Crafting Our Early Retirement Recipe: Our 2016 Asset Allocation Strategy

As we approach our dream of early retirement, I can’t help but feel a mix of excitement and careful consideration. It’s been nearly a year since we last dove into our asset allocation strategy, and boy, have we learned a lot! Today, I want to share our updated approach to ensure our hard-earned money works for us while we’re lounging in that hammock we’ve been dreaming about.

Our Current Asset Allocation: A Snapshot

Before we dive in, let’s take a look at where we stand right now, with about three years left until our planned early retirement:

• Cash: 1.2%
• International Bonds: 2.6%
• US Bonds: 12.2%
• International Stocks: 22.9%
• US Stocks: 55.1%
• Alternatives (mainly REITs): 5.8%
• Unclassified: 0.3%

The Target: Fine-Tuning Our Recipe

After countless hours of research and some helpful guidance from Personal Capital, we’ve settled on a target allocation that we believe will serve us well into early retirement:

• Cash: 1.0%
• International Bonds: 2.4%
• US Bonds: 10.6%
• International Stocks: 22.8%
• US Stocks: 52.8%
• Alternatives (mainly REITs): 10.5%

You might be wondering, “Isn’t this a bit aggressive for someone so close to retirement?” It’s a fair question, and here’s our thinking:

1. We’re aiming for a safe withdrawal rate of 3-4% annually.
2. About 2% of that will come from dividends and income returns.
3. The remaining 1-2% will come from capital gains.

Our current allocation has historically returned about 8.9%. Even if we fall short of that (because, let’s face it, the market can be unpredictable), we should have plenty of cushion for growth.

Risk Management: Our Five-Year Rule

One of our key strategies is the “five-year rule”: any money we think we’ll need in the next five years doesn’t go into stocks. That’s why we have bonds. If the market takes a nosedive (hello, 2008 flashbacks! ), our bond allocation should cover five years of expenses plus dividend income.

Here’s how our strategy looks on the Personal Capital Efficient Frontier:

Tax Optimization: Location, Location, Location

We’ve also been smart about where we hold our assets:

• Bonds go in our 401(k)s to shield them from taxes.
• REITs find a home in our Roth IRAs, thanks to their high distribution requirements.
• Stocks, with their lower tax rates on dividends and capital gains, are more flexible.

The Home Fund: A Slight Detour

Originally, we planned to buy real estate abroad ASAP. But you know what? Life’s unpredictable. We’ve decided to keep our options open and save for a future home purchase more conservatively.

We’ve set up a separate fund using the Vanguard LifeStrategy Income Fund (80% bonds, 20% stocks). It’s a bit more aggressive than pure cash savings, but it gives us flexibility and potential for growth.

What’s Working for Us

If I had to sum up our FIRE journey in a few points, here’s what’s been key:

1. Tracking and minimizing spending
2. Paying off all debt
3. Saving aggressively
4. Avoiding lifestyle inflation
5. Spending on what truly adds value to our lives

Looking Ahead

We don’t have a crystal ball, but we’re confident in our long-term strategy. Our goal isn’t to outperform the market but to sleep well at night knowing we’re on track for the early retirement we’ve been dreaming of.

As we continue to invest over the next few years, we’ll stick to this allocation, adjusting as needed. It’s not just about the numbers—it’s about creating the freedom to travel, pursue our passions, and live life on our own terms.

Here’s to crafting the perfect retirement recipe—may it be as satisfying as that homemade pie we’re looking forward to enjoying on a lazy Sunday in our future!

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I’d like to conclude with a quote that captures the essence of long-term investing:

“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for ten years.” –Warren Buffett

What would you do differently if you were planning an early retirement than we did? What asset allocation works best for you as an early retiree?

Risk disclosure: All investing involves risk, including the possible loss of principal. The material contained on this website is for discussion purposes only and should not be construed as financial advice.