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This is a question of risk tolerance and asset allocation. For someone who is pretty risk adverse, while I’m working I’m comfortable with nearly 100% equities / 12 months emergency fund as I know I can make more income and am not married to exactly when I retire (broad market index only, no interest in individual stocks & typically sell RSUs upon vesting, with annual refreshers). Once I do retire, I will want at least 3 years’ worth of cash and move my asset allocation to ~70/30 equities/bonds. I’m not planning to make this change in AA until I retire because I have large retirement accounts that I can rebalance without tax implications. If there were major tax complications I’d start contributing to investments in a way that lets me build up the bond allocation over time.
Wow, $1mm in young 30’s?! What’s your position/title? I feel dumb for doing BigLaw. Likely work (much) more than you, and make like 60% of what you earn after three years of student debt and no income in my 20’s.
“Lets me take this opportunity to flex my own salary because it won’t look as bad since OP flexed more”
What D1 said. I’ll add, as you approach your retirement date you should start to de-risk your portfolio so your retirement target date doesn’t move if the market corrects. For example, I built a 3 year rolling treasury ladder before I retired enough to fund my annual living expenses. On top of that I made sure that my assets that I would need for the first 5 years of retirement would be stable, the 5-10 year window had more risk, and 10+ year assets more risk. Look at your series of return risk.
How do you have $1m/ year in your early 30s???
I would personally just keep doing what you're doing. Why complicate things?
Agree with D1. If I were you, I’d make sure I have 1-2yrs of living expenses in a MMF, but aside from that would be 100% equity.
Subject Expert
Unless your WR is very low, data show that SWRs are somewhat higher if you hold at least some fixed income, with the range of 20% to 40% often containing the optimal values from different analyses. And as people are pointing out, it has psychological value for most people.
I would resolve to hold at least 20% by the time I retire and to glide there over the course of the last several years before retirement, e.g. ten years.
If you are OK with a market crash potentially delaying your retirement as a result you could stay 100% until retirement and shift all at once.
If your WR is very low you could forego fixed income.
Subject Expert
Yes. Fixed Income has broadly sucked for a long time. We had about thirteen years of ZIRP and then a fiasco as rates rose since 2022.
But these things are cyclical, and fixed income does poorly sometimes and well other times. Typically it does better than the stock market when the stock market does poorly, and most of the time it does better than it has since 2007.
The reason to hold it is not because it does better than stocks over long periods; that has almost never happened. The reason is because SWRs for stock heavy allocations are set by periods when stocks do poorly, and bonds help during that time, so portfolios with some bonds in them have higher SWRs. You can spend a little more if you have bonds than if you don't.
You can use bank accounts instead, but modeling shows that does worse on average because the duration exposure of bonds 1) raises returns on average and 2) raises returns during falling interest rates.
I'm not a big fan of bonds. I hope to accumulate enough money that my WR is low enough to avoid them. But the evidence they help SWRs is real, and important for people who need higher WRs from their portfolio. The 4% rule, for example, depends on having bonds. In US historical data it does not work without them.