REVEALED: Our Asset Allocation During Financial Independence

A reader writes:

Hey Nords, what asset allocation do you maintain now that you’re financially independent and retired?

I retired from the military over 13 years ago, and today we still have pretty much the same high-equity asset allocation that we had when we reached financial independence. Our fund choices are more complicated and expensive than they need to be, so that might evolve over the next two decades. But before I distract you with tickers, let me talk about designing an asset allocation.


Different Asset Allocations

There are many different ways to invest for financial independence and your retirement, and almost all of them work. Military service is reliable employment, so while you’re in uniform you could choose an investment portfolio that’s high in equities. In an ideal world, we’d all have passive index funds with some of the world’s lowest expense ratios. We could all maximize our contributions to the Thrift Savings Plan (C, S, and I funds) and we could all put our Roth IRA contributions in a total stock market fund. In addition to equities, you could invest in real estate with REITs or rental properties.

Image of a pie chart for asset allocation with 10 different asset classes |

Not ours– that’s way too complicated.

However, we’re all human beings, not just heartless logic machines. Behavioral finance is a very important aspect of investing with our emotions. It shows how we feel about money, how we deal with risk, how comfortably we sleep at night, and why we panic when the stock market drops.

Education and experience are also part of asset allocation. The more you learn, the more comfortable you can be with volatility or bear markets. When you research and create your personal plan, you’re more likely to stick to the details until you reach your goal.

Even Warren Buffett spends hours each day reading newspapers and financial reports to understand the global economy, different industries, and dozens of companies. Today he sleeps extremely well at night, but when he was starting out in the 1950s he found that research and thinking helped him form his own conclusions instead of getting swept along with a crowd. I’ll never be Warren Buffett but I enjoy reading about economics, the markets, and investing– for maybe an hour or two a week. I’ve developed the confidence to stay invested during recessions and bear markets.

When my spouse and I started investing in the 1980s, we made plenty of mistakes. We invested in actively-managed funds with sales charges of 2% and annual expense ratios over 1%. We chased hot managers and performance. We timed the market. We picked stocks. We reacted emotionally to volatility and recessions. Our only “plan” was to save as much as we could for as long as possible. Our high savings rate overcame all of our mistakes.

Today there’s an overwhelming amount of investing information, and that can lead to paralysis by analysis. It takes most military families about 20 years to save for financial independence, and there will be lots of changes during those decades. The best approach is learning a little about asset allocation now so that you can start investing, and then keep reading about it. While your wealth grows you’ll find your comfort zone and, best of all, you’ll sleep well at night. The more you learn, the less likely you are to panic.

As you read the rest of this post, think about how you’d design your own asset allocation and build your own investment portfolio. There are millions of different choices for your financial independence. The key is to develop your very own asset allocation plan, not one handed to you by a financial advisor (or a blogger!). You have to have a system that you believe in (because you built it) and that you’ll follow (because you made your rules).


Our Situation

My military pension handles most of our expenses, and we (finally) have a little cash flow from our rental property. The rest of our spending is covered by our investment portfolio interest and dividends plus the 4% Safe Withdrawal Rate.

We sleep comfortably at night with our asset allocation because much of our income is annuitized and adjusted for inflation. Your financial independence should also include some annuity income, even if it’s “just” Social Security. An annuity is only longevity insurance and it has nothing to do with the 4% SWR or success rates. An annuity is failure protection. If your investment portfolio is completely wiped out by an economic depression or some unforeseen catastrophe, you’ll still have a bare-bones income every month.

When my spouse and I began saving for financial independence, we were clueless about asset allocation. We started with balanced funds and equity-income funds. As we learned more about asset allocation and read Milevsky’s “Are You A Stock Or A Bond?” book, we realized that our reliable military paychecks meant that we could invest much more aggressively. We eventually invested in a 100% equity portfolio.

As I approached my retirement, we decided to keep a high-equity portfolio. A U.S. military pension is the world’s best annuity and the equivalent of the income from a portfolio of inflation-adjusted bonds. With so much bond-like income from a pension, we decided that the rest of our investments should stay in stocks.

However, we also knew that a high-equity portfolio is very volatile. One reason for asset allocations to both stocks and bonds is that the overall portfolio has much lower volatility. If I had left active duty for the Reserves (with maybe a civilian bridge career) then we might have reduced our equity allocation and added a bond fund to our portfolio. Since I stayed on active duty all the way to 20 years and a military retirement, we also stayed with a 100% equity portfolio.

When I retired in 2002, though, my pension did not cover all of our expenses. We had to make annual portfolio withdrawals, and we started with the 4% Safe Withdrawal Rate. Every year we’d have to sell some shares to cover our spending. We could ignore the daily fluctuations in our investments but we wanted to avoid making large portfolio withdrawals during a bear market. One option was cutting spending (and skipping a withdrawal), but that would significantly crimp our retirement lifestyle.

Because most bear markets last for less than two years, we eventually decided to keep two years’ worth of portfolio withdrawals in cash. That is mathematically and statistically unnecessary for the 4% SWR, but it sure helps us sleep better at night.

One last note about our situation: we’re still tinkering at the margins. 10 years ago I was a much more active investor than I am today. I’m also working on a new asset class with a very small portion of our portfolio, but I’ll probably draw down that experiment over the next decade or two. Every year I’ve traded less than the year before.


Our Asset Allocation

We start out each year with the next two years of portfolio withdrawals in a money-market account and CDs. During the year we spend the income from my pension, our rental property, the portfolio’s dividends & interest, and the cash. If the stock market has an up year then at the end of the year we’ll sell a few shares of stocks, replenish the cash, and start the next year with two years of withdrawals in the money market and CDs. (Nobody worries about making portfolio withdrawals during a bull market!) If the stock market is down then we’ll keep spending our cash for another year. In a very long bear market we might end up selling some equity shares at lower prices than we’d like, but after enduring two recessions we’re much more comfortable with this cash stash.

One of our asset allocations is a growth stock: Berkshire Hathaway. We started buying it in 2001 (during the Internet recession) because it was trading at historically low prices. I’d read about Buffett & Munger since the early 1990s and became much more interested in the company when Buffett spoke out about the tech bubble. Berkshire lost less of its value during the recession than most stocks, and I like the way that those two think about investing.

A small part of our asset allocation is angel investments. That’s a topic for a whole separate post, but I discuss angel investing a little in this podcast. It’s part of my high-growth “shoot the moon” testosterone-poisoned stock-pickin’ financial behavioral psychology. We added this asset class in 2007 because I want to learn more about angel investing. That experiment will taper off during the next 10-20 years.

When my spouse and I retired, we both had contributions in the Thrift Savings Plan. We’ve stayed with the TSP as long as we possibly could, but now we’re converting those TSP funds to Roth IRAs to lower our income taxes before my spouse’s Reserve pension begins.

The rest of our portfolio is invested in passive index exchange-traded funds. After 30 years of trying almost every type of investment, we prefer value funds. They trade at a lower ratio of price to earnings (low P/E) and may have a slightly higher return than growth funds (the “value premium”).

Better still, these funds pay dividends. Dividends are a clear performance indicator that’s difficult to disguise with accounting shenanigans. We also get a little endorphin thrill every 3-6 months when one of our funds pays a dividend. It’s the emotional part of investing again!

To finally answer the reader’s question, our asset allocation is:

  • 8% cash (money market and CDs)
  • 23% Berkshire Hathaway (BRK/B)
  • 23% iShares MSCI Value ETF (EFV)
  • 23% iShares Select Dividend ETF (DVY)
  • 23 % iShares S&P600 Small-cap Value ETF (IJS) + angel investments



I’m frequently asked, “When do you rebalance?” The reality is that we rarely need to mess with it. We’ve set our rebalancing bands at a very loose five percentage points around each asset class, so Berkshire Hathaway (or an ETF) would have to grow above 28% or drop below 18%. Each year when we replenish our cash stash, we’ll sell whatever portion of our assets is at the highest percentage of our portfolio. We rebalanced during 2008-09 as the more volatile IJS shares plunged, and a few years later they came roaring back.

Our angel investments are a portion of the small-cap value asset allocation, so even if I stumble across the next Google we might not have to rebalance. The sad truth is that several of my startup investments have already shut down so we haven’t had to “worry” about this issue.


Lessons Learned

I drafted this post in 2015.  Will my spouse and I still have this asset allocation 10 years from now?

Maybe.  Nope, but we’ve applied our lessons from this section.  I go into more detail in the “2022 update” below.

Lesson #1: When I retired, I was a much more active investor. Over the last decade, we’ve figured out how we want to invest and how hard I want to work at it. I think we’ll stay with this asset allocation but we might change to other funds.

Lesson #2: When we chose the ETFs back in 2002, their expense ratios of 0.25%-0.40% were very cheap compared to the actively-managed mutual funds we’d been using. However, today that’s 4x-6x more than I could pay in a total stock market index fund. Our portfolio’s overall annual expense ratio is about 0.25% but we could get it down to 0.07%. Perhaps the next time we rebalance we’ll buy funds with cheaper expense ratios. I’d still like to use funds which invest in the stocks of dividend-paying companies.

Lesson #3: We’ve held some of these shares for 13 years, which means we’ve accumulated large unrealized capital gains in the taxable portion of our account. A big change in asset allocation would result in a very big tax bill. I’m waiting for a better way to deal with that issue, although it might simply require a nasty bear market. I’m sure an “opportunity” will come up in the next 50 years.


2022 Update:

Nearly seven years later I’m approaching 20 years of retirement, and now I’m in my 60s.  (That’s a lifestyle post which I’ll write later in 2022.Our investments have continued to grow faster than inflation, and our withdrawal rate is now a smaller percentage of a much larger portfolio.  We’re still continuing our 4% Safe Withdrawal Rate plans that we started in 2002, but now our investments are now immune to sequence of returns risk (SORR).   After our first decade of retirement we no longer needed to worry about it.  We’re spending a lot more of our annual withdrawals on legacy and philanthropy.

Lesson #1:  Our investing is less active than ever.  (It’s less work than ever, too!)  Because we’re not worried about SORR during a bear market or a recession, we no longer keep two years’ expenses in cash.  Today we keep enough cash on hand to pay the bills (or for our next round of gifting) and our asset allocation is >95% equities.

Lesson #2:  Our asset allocation up there worked great for over a decade, and it’s still a good one.  However we realized that we could do much better on expense ratios.

As we simplified our investment lives, we decided to go with a total stock market index fund.  After further discussion, we decided to invest only in Vanguard’s VTI ETF with its 0.03% expense ratio.  We’re still invested in dividend-paying companies, small-cap value companies, and Berkshire Hathaway– because VTI owns shares of all of them.  We could add an international fund, but the largest companies in VTI already have substantial international revenue.  Our one-fund portfolio might not be the most optimal asset allocation, but it sure is simple.  More importantly, my spouse (and eventually our daughter) won’t have to manage a more complicated portfolio if I no longer can.

Ironically, our long-term returns might drop a few fractions of a percentage point.  Today, though, we still have more than enough assets for the rest of our lives and they’re still growing faster than inflation.  The lower expense ratios pay for an extra month of slow travel every year (for as long as we can travel) and they’ll eventually boost our philanthropy.

You can find total stock market index funds with lots of investment companies.  Vanguard has a longer track record at replicating an index, although other funds might have lower expense ratios.  We still earn dividends (at the rate of the total stock market) but we chose the ETF version because it almost never distributes capital gains.

We’re still drawing down our angel investments.  One company had a partial exit in 2020, two more look pretty good for exits during the next five years, and two more are too close to call either way.

Lesson #3:  It took several years for us to make this move in a tax-efficient manner.  We put our Roth IRAs in VTI right away, and we moved over our taxable account through a combination of selling shares for expenses while minimizing capital-gains taxes.  We even got to move a little faster during the pandemic recession in 2020 when our old ETF shares had lower capital gains!  (Yay?)  We bought VTI shares on sale that year, and they’ve recovered.


How’s your asset allocation working out for you?  Are your plans changing?

I’ll keep writing about asset allocation and managing your money in financial independence. If you want your questions answered in a future post, please ask them in the comments below or e-mail NordsNords [at] Gmail!


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Related articles:
Handling your cashflow after the military
How Do You Survive A Stock Market Crash?
How much cash in a retirement portfolio?
How Should I Invest During Retirement?
Details of the 4% Safe Withdrawal Rate
Is the 4% withdrawal rate really safe?
The 1980s-2000s: How I Wish I’d Invested Back Then
How (and why, and when) to transfer your TSP account to an IRA

About Doug Nordman

Author of "The Military Guide to Financial Independence and Retirement" and co-author of "Raising Your Money-Savvy Family For Next Generation Financial Independence."
This entry was posted in Investing & TSP, Money Management & Personal Finance. Bookmark the permalink.

2 Responses to REVEALED: Our Asset Allocation During Financial Independence

  1. vanguard23 says:

    Thanks for a “revealing” look at your AA and for providing a possible blueprint for an early military retiree’s AA. As John Bogle highlighted in his book “Common Sense of Mutual Funds”, (and I am paraphrasing a bit) Asset Allocation (AA) coupled with low costs, more so than choice of stocks and/or mutual funds, offer the best indicator of returns for long-term investors.

    As financially independent early retirees, with living expenses covered by our combined pensions, we know we can be more aggressive with our AA but we also have to consider the “what lets us sleep at night” factor…leading to a more conservative AA range of 60/40 to 70/30 (bond positions mostly in the G and F Funds in the TSP). Frankly, I didn’t really focus on AA, as much as I probably should have, until close to retirement from the military…just wanted to save and invest as much as we could for as long as we could. And just like you, we had to overcome some of the same mistakes along the way, with investments in front-loaded funds and high flying tech stocks (remember JDS Uniphase and Sun Microsystems?).

    By the way, I see you are invested in Berkshire Hathaway…have you ever attended their annual meeting? Any concerns with who would take over, and how the stock would do, when both Buffet and Munger hang it up? I have always been intrigued by owning a stock in BRK (more as a novelty than anything, I would admit) but have shied away from pulling the trigger.


    • Doug Nordman says:

      Good advice from Bogle, Mel, thanks!

      I keenly remember JDSU and Sun– as well as Nortel. I’m done picking stocks.

      I’ve never attended a Berkshire meeting (the crowds on Omaha’s infrastructure are ridiculous) but I read all of BRK’s reports and I follow the meetings on social media. I’ve also read all the Buffett & Munger biographies and other books (a very worthwhile project). I have no succession concerns, especially after following names like Abel and Rose over the years. Buffett has also surrounded himself with the next generation: Weschler, Combs, Howard Buffett (and perhaps someday his son), Cool, and board member Bill Gates. However I think Berkshire will spend the rest of my life trying to beat the S&P500 without racking up any more 25% annual returns.

      The best part about having BRK in a portfolio is the investor education that comes with the purchase research plus the tracking responsibility of ownership. It’s immunized me against a bunch of mistakes that would’ve seemed like good ideas at the time…

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