Financial Changes Around Here

So, we’ve been traveling for a while now. We’ve been working on trying to figure out how this whole life works, and see what happens when we give this whole FIRE life a go.

But, seeing how this is a financial blog, let’s talk about how we adjusted our finances to prepare for this life change.

As many other blogs and podcasts have mentioned, there are different stages on the FIRE journey.

There’s an acquisition phase and draw down phase. And these two phases have distinctly different goals, one being to accumulate as much as possible, the other being to maintain the value and provide spendable cash.

During this transition there are a couple things to consider:

  • How your money is allocated within your portfolio
  • How your money is distributed between your taxable and tax-advantaged accounts
  • How to access cash to cover life’s living expenses

So let’s tackle them:

How we decided to allocate our portfolio

After years of reading about the concept of FIRE and understanding that at some point we were going to have to shift the way we looked at our money, I came across a couple of conclusions and strategies that I liked. Here are a few things that I latched onto:

  • The Bond Tent – Basically this says that you should shift an abnormal weight of your portfolio to bonds and away from equities right around the time of retirement. Given that your returns over the first 10 years of retirement are largely indicative of the success of your portfolio, you should keep a heavy bond weighting through the first years, and slowly move back toward more equity weighting as the years progress.
  • The Yield Shield – This is the theory that during this first bit of your retirement you emphasize the yield of your portfolio. This is to minimize the actual selling of assets. If you can design your portfolio to provide a large portion of your expenses through dividend yield, you can save as much of the principle in your accounts as possible.

So, how did we handle this?

  1. When we knew we were going to transition, we stopped investing. We started banking cash so that we had a larger emergency fund. We built it up to about a year’s worth of expenses. We did open a high interest savings account to hold the cash so that we would get some returns while still having direct access to it.
  2. We shifted a portion of our portfolio to be higher yielding assets. If you look back at our old allocation, we were running at 95% equities. Currently, we’re running at 65% equities.
  3. With 35% of the portfolio, we wanted to maximize the yield, so it’s mixed of about 50% bonds, and 50% REITS. The bonds are your typical bonds, mixed with some preferred share ETFs, namely PFF. The REITs are a combination of property backed and mortgage backed ETFs to juice the yield.
  4. As the years progress, or if the market dictates, we will have to sell some of our assets. If we do, we will start by selling bonds, in the hopes of allowing the equities to recover. We also want to shift slowly back to be more heavily weighted in equities over the longer term, for more growth. So, we won’t really re-balance, we’ll keep the bonds and REITs roughly the same nominal value and any additional investments will be made into the equity portion.

So, that’s where we are sitting now. There is still some clean up to get to the optimal mix, as there’s some remainders from our wealthfront experiment.

Allocation between accounts

Now that we have our assets in an optimal allocation, let’s look at how those fit into our different tax treated accounts.

We all know there are three basic tax treatments on accounts. They’ve been discussed ad nauseam , Traditional (401k & IRA), Roth (401k & IRA), and taxable.

But, now that we have our proper allocation, where the hell do we stuff it all?

Here’s my thoughts on what to stick where:

  • Tradition Accounts – Bonds – We are holding all of our bonds in our traditional 401k’s. Why?

2 reasons:

  1. Dividends that come off bonds are not typically qualified, (other than muni bonds, but even that is a small subset) and therefore taxed at the earned income rate. So, we are keeping these in our 401ks, so we don’t get taxed on the dividends… yet.
  2. Speaking of future taxes, we will have to pay future “full” income tax on all the principle and growth in our 401k when we redeem it in the future. So, why not have the lowest growth portion of our portfolio in the account we will eventually have to pay our “full” tax rate on?
  • Roth Accounts – REITs – We are holding some of the REITs in our traditional account, and some in our Roth accounts. We owned 100% of the bond allocation in the Traditional account with some room to spare, so some REITs spilled into there. But, REITs are held here, why?

2 reasons, similar to above:

  1. Dividends off REITs are not typically qualified. And therefore, taxed as ordinary income. So, if we are going to be gathering dividends, we want them tax sheltered.
  2. REITs over the long haul appreciate more than bonds. So, since this is a Roth, we don’t owe tax on our growth, we put the higher growth assets here.
  • Taxable – Equities – Similar to how our Traditional account is holding some of our REITS, our Roth account holds some of our Equities, simply because we filled up 100% of our REIT allocation and there was room to spare. But, why do most of the equities go in our taxable?


  1. Dividends on equities are typically qualified. This means that they are taxed at a lower rate than your REITs or Bonds. These rates are inline with your capital gains rates. Equities also tend to pay lower amounts of dividends.
  2. When we sell these, we pay the long term capital gains rates, which are considerably lower, than our standard income rates.

But wait?? What about the Cash? How do you get at the dividends?

Astute readers will now ask a question:

So, you are trying to live off your dividends, but they are all in tax advantaged accounts that you can’t access…. HUH?

Very good question, we sure do have very intelligent readers around here. Glad you asked.

So here’s what happens, let’s walk through a simple example:

Let’s say we have 100% equities in our taxable account, and a 50/50 split of REITs and Bonds in our tax advantages accounts. Something that would look like this:

Now, the month end rolls around and our REITs and Bonds pay out a dividend. So, now our allocation looks like this:

But, now there’s cash in my tax advantaged account that I need to get access to. So… we take that cash and we buy equities with it, in that same account. Then we take that value and sell the same amount of equities in the taxable account. See here:

Yeah, this will slowly push more equities into our advantaged accounts, but they will have considerably less time to grow, so the tax burden will be minimized.

If we need to sell certain assets that are in the tax advantaged accounts because say, our emergency fund needs a boost, we would use the same principle: Sell Bonds -> Buy Equities || Sell Equities -> Get Cash.

This keeps our assets principle the same, it keeps our allocation the same. As mentioned previously, we will actually want to start rebalancing our portfolio more towards equities, so over time we will employ this same strategy to accomplish that.

Of course Mrs. Market can come and blow a hole in this whole plan, but we’ll cross that bridge when we get to it. At the moment, that’s the plan, and I’m sticking to it.

Thoughts? Concerns? Questions?


  • 5am Joel November 27, 2019 at 5:53 am

    Apart from the money and mathematics of it all, how do you guys *feel* about this new allocation? Are you traveling easy and resting well? Just curious to hear if it’s reenforced your confidence or changed anything.

    ps. I love your pretty charts and graphs!

  • The Frug December 4, 2019 at 7:12 am

    Great post. We’ve been following a very similar strategy. I’m also a big of the bond tent you described. I like to think of it as a bond bridge over troubled waters should the markets take a hit. It allows us to avoid selling any equities during a future bear market.


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