Asset Allocation for Early Retirement + How does real estate fit in?

Investing in the stock market is fun and all but investing in order to retire feels like a whole other sport. Even more, once you are retired, everything feels like some sort of parkour challenge. Difficult, and dangerous. If it doesn’t work out your life may end in some sort of disaster. So what do you do? 

Well, today I will cover the ideal asset allocation for early retirement. What is smart, what is safe and what worked for me. Stocks, bonds and real estate. It’s all in here.

My retirement dilema

When I started investing, playing with money and being aggressive gave me a pretty big rush. However, when I actually went to retire everything felt really scary which caused some very strange arguments between me and my wife.

“I don’t want to keep staying in these cheap AirBNBs if we’re going to start traveling long-term. We might as well stay home, it’s nicer there.” 

“But then our travel is going to be really pricey and I should probably work a bit longer.”

“Or we could not travel?”

“Then there is no point in retiring”

See weird. Not horrible but it caused us stress nonetheless.

Fun for the whole family!!! No…

By the math of it, we could cover all our expenses and then some but there were a lot of what-ifs… What if my rentals needed repairs? What if I had some uncovered health expense? Should we really be spending more back home? What if something happened? Should I change my asset allocation for early retirement and get out of the stock market? Is that smart? I had to dig around to figure out the plan.

And today I’m ready to present the asset allocation for early retirement strategy! 

  • Why early retirement is different than normal retirement 
  • What will get you the most money in retirement
  • Then what would be safe to cover surprises
  • And how real estate changes everything again

Early Retirement is different than normal retirement

One important twist that you need to realize is that you are special as an early retiree. In many of my articles, I will tell you – you aren’t special, but today you are a special little snowflake. Or at least you are just as special as all the other early retirement snowflakes out there. 

There is a good reason for that. If you retire very early you break traditional retirement planning and we have to do something special.

In essence, you need a different asset allocation for early retirement than a typical retiree because your money has to last forever!

Most typical retirement planning has people in near 100% bonds at retirement because it is safe and people don’t usually live that long after a ‘typical’ retirement at 72. Bonds only earn 2.8% per year (inflation-adjusted), so for bonds to pay for your retirement forever on a $100,000 lifestyle you would need $3.5M. That’s a lot of dough!

Normal retirement planning has you sell off your bonds over the years to make everything more achievable but that still means you’ll need $2M of bonds to have the pleasure of being broke after 30 years.

To make it worse we are retiring for up to 70 years, so following that same model we would need $3M in bonds to make it. Looks like you’ll never need to worry about your asset allocation for early retirement because you’ll never make it. 🙁

Three million dollars is a lot of money. You could try to do it, but in reality, you can’t play it hyper-safe with just bonds like some advisors would want you to AND retire early. Bonds can fail anyways. Nothing is perfectly safe! You need stocks, so now you need a special asset allocation for early retirement. 

The early retirement asset allocation for the most spending money

OK, having a retirement portfolio that needs to be so big you could never retire kind of defeats the purpose of a retirement portfolio. 

Maybe if we shake things up a bit we can break some rules without being stupid.

So if having 100% bonds doesn’t help us, what would end up with us needing the least amount of money to start retirement? 

That’s Easy! Scream “YOLO” and cat-leap into 100% stocks! Everyone knows that average stock returns are higher than average bond returns (7.2% vs 2.8% inflation adjusted). That certainly breaks some rules but the question is… Is it smart to be part of the roller coaster that is the stock market when we are retired? Or is it stupid?

YOLOOOOOO. Is he leaping to success or face-planting?

Luckily someone has already done some research on asset allocation for early retirement. Big ol’ Gran-daddy Bill Bengen. He researched this exact situation to figure out two things:

  1. What allocation ended with the most money at the end of a 30-year retirement
  2. What allocation was the least likely to make you run out of money.
  3. All of this was done over the past 100 years of stock market data which included some horrible times…such as the GREAT DEPRESSION!

If something worked through the great depression and during the 1970s stagflation it should be able to withstand whatever is coming for us too. His analysis is just on paper but it’s a damn good analysis.

How much money you can pull and be safe with different allocations (link)

So what did he find?

Well, he found a portfolio of between 50-75% stocks was the safest amount to live off of in the future. To be more precise, having 75% stocks or above ended up with you having more average money, but 50% bonds made the horrendous periods less horrendous as can be seen here.

So what can we conclude? In retirement, around 75% stocks will net you a safe retirement (assuming you follow the 4% rule) and more spending ability than a portfolio with 50% stocks or less. That way you can hire all the tutors and massage therapists you’ll need to get through your fun early retirement adventures. 

From the data, it’s not wise to go above 75% stocks because bad things do happen and crashes will wreck you. But there isn’t much to gain from going below 75% stocks either especially when you use my strategic asset allocation method in which we get the best of both worlds (it’s a good read!…there are plots like this one!).

simple strategic asset allocation - 50yr

The strategic asset allocation strategy really helps us beat the 4% rules targets because Bengen assumes everyone is a dumb robot. He even addresses this in the last analysis section of his seminal paper (which I summarized and analyzed here).

So, do I recommend 100% stocks like our YOLO friend up top? Nope. Our research papers don’t support it either. 75% is a happy max. Does it actually comply with real retirement spending though? Read on to find out.

Emergency funds – Solving Bad Surprises

Now because you are retired there is something special that happens which makes you different than a normal investor and possibly different than the person modeled in the 4% rule.

You HAVE to live off your investments.

So that means we need to be able to handle bad surprises without getting obliterated. Bad health things, atrocious markets, whatever. I don’t want to be forced into selling my stocks at a horrible time, ruining my retirement just because I tried parkour and broke my leg. 

Therefore, you need an emergency fund. 

People often treat this as cash but I just treat is liquid assets (stocks, bonds or cash) which don’t fluctuate too much (soooo just bonds and cash).

How much? 24 months. That will get you through most of the roughest markets without ever needing to sell a stock and reasonably, you can only get so many parkour injuries before you learn your lesson.

To be honest, in most cases selling your stocks is a better idea since they are usually worth a lot more but you need that bond/cash guarantee you won’t go bankrupt from one bad wall flip. 

Conveniently, we already have 24 months of living expenses without doing anything! If you live a $100,000 lifestyle you only need $200,000 in bonds/cash to fill this requirement.

However, you will need $2.5M to retire according to Bengen’s 4% rule (stating that you should invest 25x your annual spending to make it FOREVERRRR) which is easily always over $200,000 in bonds at a 25% bond portfolio. Hurrah! An easy win!

Real estate makes everything more complicated

Ready to kick it up a notch? Let’s add some property into the mix! I love real estate but it does make investing more complicated. Especially our asset allocation for early retirement.

It adds in some possible sudden drawdowns on your liquid assets which might end up arriving when you are still in the hospital recovering from your parkour mishap. 

The cause for these sudden cash flights? Repairs. They can come out of nowhere and they can be extreme. (Kind of like a next-level parkour challenge.) 

A rule of thumb – expect to need 1% of the value of every house for repairs every year. That’s just the average though. In reality, you should make sure to have at least 5% of the most expensive house’s rebuilding fees readily available. That, and a line of credit just in case. 

*Really you should work out your fees more accurately than that. If you know you have an AC or roof that is very old. Get a quote. It will eventually break. That is known.*

I add these to my emergency fund planning. In my case, the most expensive rental I have would be $300,000 to build from scratch. So I make sure I have an extra $15,000 (that’s 5% of $300,000) in easily available money to pay off any bad surprises 

The other awkward part about real estate? It pushes less of your money into liquid assets like stocks and bonds which lowers your ability to pay those surprises. Oh my! What’s a boy to do?

What does this look like in the end?

Let’s talk numbers baby! Here is my life as a case study for you:

  • $50,000 in annual expenses
  • $800,000 in real estate (ignoring mortgages…which are amaaaazing) – with the most expensive structure costing $300,000 to rebuild
  • $500,000 invested – 75% stocks and 25% bonds/cash which means:
  • $125,000 in bond money that I can always sell at good value – which is more than 24-months of my expenses ($100,000) and would cover my house repair “just in case” money ($15,000) 

If I were really into housing and had very little liquid investment I would make sure I still hit my bond targets. Real estate is already a very aggressive form of investing and it’s better to be able to pay those bills than get an extra percent on a small portfolio. Know what I mean? 

Now it’s your turn. What’s your asset allocation like? 

TL;DR – Asset allocation for early retirement action plan

  • Make sure you have 24 months of expenses in bonds/cash
  • Add on 5% rebuilding costs for your priciest rental property in bonds
  • Aim for 75% stocks max if you are fulfilling the above in order to have maximum spending money.
  • Practice simple strategic asset allocation for even more returns.


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