What is the right asset allocation for early retirement in a LCOL place?

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Phyneas
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Joined: Tue Apr 27, 2021 9:10 pm

What is the right asset allocation for early retirement in a LCOL place?

Post by Phyneas »

Here is my current situation:

1) I live in a very low cost of living area (25-32k per year with a nice vacation and good quality healthcare) and plan to continue to do so going forward.

2) I'm unmarried with no kids and no mortgage/debts, and I over-save like crazy because I don't like spending money.

3) My current net worth is $2.23 million, at the age of 37.

4) Due to some recent health problems I've changed my plans a bit, and I'm thinking about retiring in the next year or so and focusing more on things that interest me, as I'm fortunate enough to be in a financial position to do so. As such, I've been doing a lot of reading about safe withdrawal rates/variable percentage withdrawal, and asset allocation, both on here, elsewhere (https://www.financialplanningassociatio ... nity-study) and ERN (https://earlyretirementnow.com/2017/09/ ... lidepaths/).

5) I've never owned BND/W or anything like that, nor invested heavily in bonds, and I'm not keen on starting now. I do have 10 years of living expenses split between CDs, a HYSA, I/EE bonds, a money market fund, and some ultra-short and short treasuries, but that's the extent of my fixed income, I've been looking at adding a position in short TIPS, but that's another issue. Everything else is in VT, plus 3% of my portfolio in crypto, so my current asset allocation is 80% VT, 17% cash/short-term treasuries, 3% crypto.

My question is, if I have enough in 'safe' fixed assets to cover the tent period of retiring if there is a prolonged bear market or downturn, especially during a time of presumably high valuations, does it actually make any sense for me to buy BND/W or TIPS or LTT or any of those types of instruments and transition into a bond-heavy portfolio, or, assuming my risk-tolerance is appropriate, should I just stay where I am?

I know that unexpected costs can come up as I've already had one or two medical problems, and I am hoping to get married in the future (without kids), so I'm budgeting for 40-50k per year withdrawal going forwards (plus inflation) or around a 2% withdrawal rate, with the possibility of those costs increasing as well, potentially to a 3.5% withdrawal rate (with expenses matching portfolio performance). However, what concerns me more than short-term downturns is under-utilising my capital and running out of money over a long retirement, especially if health problems or getting married increase my yearly costs (as they most likely will), and it seems like the more equities you have, the greater your chance of not drawing down your portfolio early.

Is my current thinking wrong on this? Should I be more conservative for my time horizon and expenses?
60% AVGE | 20 Year TIPS LMP | 5% Cash
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FiveK
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Re: What is the right asset allocation for early retirement in a LCOL place?

Post by FiveK »

One attribute of "the right" asset allocation (AA) for any individual is that individual's willingness to maintain the AA through a market roller coaster ride.

If you are happy with what you have, and are asking only because "someone said something," then maintaining what you have is reasonable.
pkcrafter
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Re: What is the right asset allocation for early retirement in a LCOL place?

Post by pkcrafter »

However, what concerns me more than short-term downturns is under-utilising my capital and running out of money over a long retirement, especially if health problems or getting married increase my yearly costs (as they most likely will), and it seems like the more equities you have, the greater your chance of not drawing down your portfolio early.

As always, this decision involves a compromise between having enough and losing too much in a nasty downturn. I would not suggest 80% in stocks, but if your needed withdrawal rate is somewhere between 2.2% and 4%, you could get by by on 40% equity, but you also have the ability to take on more risk, so my suggestion is 50% equity.

https://investor.vanguard.com/investing ... allocation

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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