An investment policy is entered between a financial advisor and yourself. In my case, I am the financial advisor and think it is beneficial to enter an agreement with myself when I am at peace. I want to do it while I’m at peace and in a good place because when things go pear-shaped I can come back to the mechanical side of things.
I started with the outline developed by The White Coat Investor and here is my investment policy.
Financial goalsSection titled Financial goals
In keeping with the meet in the middle practice, I want to reverse engineer from the least acceptable to most acceptable retirement ages that are both most likely.
This gives me what I refer to as a Coast FI stack. Five Coast FI numbers with decreasing retirement ages, up until the point that the age I should be able to achieve the number corresponds (roughly) with the retirement:
- Coast FI 1: $155,034
- Starting at age: 41
- Achieved by age: 43
- Retire by age: 67
- Starting balance of: $47,000
- Coast FI 2: $170,925
- Starting at: 43
- Achieved by: 44
- Retire by: 65
- Starting balance of: $155,034
- Coast FI 3: $220,056
- Starting at: 44
- Achieved by: 46
- Retire by: 60
- Starting balance of: $170,925
- Coast FI 4: $322,304
- Starting at: 46
- Achieved by: 48
- Retire by: 55
- Starting balance of: $229,056
- Coast FI 5: $453,515
- Starting at: 48
- Achieved by: 50
- Retire by: 50*
- Starting balance of: $322,304
- FIRE: $500,000
DetailsSection titled Details
I created this using a Coast FI calculator. Coast FI is the amount of money you would need to maintain your current total lifestyle cost at a specified future age or date, without having to save another dollar; the invested amount will grow to within a “safe withdrawal rate” by the specified age.
I used the Coast FI calculator from Wallet Burst (I can’t speak to the quality of content on the rest of the site, but I appreciated the calculator).
I chose a growth rate of 8%, which might be considered conservative for the market in general. I chose an inflation rate of 3%, which is the average for the last 100 years and higher than any given year from 2010 to 2021. I used the rule of thumb for a safe withdrawal rate of 4%, which hypothesizes that you can draw down your net worth by 4% each year and live off those investments alone for around 30 years, at least.
My current total lifestyle cost is roughly $17,760 and I used $20,000 to give myself a bit of a raise. I still don’t have a normal year’s worth of data to confirm this specific dollar amount. Also, this is total cost of lifestyle, not income. As of August 2021 my expenses were at 19,000 USD, however, 2021 is an outlier year given things I’ve purchased and paid for in full as it were.
I set the monthly contributions to $4,000, which is somewhat optimistic and will be adjusted if month-after-month I’m not able to achieve that amount. With that said, these numbers do not include 401(k) contributions made along the way beyond the initial net worth at 41.
This data can be used to generate a static FIRE number:
total lifestyle cost * 25. My FIRE number is $500,000.
Because the numbers account for inflation, they will be in current dollars but may be higher actual balances in the future (1 USD being worth 0.60 cents later means 1 future dollar may be roughly 1.40 USD at that future time).
This gave me the Coast FI number and the age at which I should hit that number. I changed the net worth to be that Coast FI number. I changed the starting age to be the age the calculator estimated I’d hit that number. And I reduced the acceptable retirement age.
For the last row to be achieved, I need to make an extra $2,000 in contributions per month, which should be covered and a bit more by the 401(k) I’m not formally putting in calculations.
There’s my primary retirement goal; able to “retire” by 50. By breaking it down I’m setting micro-goals that aren’t a decade away. Let me see if I can get the $155K by age 43. If I do that, let me see if I can get the $170K. And so on. And, if I can make that first one, then I’m in a comfortable position to believe that I will be able to retire at the latest acceptable time for me, which should come with other benefits I’m not counting on (social security, medicare, and the like).
Another thing I appreciate about the table is that it’s not bullets and a lot of words. I can scan down the left column for how old I am, scan across and see how close I am to achieving that level of investment, which is not representing my total net worth (traditional savings accounts, real estate, and similar).
InvestmentsSection titled Investments
The items in the following that are taken directly (or paraphrased) from White Coat Investor are indicated in italics.
- I will strive to minimize the effects of taxes and expenses on our investment returns.
- My primary investment vehicles will be broad-based index funds, preferably in tax-advantaged accounts.
- I will buy, hold, and not panic during market corrections; unless I lose all faith in American businesses, governments, and money.
- My savings rate and returns will be determined on a per-paycheck basis as a natural result of the Building Wealth Paycheck to Paycheck workflow.
- I will do what I can to vote with my dollars on the individual level and spread the level evenly in my personal investments.
- I will contribute at least $100 per paycheck to long-term savings.
- I will use a modified total stock market and chill strategy.
- Retirement withdrawal rate will be 3.5 percent. If portfolio increases by 50 percent over the course of 3 years, increase annual withdrawal by 10 percent (not the withdrawal rate). ex. Year 1 withdrawal twenty thousand USD; year 2 withdrawal twenty thousand USD; year 3 withdrawal twenty thousand USD; year 4, if portfolio value is 50 percent more than in year 1, withdrawal twenty-two thousand. Presuming next 4 years do the same, withdrawal twenty-four thousand two hundred USD. (Modifications are possible depending on age and health).
- For the equities portion of my portfolios, I will strive to be evenly distributed between small-, mid-, and large-cap stocks.
Notice each of these are aligned with my financial values, principles, and practices.
Asset allocationSection titled Asset allocation
Investments will be in three brokerage accounts:
- Roth IRA:
- post-tax going in (taxes are paid),
- tax-exempt while growing, and
- tax-exempt on withdrawal.
- Tax-deferred (traditional IRA-like):
- potentially pre-tax going in (I make too much annually to qualify),
- tax-exempt while growing, and
- taxed on withdrawal.
- post-tax going in,
- taxed on dividends gained, and
- taxed on capital gains upon withdrawal (realized).
For the taxable account there are potential tax advantages for selling a position with capital losses. It’s called tax loss harvesting. I don’t plan on doing anything there unless or until I fully understand it.
I have multiple buckets (I’ll put debts in this description despite them not being assets in the strictest sense), each is given a range of percentages it can or should be during any given pay period.
The cash accounts use the flow-based approach described in May 1 Paycheck and Time- and Flow-Oriented Budgets. I’m sure over time these percentages will need to shift and, as they do, this table will be updated. I’m also not going to be very strict on the actuals matching or being within the targets.
Coast FI 1 (43 years old)Section titled Coast FI 1 (43 years old)
When I reach Coast FI 1 (or leaving my current employer), I will likely roll my 401(k) into my Traditional IRA account. I am considering leaving one 401(k) open somewhere to draw from around age 55, depending on the rules of the 401(k) as this would save me from having to wait until 60.
Coast FI 2 (44 years old)Section titled Coast FI 2 (44 years old)
Contemplate opening bond or similar income-generating accounts inside the IRA accounts. These dividends are non-taxable and would be rolled directly into the equity fund(s) in those accounts. This shouldn’t count as a contribution; therefore, I can max out the contributions to the IRAs, if possible while using the IRAs to maintain overall portfolio balance, which will probably see bond limits to 1 and 2 percent.
Coast FI 3 (46 years old)Section titled Coast FI 3 (46 years old)
Increase bond limits to 2 and 4 percent.
Coast FI 4 (48 years old)Section titled Coast FI 4 (48 years old)
Increase bond limits to 4 and 8 percent.
FIRE-able (50 years old)Section titled FIRE-able (50 years old)
Increase bond limits to 20 and 30 percent.
At this point, I should have enough in the taxable account to continue living my modest lifestyle until age 60, when I can start withdrawing from the IRAs. I hope to be in a position where I am earning income from non-investment sources; the plan shifts at this point, based on current conditions and over the next two years.
- I’ll save up to one year’s worth of expenses in cash.
- If I’m planning on pulling the cord at the end of the two years (to either retire or take a drastic pay cut — Barista FIRE), I will adjust to a 70 percent stock holding.
Beyond FIRESection titled Beyond FIRE
I have no idea.
The fact my Agile-brain has even allowed me to come up with a 10 year “plan” is crazy-talk; one of the Agile values is adapting to change over following a plan.
In other words, this is a plan like any other, once met with reality it may become rather moot.
What makes me feel comfortable about it is it’s based on the value of the portfolio, which is the crux of the whole thing. So, if time slips a bit, I still have the same goal and, once I hit the first Coast FI number, the retirement date is acceptable, though not ideal.
DetailsSection titled Details
Asset allocation is about how much of your portfolio is in different types of buckets. The rule of thumb here being to diversify. Before broad-based index funds and the like, being diversified meant choosing individual businesses in a variety of industries. You might have invested in a few technology companies, a few manufacturing, a few energy, and so on. When it comes to index funds, these rules don’t have to apply, because you could have a single fund that touches the entire market (at least the entire market traded through the channel you’re using - the US exchanges in my case).
- In the beginning, while actively maintain traditional employment, the portfolio will be 95-99% equities and 1-5% bonds; preferring higher equities.
- I will strive to favor equal distribution across the entire American stock market (all US businesses traded on the exchange); favoring small-cap businesses when not equally weighted.
- Diversification beyond equities and bonds will not be done until achieving level 1 Coast FI, if ever.
Emergency fund (cash and credit)Section titled Emergency fund (cash and credit)
Most of my emergency fund will use revolving loans; I’m sure someone’s head somewhere just exploded. The reason I think this is a decent choice is my revolving loans have relatively low interest rates; less than 11 percent.
I also have a wide definition of “cash” when it comes to this emergency fund; in short, cash means I can get my hands on it within 5 days and it is earmarked for short-term needs (one year or less).
Anywhere from 1 to 2 months in traditional savings and checking accounts. Another 2 to 3 months in a tax-exempt bond fund. Insurance deductibles in an equities portfolio designed to earn dividends, have a yield greater than 3 percent, and afford me the opportunity to vote on matters presented to owners; dividends will be moved elsewhere.
Replacement costs for tools like cellphone, laptop, and the like will be saved over time. The tool will only be replaced if the current one no longer serves or the new one will bring as much joyful utility as the current one.
Housing and paying off debtSection titled Housing and paying off debt
- Monthly housing expenses will be no more than 25-30% of my net income.
- I will not seek to own my own home unless it is part of an assisted living strategy.
- Debt will be avoided when possible and paid off immediately, while maintaining at least a 10% contribution per paycheck to savings and investments.
Spend and givingSection titled Spend and giving
- I will use the Building Wealth Paycheck to Paycheck method to help automate these decisions and habits.
- This will occur every time income is received.
- Contributions will be done in a way that helps maintain desired asset allocations.
ChangesSection titled Changes
- This policy will be revisited regularly.
- Will be changed based on the financial goal being pursued first.