We have been living off our portfolio for over 8 years now, since late 2012.
For the 1st 6 years I made only minor adjustments – annual rebalancing, minimizing long-term taxes with capital gain harvests and Roth conversions, and adding the occasional small chunk of fresh capital as blog income allowed.
But after ~7 years of the stock market trending upward and the conscious decision to spend more, in early 2019 we took some money off the table (sold stocks / bought bonds.) When literally everything went to hell due to COVID-19, we sold most of those bonds to buy stock and increase our cash cushion.
Now, this is what our portfolio looks like in 2021.
GCC Asset Allocation
As of early April 2021, according to Personal Capital our portfolio looks like this:
This looks very similar to our asset allocation from one year ago, just with a substantially higher valuation.
Assets and allocation
Our portfolio continues to be heavily weighted towards equities. Here is the breakdown:
US Stocks: 65% -> ~71% VTI, plus 21% S&P500 and ~7% Small-cap trusts in my old 401k
International Stocks: 18% -> ~93% VXUS, 7% VWO, and small holdings of Vanguard MFs in our HSA
Bonds: 8.5% -> ~75% Municipal bonds (mostly MUB, some VTEB), 10% intermediate term Treasuries (IEI), 15% I-bonds (not shown in the chart, about 1.5% of total)
Alternatives: 3% -> 100% VNQ (a REIT) and REIT holdings as part of VTI
Cash: ~5.5%
Some interesting ratios:
Stock / Bonds-Cash: ~ 87 / 13 (trending away from 100% equities)
US / International equities: ~ 80 / 20
Taxable / Pre / Post-tax: ~ 68 / 24 / 8 (Roth is trending up – was 0% 8 years ago)
Data from previous years: 2016, 2018, 2019, 2020.
Ch-ch-ch-ch-Changes
Each year when I write these asset allocation reviews I try to highlight any updates or changes over prior years.
This year there is nothing to highlight – the portfolio holdings are exactly the same as they were a year ago.
But just looking at allocation percentages fails to convey the extent of how our portfolio has changed over time even with asset allocation remaining constant.
As such, here are 2 charts showing asset allocation over the last 9 years. In the first chart it is easy to spot a 10% shift in stock/bond ratio starting 2 years ago. This was a change we made due to just being older and less interested in enjoying market volatility.
Does a 10% shift have any real long-term impact? Maybe, but probably not.
This second chart shows the same information but with total portfolio value as the y-axis.
The most interesting thing here is that we now own more US stock than our entire portfolio was worth when we started living off of it. It’s also clear just how much more bonds and cash we have.
Tax Optimization
Another important factor that is left out when looking solely at asset allocation is taxes.
If our effective tax burden is greater than zero, then it is better to have more funds in Roth IRAs and to have a higher basis in taxable accounts. This is accomplished via Roth conversions and Capital Gain Harvesting.
When the market was way down in March/April 2020 I converted ~$17k from Traditional to Roth. I also front-loaded IRA contributions. In December when the market was back to all-time highs, I harvested ~$50k of long-term capital gains. This was all done with zero tax.
Overall we are approaching 10% of our portfolio being in Roth accounts and our basis is >$300k higher in taxable accounts. Details here.
This will save maybe $100k+ in future taxes, so seems worth doing. For a step-by-step example of what harvesting a capital gain looks like, I’ve written a template based on the trades I executed in December 2016. Drop your email address in here and I’ll email it to you.
Portfolio Expense Ratio
Through absolutely zero effort on our part, the total cost of managing our portfolio continues to fall, dropping from 0.08% 8 years ago, to 0.06% 5 years ago to <0.05% 2 years ago… and now to 0.03%. On $1 million, a 0.01% drop is a savings of $100+ per year.
Some of this is because my old work 401k continues to negotiate lower prices on the asset trusts they use, and part is from Vanguard continuing to drop expense ratios. I’m looking forward to the days when they start to formally pay us instead. This does happen now in practice as ETF managers lend shares to short sellers, but I would like to see a more formal contractually obligated payment to shareholders via a negative expense ratio.
Retirement Account Fee Analyzer by Personal Capital
Plus, now that many of the big brokerages charge zero trading fees, we also no longer pay $20-$50/year for cap gain harvesting and portfolio rebalancing.
Reward Points
While not a traditional asset class, we have continued to build a healthy amount of airline, hotel, and travel rewards points through credit card signup bonuses. Despite cashing out a ton of points last year our point hoard (and credit score) continues to be worth a healthy chunk of change.
One example of point usage: $16,000 business class flights to Europe for $300.
Alaska Airlines: 161,700 miles
Amex: 0
Capital One: 0
Delta Airlines: 9,281
Hilton: 27,051
IHG: 180,916
Marriott/SPG: 191,567
Ultimate Rewards: 3,750
United Airlines: 47,429
Total value: $6,304+
Not included in the above – 2 free night certificates with IHG and 3 with Marriott (5 nights total) and $750 credit on United for a covid-related flight postponement.
Free night certificates with the Marriott Bonvoy Boundless credit card are a sweet deal.
My hope is we can use a bunch of these free nights for a ski trip in Japan in January 2022 (but probably not.) Otherwise, our next potential travel is to the US in summer 2022.
For ideas on how to accumulate or redeem award points, check out our Award Travel Series!
Final Thoughts
We’ve been living off the portfolio for over 8 years now. It’s been a pretty good ride.
A couple years ago we shifted about 10% of our portfolio from stocks to bonds because we are older people with kids who are less interested in enjoying high volatility. That is still the allocation we have today.
I was able to slip some money into stocks during the covid plunge, but not as much as I would have liked. I was hoping the market would stay down longer, but since when has the market cooperated for anybody but long term buy and hold investors?
But overall things are good – portfolio is up, Roth percentage is up, basis is up, quality of life is up. Can’t complain.
Congrats on a great year and the rising portfolio.
I had to go back and re-read your March 22, 2020 post, because I remember it scaring the wits out of me at the time. One of my favorite bloggers (that would be you!) sounded the alarm that we might be headed into a Great Depression type situation.
Is that the exact same post that was up then? Or did you bold/highlight your bonds to cash conversions. I don’t remember it sounding so sensible at the time, and I am wondering if it was just my concerned state, or if bloggers highlight things with hindsight.
Thanks so much for sharing your life with us!
The Coronavirus Course Correction post is the same, I haven’t changed it. I just re-read it also and it does sound more level-headed that I know I felt at the time.
A few weeks later I wrote The 2020 GCC Asset Allocation after I had already taken many of the steps I listed in the course correction post.
March 2020 was an interesting time. It was clear unemployment levels were headed towards Great Depression like levels (which they did.) Congress didn’t seem to have a sense of urgency and there were some Senators suggesting we just let States go bankrupt, that maybe tax cuts were better than direct payments to people, etc…
Fortunately more reasonable ideas prevailed and we’ve since had ~6 Trillion dollar in stimulus. Yesterday the US hit 50% of people with at least one vaccine jab. Still, something like 45% of small businesses have closed their doors forever. Instead people turned to Amazon, etc… good for corporate profits (and the SP500) maybe not so good for many individuals.
I read it a couple more times. The freezer stuck in my head as a sort of doomsday thing and I did not remember that you said you were buying stocks as things went down. Funny how we pick out certain elements.
I had plenty of cash/bonds (though my high yield bonds were down 20% or so) and an employed husband, and I couldn’t stop thinking he would lose his job, people would be using guns to get food, and there would be total collapse. Strange times and strange thoughts!
Thanks again for the blog and personal responses. Great community here!
The freezer thing wasn’t doomsday at all, we just didn’t know how long lock downs would be so this allowed us to do a really big Costco run. It turned out that we didn’t really need it since Taiwan’s covid response was nearly perfect, but now we only go to Costco every 2 months instead of every month and that is a nice life bonus.
How were you able to convert $17k from a traditional IRA to a ROTH in 2020 when I thought the max I could convert each year was around $6K in 2020? Thank you!
JJ
You can CONTRIBUTE $6k
You can CONVERT an unlimited amount (and pay taxes on the amount you convert.)
How do you make IRA contributions (front-loaded or otherwise), while using the Foreign Earned Income Exclusion to exclude your income from federal tax?
In years when I spend time in the US, income earned while on US soil is not excludable with the FEIE. (Not the case this year, zero time in the US.)
The IRAs I am referring to above are for the wife and kids. Winnie has income that we choose not to exclude with FEIE. I also pay both kids for modeling services which is not excluded.
And you can contribute to a spousal IRA with Winnie’s income, right?
My memory is a little fuzzy on this at the moment, but there are some restrictions to IRA contributions with the FEIE and I can’t remember how those apply to spousal income.
However, Winnie’s total earned income is less than the individual IRA contribution so she just puts all of it in her IRA.
Just wondering about the harvesting of long-term capital gains when the market was back to long time highs. Wouldn’t we want to ideally harvest gains when the market was down, and therefore potentially be able to harvest more gains? Thanks.
Ideally you would be able to sell stock whenever you want to buy something (e.g. a boat) and not have to pay any tax.
This requires you have a bunch of stock at high basis (near current market price.)
I typically do the gain harvesting in December because I have a pretty good idea of our total annual income at that point. This is all done at current market price, whatever that happens to be. But higher is better.
Curious why so many different types of bonds?
The I-bonds I got 20 years ago and haven’t been in a position to unload them. The 10-year bonds I bought 15 years ago and it is a small position so I’ve never bothered to do anything with it. The Muni-bonds I’ve purchased in multiple lots and got whatever had the lowest e/r at the time (was ishares as only option, then Vanguard, then ishares again)
This post was great! I always love learning from your asset allocation series — it’s been super helpful for me as I start my FI journey.
I had a quick question about your alaska airline miles — did you accrue that many points from the sign up bonuses alone or did you purchase additional miles with their current incentive on their website? My mom and aunts are from Thailand originally and I’ve been helping them accrue points to fly there for free via Alaska airlines. Thanks!
I haven’t purchased any miles. Some of these are still from my old working days, being based in Seattle I flew on Alaska often. I have gotten the bonus on the Alaska card a few times since retiring though.
Purchasing points or miles is seldom good value unless you are just getting a small amount in order to get a high value redemption, e.g. you purchase 1k miles to get to 160k total so you can get a RT biz class ticket.
I’m not too different:
4% cash
10% private alts
86% equities
0% bonds
Let’s go!
what are your private alts? Bond-like or equity-like?
thanks for your updates. my portfolio looks very similar and last year I switched my bi-weekly 401k contribution to stocks when they were down and now back to bonds. rebalancing is a good thing to do. wish i had more cash to invest last july…
I assume you have blog/consulting earned income to be able to contribute to the roth annually?
blog income: GCC Business Review 2020
GCC,
May I ask how long your cash and bonds will support your minimal spend, including a reasonable amount of leisure spending?
My thinking is that a more aggressive portfolio is OK at a higher net worth since your cash/bond cushion on the downside is bigger and can carry you through a downturn longer. Assuming one wants to and can afford to take more risk, my idea is that if I hold cash/bonds that can last me something like 5 years, I could invest the rest in equities. So for example, let’s say I have $3M in investible assets and I am perfectly happy spending $90k/yr. during bad years, this means I should be OK having $450k (e.g. 15% of portfolio) in cash/bonds. And if over the next 5 years, I get lucky and end up with $5M in investible assets, I should be OK with10% of my portfolio (e.g. $450k) in cash/bonds and a hell of a lot of fun spending that extra $500k that I took a risk to earn.
I’m curious if this type of thinking factors into your asset allocation.
We have way less than 5 years, maybe 2-ish. That is up from nearly zero. But with dividends, even at reduced levels, we would get several years of runway on the cash. 5 years in cash seems a bit extreme unless you have some big purchases planned in the next 3-5 years (house, boat, etc…)
Curious that your cash and bonds would only fund 2 years of expenses but make up approximately 14 to 15 % of your net worth. Does that mean you have net worth 13 or 14x expenses, rather that at least 25x expenses?
Cash is <5% net worth. In my earlier reply I was speaking only to the cash portion
The asset allocations on PC and Vanguard differ. For example, VEMAX/VWO is 98% emerging according to Vanguard but only 81% according to PC.
I think some nuance in how they define emerging vs developed. All international though
It’s nice to see are there early retirees who carry a decent amount of equity! I love financial samurai, but don’t have that type of appetite for real estate exposure. I am definitely more on board with VNQ.
all equity all the time. I have zero interest in real estate
I’m curious why your Roth was 0% 8 years ago. Did you have other ‘better’ investments during your working years?
I’m still in accumulation phase and have been maximizing Roth IRA + traditional 401k for quite some time.
These 2 posts explain my thinking on whether to contribute to Roth or not:
The Great Roth Controversy
Roth Hypocrisy
Basically I put those funds in the taxable brokerage account – still got the same 0% tax rate but with full access to the funds long before age 59.5.
Thanks – I now remember reading those a while back. I seem to fall into ‘when is the roth a good idea’ bracket. A taxable account may achieve 0% but I like the certainty (er… higher confidence) of the Roth and will not need the funds before 59.5.
Really helpful perspective as always!
Definitely contribute to Roth then (thumbs up emoji)
I’ve pretty much given up tracking/tweaking asset allocation, Crazy, huh, but hear me out. We have sufficient pension/SS income for all needs and many wants.
We own greatly appreciated rental real estate. Enough appreciated that cap gains would kill us if we sold even one property. The % allocation doesn’t matter bc I won’t change it.
When I worked I laddered zero coupon muni bonds to mature each year after retirement to generated what I thought (25 years ago) would be the delta between pension and needs/wants. When I retired I had 10 years of laddered bonds. Investment grade bonds pay so little that it’s just easier to keep cash. My dividends/internal capital gains on taxable accounts are set up to pay out in cash rather than reinvest. My bonds are those I purchased ~4+ years ago. The cash/bond portion of my portfolio is whatever turns shows up.
The rest is stock mutual funds. 15 years ago I harvested all losses I had and don’t expect to ever have another opportunity.
The only allocation I actively manage is International stock. I keep that 15-20% of my Fidelity/TSP accounts. I look at and tweak that every few year, which reminds me…
Let it ride is a good place to be
I was just looking at mine today. I’m at 85% stock, 15% split between cash and bonds. I might rebalance to 80/20. It’s been an awfully good run in the market the past couple of years.
I haven’t worked in 5 years and my portfolio is up over 60%. Perhaps the nightmare sequence-of-returns risk has passed!
Very nice. It would have been hard to find a better time to retire in terms of the stock market gains.
How has your spending been over that time?
On inflation-adjusted terms my spending is about the same as 2010 time frame. It’s up about 30% from the year or two prior to FIRE (due to more travel/entertainment). Spending is about 1.2% of current portfolio. It’s hard mentally to spend even 3% as it seems like such a crazy sum (never spend that much in a year in my life). Once a saver always a saver.
We solved this problem by having kids – pretty much impossible not to spend more lol
Excuse me, your fund is held for a long time and does not trade? Do you live only on fund dividends?
We spend more than we receive in dividends, so I sell some stock each year to get cash.
See these 2 posts:
Cash Flow Management in Early Retirement
How Do I Live Off Just Dividends?
Impressive on the fees and trading costs. I’ve got a brokerage where they still charge a percentage of trade, so in that account it cost $50 for a single trade of $5k. Unfortunately the entity that invests has to use a local broker and they’re all that expensive. All my other investments are through low cost brokers so they’re at the $0 level which has been great.
Does the business account invest into equities or do you pay it all out as self-employment income/investments into your individual names? I suppose a business can invest in the US with the same low fees?
What do you mean by business account?
Does the blog income goes into another entity (LLC or SCorp, not sure on all the US business entities), or does the income go to you personally?
Was just wondering if the income goes to an LLC or SCorp whether you can then open a brokerage account on behalf of that entity to access the low commissions at brokers? My problem is I have a business but it cannot send funds to brokerages that aren’t locally domiciled and therefore can only access high cost brokers, not low cost brokers. Just wondering on your side?
It is all flow through to me, so all the money is mine personally and in low-fee brokerages
Strong allocation! One thing to consider (which has been way heavy on my mind lately) is the erosion of the value of capital in your bond/cash allocation. The increase to the M2 money supply through stimulus, QE, and ultra-low rates has degraded bond/cash value drastically over the past year(ish). I took a chunk of my bond/cash allocation (similar to yours) and hedged in an inflation resistant hard asset (for me, that is Bitcoin, but could consider gold?). Only started with about 1% of my overall portfolio (now about 3.5% thanks to growth), but helps me sleep easier knowing I’m hedged a bit against the fiat creation frenzy. Food for thought! Love your posts!
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