People talk a lot about “asset allocation,” or the distribution of your assets into different asset classes such as large cap, small cap, international, etc. I’ll go into more detail on asset allocation in the future, but for today I’d like to focus on how net worth is allocated. Specifically, how my net worth is allocated.
You see, I’ve spent a good deal of time thinking through the proper asset allocation for my investments. But until I wrote a post about my own net worth, I never really stopped to think about the allocation of my assets into different types of accounts: cash savings, non-retirement investments and retirement investments.
Typically, I just save as much as I can and then when my checking account gets a little high, I transfer some money into either my Roth IRA or, when that is full, non-retirement investments. I suppose that this has worked fine, but maybe it has caused me to have too much money in retirement accounts and not enough in liquid investments? Or vice versa? You’ll never know until you look at the numbers, so let’s dig in!
How my assets break down over time
Here is a series of four pie charts looking at the percentage breakdown of my assets by account type over time. I was able to use consistent yearly data from 2013 to 2015, however I didn’t start tracking data of this type until August of 2012 so there is a small inconsistency there.
Clearly, you can see that retirement savings is becoming an ever increasing part of the pie. Cash savings is going down on a percentage basis, and non-retirement investments are going up.
What should a net worth allocation look like?
Strangely, I was not able to find any internet wisdom on this topic. The internet is lousy with ideas about asset allocation within these account types, but I couldn’t find anything suggesting what the appropriate ratio of retirement to non-retirement investments is.
So I am left to my own devices to reason through the appropriate allocation. As a 27 year old who is decades away from retirement, I think having 62% of my net worth tied up in retirement investments is a bit much. These retirement investments are all accounts that impose penalties for withdrawal before traditional retirement age, so they’d be of minimal use if I were to pursue early retirement.
I’d like to continue to add to my retirement investments but a more conservative rate. I’d also like to maintain a consistent dollar value in cash, but decrease it as a percentage of my overall net worth by increasing the value of my non-retirement investments. This should be do-able as I have already maxed out my Roth IRA for the year, so all future investments this year (outside of my work-sponsored plan) will go into non-retirement accounts.
What do you think about the breakdown of my assets by category? Should I shift my strategy? What breakdown do you use for your assets?