Early retirement: advice on timing, asset types and allocation

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toaster
Posts: 2
Joined: Sun Mar 19, 2017 11:29 pm

Early retirement: advice on timing, asset types and allocation

Postby toaster » Mon Mar 20, 2017 12:29 am

Emergency funds: yes
Debt: mortgages
Tax Filing Status: Single (couple, unmarried)
Tax Rate: 28% Federal, 9.3% State
State of Residence: California
Age: mid 30s
Annual desired spend: $50K
Portfolio: low 7 figures
Current allocation (that needs to change): 30% cash, 55% stocks, 5% bonds, 10% property
15% in retirement accounts

Hi BH community,
New to the community, first-time poster and really appreciate having this forum for some advice. We are financially planning for our early retirement next year in 2018 and want to set up our asset allocation to meet our needs: (1) cash flow of about $50K (dividends, rent, ideally not touching investments) (2) medium to high risk, we are in it for the long term but will be nervous during a crash given that we won't be earning any income (3) beat inflation over a long period of time.

We are in the midst of selling off our risky individual stocks and our primary residence which will be leaving us very skewed towards cash. We are completely on board with the low-cost index funds, buy and hold strategy but we are conflicted on timing, asset types and allocation. We would appreciate your general advice on asset allocation to achieve our early retirement goals, specifically around these considerations:

1) Timing: I know the general advice is to not try to time the market and that immediate investment tends to outperform gradual investing. Does the fact that we are planning an early investment within a year change anything? And that it will be close to 40% of our portfolio? Also we think a market correction is overdue.
2) Asset types: we like the idea of high yield bonds because they provide cash flow from dividends for our income but they are priced high at the moment, bonds seem to inevitably go down from interest rate increases and stocks seem overvalued.
3) Our latest thinking is 35% US Stock, 20% Intl Stock, 10% HY Bond, 20% Bonds, 12% rental property, 3% cash.

Thanks in advance for any feedback and insight into anything we haven't thought of!

Sidney
Posts: 6606
Joined: Thu Mar 08, 2007 6:06 pm

Re: Early retirement: advice on timing, asset types and allocation

Postby Sidney » Mon Mar 20, 2017 8:15 am

Here are a couple of thoughts.

One: Try to push to the back of your mind a focus on cash flow vs. return/risk. Mainly to make sure you don't make moves which might be sub-optimal from a return/risk standpoint just because they are "cash generating."

Two: If you plan to do any charitable donating after you retire (and presumably when your tax rate is lower), instead of selling, consider moving some of the individual stocks (if they have unrealized long term gains) to a donor advised fund and take a deduction in a year when you tax rate is higher.
I always wanted to be a procrastinator.

zuma
Posts: 257
Joined: Thu Dec 29, 2016 12:15 pm

Re: Early retirement: advice on timing, asset types and allocation

Postby zuma » Mon Mar 20, 2017 9:22 am

Re: dividends/income -- Since you're investing for the long term, consider a total return approach to your portfolio instead of focusing on high yields. Here's Vanguard's take:

https://personal.vanguard.com/pdf/s352.pdf

By focusing on the entire return earned by the portfolio—rather than its individual components—a total-return approach provides several advantages compared with an income-only method. Namely, the total-return approach:
• Maintains a portfolio’s diversification (risk exposure);
• Allows the portfolio to be more tax-efficient;
• Increases the portfolio’s longevity.

I think this warning is probably more relevant for someone with a bigger bond allocation than you (30% seems reasonable to me), but it's still helpful to keep in mind.

toaster
Posts: 2
Joined: Sun Mar 19, 2017 11:29 pm

Re: Early retirement: advice on timing, asset types and allocation

Postby toaster » Mon Mar 20, 2017 10:15 pm

Thanks for the thoughts and reading material! Makes sense to prioritize the overall performance vs. the income but having a certain % yield coming in is definitely tempting and attractive during retirement. I have a couple of follow-up questions:

Does a 10% allocation on high-yield bonds seem reasonable? Should it be categorized as something in between a stock and bond in terms of risk measurement? We are considering the Vanguard High Yield Corporate Fund Admiral shares VWEAX.

In terms of selling off of individual stocks, the donor advised fund is an interesting option. Are there any other options to help with capital gains tax? One thing we were considering was selling when our income would be zero to be below the taxable income level but that would risk delaying the diversification.

And also appreciate any thoughts on timing, should we deploy capital immediately when we finalize our asset allocation? Everything is quite high at the moment.

Thanks again!

zuma
Posts: 257
Joined: Thu Dec 29, 2016 12:15 pm

Re: Early retirement: advice on timing, asset types and allocation

Postby zuma » Mon Mar 20, 2017 11:41 pm

You will need income during retirement. One way to generate income is to rely on high-yielding funds that pay regular dividends. Another way is to withdraw money from your portfolio (at a safe rate) by selling shares. A total return investor generally prefers the latter method because it's a better long-term strategy despite being somewhat counterintuitive.

Re: market timing -- if you are comfortable with your AA then I see no reason to wait.

inittowinit
Posts: 47
Joined: Thu Jul 05, 2012 6:37 pm

Re: Early retirement: advice on timing, asset types and allocation

Postby inittowinit » Tue Mar 21, 2017 12:38 am

toaster wrote:
And also appreciate any thoughts on timing, should we deploy capital immediately when we finalize our asset allocation? Everything is quite high at the moment.

Thanks again!


I don't know about you, but I don't have a good way to figure out whether stocks are overvalued or undervalued, so I just buy and hold. Not at all the same situation as yours, but anecdotally -- I lump sum invested a moderate inheritance I received earlier this year into VTSAX and VSIAX, despite people saying they're overvalued (though my risk tolerance may be higher since I am a bit younger than you and still an early accumulator). The factors affecting my decision were that my IPS states I should not market time, the lit seems to say lump sum investing ends up with better results more often than DCA, and I was willing to deal with the disappointment even if I were to miss out on DCAing into a big market downturn.

Here are a couple of articles from the wiki with good information to help you make your decision. Note they also contain a list of links to other resources at the bottom of the page. Man I love the wiki.

On Market timing: https://www.bogleheads.org/wiki/Market_timing

And on lump sum vs. DCA: https://www.bogleheads.org/wiki/Dollar_cost_averaging#Dollar_cost_averaging_versus_lump_sum

On High Yield Bonds (note the heightened credit risk): https://www.bogleheads.org/wiki/High_yield_bonds#Credit_risk

And here's a few fantastic threads that discuss total return vs. dividend or income investing:
- https://www.bogleheads.org/forum/viewtopic.php?t=189731
- https://www.bogleheads.org/forum/viewtopic.php?t=170720
- https://www.bogleheads.org/forum/viewtopic.php?f=1&t=122734
- https://www.bogleheads.org/forum/viewtopic.php?t=169520

I have also seen lots of discussions on the board lately asking questions about whether to hold off investing now because the stock market is priced too high and bond yields are rising. If you haven't yet, search the forum history for relevant terms (stock prices, overvalued, move to cash, etc.), I think you'll find a lot of good recent opinion on that subject.

A few things I've seen people say repeatedly on those forum posts that've stuck in my mind:

1) Time in the market beats timing the market. It's better to be in, statistically, and hard to determine whether something's "overvalued".

2) Stocks tend to go up and despite current P/E ratios (which I hear many people say don't even necessarily seem all to ridiculously high from an historical perspective) this could still potentially be the cheapest that stocks will be in your lifetime. Like imagine even if they're overvalued, who's to say they won't just correct by plateauing for a super long time, instead of crashing and climbing back up (like many seem to assume will happen)? So, might as well invest now.

3) Outside of US stocks and bonds, there are other markets like international stocks and other asset classes that seem undervalued at the moment. So saying certain markets are overvalued isn't necessarily a good reason to hold off investing altogether, unless for some reason you have a policy against holding whatever asset classes happen to currently be undervalued.

HIinvestor
Posts: 1125
Joined: Tue Apr 08, 2014 3:23 am

Re: Early retirement: advice on timing, asset types and allocation

Postby HIinvestor » Tue Mar 21, 2017 4:56 am

Just curious about your thoughts on how you will get and maintain medical insurance and obtain healthcare. That is a big issue that looms larger as one ages and chronic health problems develop and require ongoing treatment and attention.

Also do you ever plan to have kids? How will that affect your plans?

harvestbook
Posts: 228
Joined: Sat Mar 18, 2017 7:12 pm

Re: Early retirement: advice on timing, asset types and allocation

Postby harvestbook » Tue Mar 21, 2017 6:35 am

My rule of thumb is the first job is to sleep well at night. I know the statistical history says you are better off lump-summing right away (I think I've seen 62ish percent chance of it being the best method), but if second-guessing will cause you emotional pain, then a short-term DCA plan might help. Personally, I don't like to lump-sum largish amounts. For instance, with my IRA I begin paying $500 a week in the first week, so my $6500 contribution is spread over 14 weeks BUT I do not deviate from that plan. Then I start on my HSA at the same rate. This spreads it out but doesn't give me an excuse to delay. I always invest $250 a week in my taxable account no matter what. These are small potatoes compared to many BHers but it works for me--I don't have to think about being smart, guessing, "knowing," or wondering which of the experts are right.

Also unclear on how much debt you have--I'd be very wary of entering early retirement with a lot of debt. (Again, this is a personal emotional trigger for me--I loathe debt and would rather pay off debt than invest, and you say "mortgages" plural.) Is your rental property paid for? If not, then that to me it's as much or more a liability than asset. A few renters skipping out, some expensive repairs, or disaster could cause a drain on the other 88 percent that you might not be able to cover easily. Those factors seem more critical than what types of bonds to choose, but I like to play the middle of the road with intermediate tax-exempt and total bond. Good luck.


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