For those of you who follow along with my net worth updates and read my recently posted 2020 spending breakdown, you may have noticed something missing: I haven’t said much about our savings or investment strategy.
In this post, I will revisit the investment hierarchy I laid out nearly three years ago, and update you on how we’ve been filling our investment buckets these days.
I’ll also talk about allocation of our investments, with some revelations that may be shocking to the Simple Pathers and the Bogleheads.
The Brewing FIRE Investing Hierarchy
Let’s start with a bit of history. Back in 2018, I established my investment hierarchy, which is a simple method for deciding how to distribute investments, and in what order.
Make sure to check out my original post on the Investing Hierarchy for a description of each investment vehicle and to better understand why we prioritize our investments as listed.
Amazingly, I still stand by the hierarchy as it was originally presented. The basis for this investment sequence was tax efficiency, and thus the reasons for investing in this order are still valid today.
To quickly rehash the underlying theory: I used a metric I call “Instant Return” which I defined as the gain you immediately realize through either tax savings, debt reduction, or an investing incentive such as a company match. The value of the Instant Return is most often based on reduction in tax burden, which in turn is related to your effective marginal tax rate (EMTR).
Here’s a quick table for the expected Instant Return for each of the investment vehicles listed.
Now you know the ‘why’ of our investment sequence, let’s see how we did in 2020 and what we project to save in 2021.
2020 Investment Summary
| Investment Account | 2020 Contribution | Comment |
|---|---|---|
| Emergency Fund | 16,800 | Built up buffer for house sale |
| 401k match | 12,559 | |
| Debt > 6% | – | N/A |
| HSA | – | Not available to Mrs. BF |
| FSA | 7,750 | Not invested – tax deduction only |
| 457 | – | N/A |
| 401k / 403b | 39,000 | Maxed out x2 |
| ESPP | 1,620 | Proceeds from discount |
| IRA | 12,000 | Roth contributions |
| 401k – After Tax | 5,040 | Mega Backdoor Roth conversion |
| 529 | 6,650 | |
| After Tax / Brokerage | 41,119 | |
| Mortgage | 600 | |
| Total Invested Assets | 133,784 |
Some Comments:
First off, wow. It’s amazing that we were able to invest more than $130,000 last year. Obviously, this is mostly possible because we both have good paying jobs. At the same time, our Adjusted Gross Income for 2020 is going to be in the ballpark of $150,000. What does that mean? We’re maximizing the impact of tax-efficient investments, and squeezing every available dime out of the system.
Emergency Fund: we already had about $25,000 stashed away at the beginning of 2020, but we built up our fund further because we knew we might be selling our house and moving. The extra cash cushion definitely came in handy, as we drew down most of it by the end of the year.
Employee Stock Purchase Plan: as I’ve been saying for years, the ESPP is part of your compensation. I’ve been pocketing fistfuls of money from my employer for years using this tool, and you should be doing the same.
401k After-Tax: my employer FINALLY gave us the option to make after-tax 401k investments at the end of the year. I promptly contributed about $5,000, and immediately converted to a Roth investment via the Mega Backdoor Roth conversion.
After Tax / Brokerage: our after tax investments were divided between index investing, a couple individual stocks, a robo-advisor and crypto. I know, I know- I’ll explain in the Allocation section.
529 Investments: I never talk about our 529 accounts in my net worth updates. Since this money is earmarked for our kids’ higher education, I don’t even consider it my own. We’re hoping that some combination of 529 funds and cash will cover their cost of education. Honestly, though, it’s impossible to predict what college will cost in 15 years, so we’re not going to over-invest into these buckets. Check out this site for more information about the potential tax benefits of 529 accounts.
2021 Investment Strategy (Forecasted)
Assuming I stay employed for the entirety of 2021, these are our forecasted investments. That’s a huge IF, as I’m really not sure whether I’m going to keep working or not. I’ve got my finger on the Early Retirement trigger, and I’m not afraid to pull it if my job gets stupid.
| Investment Account | 2021 Contribution | Comment |
| Emergency Fund | – | |
| 401k match | 12,000 | |
| Debt > 6% | – | |
| HSA | 7,200 | Back on my employer’s plan |
| FSA | 5,000 | Dependent care deduction |
| 457 | – | |
| 401k / 403b | 39,000 | |
| ESPP | 800 | 1/2 year participation? |
| IRA | 12,000 | |
| After-Tax 401k | 5,000 | |
| 529 | 7,000 | |
| Brokerage | 50,000 | |
| Mortgage | – | |
| Total Invested Assets | 133,000 |
If we stay in our current jobs for all of 2021, we should be able to save approximately the same amount in 2021 as we did last year. But, as I said, there’s a lot of uncertainty about this.
Since I’m not sure about my employment future, I’m planning to max out my 401k by March. If I stay employed beyond Q1, I will probably look into making more after-tax 401k contributions. I will also consider starting up ESPP investing again; I stopped late last year because I didn’t want to tie my money up in company stock if I was leaving.
If we actually reach our full investment quota in 2021, and the stock market doesn’t take a dump in any significant way, then I’m really going to consider Coast FIRE at the end of this year. Stay tuned.
Allocation
As I frequently mention on this blog, I had a revelation in early 2019 that caused me to sell all my individual stocks and start investing in index funds only. This has served me quite well, as I stopped tinkering with positions and making poor investment decisions.
When I wrote about investing during the brief market crash in March 2020 (part I and part II), I talked about having a bond allocation of 10-15%. In those posts, I mentioned how I shifted some money to bonds when the 10-year yield was close to 3% back in 2018. Well, once it dropped back below 1% last year, I didn’t see much reason to keep money in bonds, so I sold out of those positions in 2020.
So what does my current allocation look like?
Asset Class Breakdown
The vast majority of our invested money (90%) is in index funds or ETFs, almost all of which are total market, S&P index, or similar (SCHB, VTI, FXAIX etc…). The variation in fund selection was mainly due to availability and $0 fee options, back when there were still transaction fees.
The “8.5%” allocation to cash is not actually cash; it’s mostly Bitcoin.
Bitcoin?!? Whaaaat?
I know, it’s crazy. In case you want an explanation, I’ll provide one. First, I read this post by Lyn Alden, who’s one of my favorite macro-themed investors to read. The fact that she reversed her previous stance and got bullish on BTC helped sway my position.
At the same time, I was reading Optionality (and The Deep Dish) by Richard Meadows (one of my favorite 2020 books), and he spends some time describing a barbell investing strategy. Check out this article for a good primer on barbell investing, which amounts to having mostly ‘safe’ investments combined with a small percentage of ‘lottery ticket’ type investments, with potentially big payoffs.
Long story short, I decided to buy some crypto. I initially planned to invest 1-2% of our net worth, but then Bitcoin’s price exploded, and our ~1.5% allocation is now more than 5%. How’s that for good timing!
The other cause of deviation from 100% Total Stock Market investments is our choice to start using a robo-advisor.
Why a Robo-advisor?
We decided to move the majority of our after-tax investments to Wealthfront in late 2020. I plan to write a dedicated post on this decision, but here are the main reasons:
- The Feel of “Optimizing” Without Actually Tinkering
- Tax Loss Harvesting
I’ve said, time and time again, that I’m not good at leaving investments alone. I’m always trying to over-optimize, and re-balance (or reinvent my investment strategy) way too often. By handing our funds over to a robo-advisor, I’m essentially taking the day-to-day transactions out of my own hands. Yes, buying VTSAX (or VTI) and then closing the computer will probably do just as well. But since I can’t leave shit alone, this is the better way for us.
The other reason to switch to Wealthfront is Tax Loss Harvesting. Again, I will talk more about this in another post, but the bottom line is this: Wealthfront should easily cover it’s modest management fee (0.25%) by selectively selling and re-buying funds and harvesting losses. This will help us out on our taxes, and (potentially) offset future gains as we sell assets to fund our early retirement.
Breakdown by Account Type
This is what our net worth breakdown looks like, grouped by type of account.
The majority of our money is in pre-tax retirement accounts, which is the hardest to access without penalty. We plan to roll over these funds via Roth conversion in the coming years, so they may be accessed penalty-free before we turn 59 1/2.
Our Roth account balances are substantially less than our pre-tax accounts, which is an area I’d like to improve. Roth contributions can be withdrawn tax and penalty free, so this could be a potential avenue of early-retirement drawdown income. We need to focus on getting more money in these accounts in the coming years, either via Roth 401k contributions, after-tax 401k conversions, or rollovers from pre-tax accounts.
Our taxable investments have grown significantly in the past 6 months. Half of this growth came from reinvesting proceeds from our house sale, and the other half from Bitcoin heading to the moon. Our taxable account will be our workhorse during early retirement, so we’d like to keep filling that bucket.
Approximately $100,000 of our cash allocation is being set aside for the purchase of a house down here in Virginia. In other words, this will be mostly converted into home equity. Hopefully we make a better decision than I have in the past.
So What’s Our Coast FIRE Plan?
With our more recent net worth climbing into the 7 figure range, we are fast approaching the point where we can consider a Coast FIRE strategy. So what does our FI plan look like right now?
The short answer: we don’t have one yet!
That’s not to say I haven’t thought about it. A lot. There are just too many moving parts at this point. Once we get a clearer picture of Mrs. BF’s projected earnings in the coming years, and I figure out whether I’m going to earn anything post-RE, then we can start to model the retirement glide-path. All in due time…
So that just about sums up what we’ve been doing with our money over the past couple years. How does your strategy compare? Have you caught the crypto bug? Let me know in the comments.
Disclaimer! I am not a tax professional, investment advisor, financial planner, or anything other than a guy on the internet. Please direct your questions to a true professional before taking my advice.
we’re still rolling with 60% individual stocks. i thought i noticed you saying you still hold a couple? i like the barbell strategy. if it were me i would want enough acorns or lottery tickets to increase the chances of one hitting big. you need to have enough into these things that if they go 10x or 20x they make an impact, right? another thing i take away is: wow, we really make paltry salaries in the smidlap house! well done on getting highly compensated J.O.B.’s.
seems like that coast fire is looking better and better in your eyes. any bitcoin benefit effect for us comes from owning square and paypal. they might track along with btc for a while. with all that said it’s good to have a strategy and stick to it.
Yes, we have a couple individual stocks. These are 3-5 year investments that I won’t allow myself to screw around with during the investment period. I still don’t think I could handle what you’re doing, I would keep buying and selling out of positions if I was invested in so many different companies.
It’s taken a long time, but my compensation is finally in the range of what I think it should be, and I can’t complain too much. Mrs. BF was smarter: she got a Master’s that essentially guaranteed her a 6 figure salary for the rest of her career. She planned that one better than me.
I tell you what: I ran a large meeting this morning, which involved every department within our company, and it was absolutely brutal. I was fantasizing about quitting while the meeting was still going on. Every day that our financial position continues to improve is a day closer to me deploying the parachute.
I will probably start exposing myself to Bitcoin as well at this point through dollar cost averaging a small amount. It’ll remain volatile but long term adoption seems inevitable, as does a more widely available ETF at some point. The important thing is to have a plan and stick to it!
Absolutely. I think once large corporations decided that they had to hold some Bitcoin as part of their reserves, that probably signaled a turning point. I’m still prepared to lose what I invested, but I find it hard for BTC to suddenly reverse course at this stage.
Great post as usual. I’ve been reading your blog for a while now and had just assumed you were not contributing to 529 plans. I would be interested to hear more of your thoughts on saving/paying for college in the future.
Haha, I feel bad that no one knows we’re investing in our kids’ future education. It’s literally all I worry about now (including choosing where to live based on public schools). Yikes, I think any projection as to what college will cost, or what it will even look like, 10+ years in the future is really difficult. That being said, everyone should still have some sort of plan. Let me think some more, and maybe I’ll post my plan on the topic. Thanks for the comment!
Our investing strategy just about mirrors yours – I’m fortunate to have access to 457, 403b, and HSA, so that’s great for reducing our taxable income. Having early access to the 457 without penalty will be huge once we pull the trigger.
We’re a little more heavily weighted to stock index funds for now (95ish%) but Mrs. threw some play money into Bitcoin against my better judgment. Unfortunately, we haven’t had nearly the success you have in that particular arena. Time will tell, I suppose.
Wow, jealous of the 457. The ability to max out both a 457 and a 403b, and then withdraw the 457 penalty free, is a really nice thing to have, as you mentioned.
Yes, time will tell whether Bitcoin is a good investment. I’m not even sure if it should be called an investment. I’m sure there are worse things to do with ‘play money’!
Fantastic job with the investments. I like that “immediate return” philosophy. Makes a ton of sense. My 401k sucks, no matching and what I feel are high fees, but I’ve decided to max it out for the “immediate return” of reducing my taxable income. I agree the Roth is a fantastic vehicle if used properly. My plan will be to do the ladder, but obviously once I FIRE and lower my income. Good luck on the coast fire plan. You know, pulling the trigger while the market is spinning its wheels a bit might be better than retiring at an all time high then having it drop out under you.
Thanks for the comment Noel! My wife’s new 401k also sucks, she’s paying 0.93% for a total stock market fund which is ridiculous. But the loss to fees is more than compensated by the tax savings, so we continue contributing with gritted teeth. I need to write a post on our current Coast FIRE plan. In short, my wife is staying employed for at least the next few years, so it’ll definitely be a gradual, step-wise transition into ‘early retirement’, whatever that means for us.