mix and I could see us getting to more of a 55% risk/45% safe position before the end of the year.  To do so, we’ll probably move some cash back into equities – I’m a fan of low-cost “buy and forget” index funds.

WITHDRAWAL RATE

Despite the good news in our portfolio balance, we haven’t really been spending much more money.  We indulged in a new sports car, but if you amortize the cost of that out a few years, we are basically right on our spending target (we also traded in our old sports car).  In fact, I think there is a good chance we may even end up spending a little less than expected.

Our planned withdrawal rate for 2016 was about 4.1%.  That’s pretty close to the Trinity Study recommendation of 4% for a “normal, 30 year retirement”.   Since our investments are running so far ahead of our expectations this year, our actual rate of withdrawal will probably end up being closer to 3.5%.

Since we are retired at age 50, you might argue that it would be good for us to be a little more conservative, but FIRECalc shows no real issues if we were to spend as much as 5.0%.  I’m not sure why that is exactly – but given that a high percent of our spending is discretionary, it wouldn’t take too much for us to cut back if we needed to.

So that is a look under the hood of our FIRE financial planning.  Happy to take any suggestions, complaints, or snappy remarks in the comment section.  Often I do learn from other people making an insightful remark about these types of posts …

Image Credit: Pixabay

17 thoughts on “Financial Tracking, Asset Allocation & Withdrawal Rate(s)

  1. You’re in an enviable position, Eric. That’s a pretty large cash holding. Any plans for it? Or just a large emergency fund to ride out any downturns?

    Best,
    -PoF

    Liked by 1 person

      • I appreciate that you shared that you could always cut back if things weren’t going well with the markets. We ran a few worst case scenarios and it we absolutely had to – we could really downsize and cut spending back incredibly. We could also likely get some type of work. The amount you have in cash would help me to sleep better too. Checking the returns gets old and that is a great way to put it out of your mind for awhile.

        Liked by 1 person

    • The portfolio is not diversified, a large portion (25%) of it is concentrated on a single stock. But it’s a food company, not a tech stock.
      It’s had a great run… time to diversify down to under 20%? If stock went down to midpoint between today’s market price and the option price, you’d be looking at 26x annual expense rather than 30x… cutting it close.
      Did your financial advisor have any opinion about this?

      Liked by 1 person

      • Yes – we’ve been trimming the stock options for a for a few years now. It poses a lot of risk, but the stock also has a very low beta. It is declined only once in the last 30 years (and only -0.5% that one year.)

        Like

      • I’m in a similar situation, with 20% of my portfolio concentrated on a single tech stock (former employer). This is after already selling 98% of my shares, which tells you how much it went up these years! In hindsight, diversifying was a terrible move financially but the stock volatility was/is just unbelievable.

        Are you trimming slowly due to tax considerations? Not sure if you’ve offset the stock option portion of the portfolio with tax liability. My stock’s volatility makes it very hard to do any tax planning.

        Like

      • We’re in the max tax bracket – no way around it regardless of what we do. We’ll be out of the options in about 6 years, so 1/6th of the value will go away.

        Like

  2. How did you get 16% growth this year with such a portfolio? I was able to get similar result with a more aggressive one and starting investing in February just after a funny 10% January loss of the stock market 🙂

    Liked by 1 person

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s