This guest post is by Vaughn, a long-time Financial Samurai reader who retired at 44 and is now 55. Vaughn's early retirement was driven by necessity rather than choice due to a congenital bone disease. Fortunately, his high income during his working years secured a solid SSDI benefit, and his mother’s foresight provided future rental income through a duplex. Vaughn shares his approach to maintaining an aggressive 80/20 retirement portfolio with 80% in equities and 20% in fixed income.
Imagine having an 80/20 stock/bond portfolio in retirement, or an even riskier allocation of 100% stocks. Most would not recommend such an extreme allocation for traditional retirees after the age of 65. But if you're retiring early, maybe you'll do just fine.
Living off the dividends of a heavily weighted stock portfolio (80/20) can be a retiree’s best friend, especially if they expect to be retired for a long time. I’m thinking about the would-be centenarian or the FIRE individual who ideally wants their assets to produce indefinitely, starting at an early age.
Let's first discuss why people would object to a stock-heavy retirement portfolio. Then I'll argue why the concerns may be overblown.
The Downside Of Having A Heavy Stock Weighting 80/20 Portfolio In Retirement
The cost of this 80/20 retirement portfolio comes in the form of extreme volatility.
Volatility is often defined as risk, but I disagree. To me, true risk is the permanent impairment of capital—losing money for good. Volatility, on the other hand, is just a feature of equity investing.
Next to the risk of losing my capital permanently, inflation is the biggest threat. It’s the risk that my money won’t be worth as much in five years as it is today. Inflation is like a silent killer—slow, creeping, and insidious. You might not even realize you’re in its grip until it’s too late.
Some people catch on early about the ills of inflation, but many don’t realize the damage until it’s already been done. Like any malignancy, early detection is crucial. Waiting too long just limits your options and increases risk even further.
My antidote to inflation, for someone planning for a long retirement, is to heavily weight their portfolio towards equities. Inflation acts as a tailwind for corporate profits, which results in higher profits and higher dividend payouts. The goal is to boost income through dividends rather than relying on a safe withdrawal strategy.
A few years ago, this approach would’ve sounded completely insane to me. So why the change? Because my thinking has evolved. Here are some conclusions I’ve recently drawn.
Living Off Dividends And Supplemental Retirement Income
Despite the volatility of an 80/20 retirement portfolio, I've come to realize the following things that have helped me sleep better at night. Perhaps after investing for decades, these reasons may saw you to invest more heavily in stocks as well.
- My emotions deceive me – I used to think volatility and risk were the same because it felt like I was permanently losing money during market downturns. But the markets would eventually recover.
- I assume the worst during uncertainty – When profits dip or there’s talk of a recession, my mind jumps to “Is everything going to zero?!” I’m emotionally irrational at times, but fortunately, I tend to do nothing during these periods. Recently, I’ve gained more awareness of just how irrational I am in moments of uncertainty. That awareness is progress.
- Inflation is real – The past several years truly woke me up to its devastating effects. Inflation has been eroding my purchasing power all my life, but I didn’t take it seriously until the pandemic. I’m grateful for the wake-up call.
- The economy will continue to grow over time – Finding simple ways to align myself with this growth seems like the soundest path to building wealth. All I need to do is get the long-term direction right—up or down?
Patience Is Important As An Aggressive Equity Investor
Though equities are volatile, they tend to have the strongest correlation with economic growth compared to other asset classes. Capitalism is resilient and powerful—there’s no better horse to ride. Broad-based equity exposure is the perfect saddle for the long haul.
If I’m wrong about the economy growing over time, then I doubt any asset class will perform well (except Treasury bonds). My alternative, in times of uncertainty, would be to sit tight and wait for the world to end. But in hindsight, sitting on the sidelines has never proven fruitful.
As long as capitalism remains dominant in the U.S., I believe equity markets will continue to rise over the long term. Therefore, having a much heavier weighting in equities, such as an 80/20 portfolio is logical. Again, capitalism is resilient and powerful—let’s hope we never opt for another economic model.
How I've Structured My 80/20 Retirement Portfolio
I like a broad-based index approach that tracks either the world’s economy, the U.S. economy, or both (think VOO, VTI, SCHD, DGRO, or VXUS). I also believe tilting the portfolio toward companies with strong financials and a track record of raising their dividends.
Most importantly, I think a retiree should try and live off the dividends from these broad-based index funds and never sell a share. The benefit is that you’d never need to worry about the right withdrawal ratio or capital gains taxes. You’d simply take whatever dividends capitalism provides. In periods of inflation, you’d likely get a raise, and in economic contractions, your dividend income may take a haircut.
The downside is that you’d probably live off a smaller percentage of your portfolio than what’s customary. But if you can manage this with supplemental retirement income, you’d never run out of money. In addition, your asset base would likely grow over time, along with your dividend income.
If you don't have rental income to help pay for living expenses like I do, you can always generate supplemental retirement income through part-time work or side hustles. As an early retiree, you will have more time and energy to earn than a traditional retiree.
An Example Of When Dividend Payouts Crashed
During the 2008-2009 Great Financial Crisis (GFC), dividend payouts were cut by about 23%, according to a Barron’s article quoting Goldman Sachs on June 11, 2022, and it took a few years for them to recover. While I wasn’t thrilled with lower income, it coincided with deflation—prices fell, which cushioned the impact.
In 2008, I remember buying Armani ties for $35 at Saks Fifth Avenue in Portland as they prepared to close their doors. A year earlier, those ties were over $100. The irony is that a $100 tie wasn’t in my budget the year before, but thanks to the GFC, I was able to comfortably buy five ties—and an Armani suit I still wear occasionally. Thank you, GFC!
And it's not just Armani ties that declined in value when the economy imploded, but so did things such as houses, cars, food, and other goods and services. Almost everything traded at a discount.
Depending on your allocation to the ETFs I’ve mentioned, the dividend yield in year one would range from 1.3% to 2.5%. Since I suggest living off the dividends rather than reinvesting them, the more you tilt toward higher dividend stocks, the more your portfolio will likely underperform broader indexes over time.
The 80/20 Retirement Portfolio I’m Building For Myself:
- 70% VOO – This represents the S&P 500 and has a current dividend payout of 1.32%
- 15% SCHD – This tracks the Dow Jones U.S. Dividend 100 Index and has a payout of 3.35%
- 15% DGRO – This represents U.S. Dividend Growers and has a payout of 2.19%
Disclaimer: This is not investment advice for you, but what I'm investing for myself. All your investment decisions and results are yours alone. Please speak to a financial professional to discover your true investment risk profile.
Benefits and Specifics of My 80/20 Retirement Portfolio:
- Tax efficient – Nearly all the dividends from these ETFs are qualified. If this were your only source of income, you might not owe any federal taxes, depending on the amount of income generated (for 2024, qualified dividends may be taxed at 0% if your taxable income falls below $47,025 and you’re filling singly. If filing jointly the threshold is raised to $94,050).
- Low cost – The overall cost of the portfolio is around 0.08% annually. Some people overlook the importance of low costs, but by minimizing fees, I’m keeping virtually 100% of the income and gains. If my portfolio fees were 1%, I estimate I’d have $1.2 million less after 35 years. While there’s nothing wrong with paying for active management, it’s not necessary when you’re simply riding the growth of an entire economy.
- Current blended yield – 1.72%
- Rising dividends – The dividends have increased every year for the last decade.
- Inflation-beating growth – Dividend payouts have grown 83% over the last 10 years, far outpacing inflation.
- Capital growth – Despite not reinvesting dividends, the portfolio is still up over 200%.
Related guest post: Overcoming Blindness: Achieving FIRE With A Visual Impairment
Be Cautious About Overconfidence with a Stock-Heavy Retirement Portfolio
The timing of this discussion matters. The market has enjoyed a tremendous run since 2009, especially in the past 24 months, and it's easy to feel overconfident in a bull market. This can lead to overestimating our risk tolerance.
While my points may be valid, it may not be the best time to fully commit to a stock-heavy portfolio. Instead, consider gradually transitioning to a more aggressive asset allocation if you're considering a change.
The primary reason I can manage a volatile portfolio is that my daily expenses are covered by Social Security and rental income. The dividends from my investments are used for discretionary spending, like vacations and car expenses. If you don’t have the luxury of such income streams, an 80/20 retirement portfolio might not be suitable.
Personally, I wouldn't feel comfortable relying on an 80/20 portfolio to cover essential living costs. While capitalism may be the best horse to ride, I’m not eager to take on more risk than I can handle. If you share this concern, a more conservative 60/40 portfolio might be a better fit.
Finally, if you’re still far from retirement, focus on building diverse passive income streams. Even if you choose not to invest aggressively in the future, it’s valuable to have that option.
Readers, what are your thoughts on maintaining an aggressive 80/20 stock/bond retirement portfolio? Given that stocks have historically bounced back, is the fear of permanent capital loss overblown? What are the potential downsides of an 80/20 allocation when Social Security and rental income already cover your living expenses?
– Vaughn
Diversify Your Retirement Investments
Stocks and bonds are classic staples for retirement investing. However, I also suggest diversifying into real estate—an investment that combines the income stability of bonds with greater upside potential.
Consider Fundrise, a platform that allows you to 100% passively invest in residential and industrial real estate. With over $3 billion in private real estate assets under management, Fundrise focuses on properties in the Sunbelt region, where valuations are lower, and yields tend to be higher. As the Federal Reserve embarks on a multi-year interest rate cut cycle, real estate demand is poised to grow in the coming years.
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Hi, first time reader! I really enjoyed your article Vaughn, especially how you highlighted the dangers of an unreasonable reliance on emotional responses alone to a system that is, at the end of the day, not within my control. The reminder that my emotions can be deceiving and that it’s easy to assume the worst in uncertainty is well met. Some people might assume that since they “know this” it will prevent them from acting on it, but my experience is that simply having knowledge of these factors is not enough to prevent me from falling victim to them. Thanks again!
Thanks Sam! Long time reader, what are your thoughts on CC ETF’s? Especially buying them in a roth account and reinvesting the dividends for a good period of time…
Sorry, can you explain what a CC ETF is?
A covered call etf like SPYI or XYLD?
Why thank them for their service? They certainly don’t do it for free. We pay ridiculous federal taxes for them. From what I see these wars are a complete waste of money and lives.
Another case for Buy, Borrow, Die strategy. Build your portfolio to $3M and you can use an SBLOC to borrow against your equities until you die. No taxes, no payments until you die. You can use your dividends to pay the interest if you wish or make no payments at all.
Th gov’t doesn’t count debt as income
Excellent article.
I get the stock allocation but I would consider writing some options against VOO to generate more income. Also, I noticed the bond side in your portfolio is nonexistent. I would recommend a 20% allocation in a bond ETF such as one that holds business development companies (BIZD for example or a closed end bond fund (RA for example). That side should give you around 10% gross before taxes and inflation.
Best of luck. I understand medical issues all too well.
Hi, yes, there was literally nothing about the fixed side of the portfolio. I was mainly trying to drive home the value of equities over the longterm. I don’t own BIZD, but do have a small position in MPV. Most of my fixed holding are in treasuries. Mainly because I want to see some part of my portfolio holding up during recessions/periods of financial uncertainty. Not only does the treasury exposure calm my brain a bit during uncertain times, but also gives me a base to draw from if I decided to average down. MPV is typically one of the positions I average down into. Not unlike BIZD, the volatility is extreme at times
Both my wife and I are in early 70s and retired two years ago. For our income needs we rely on Social Security, small rental income, royalty from sold business, and a tax-free annuity totaling $150-160K a year. This year I am also subject to RMDs of about $60K, which we direct to charity to lower our tax burden. We have no debt except some 2.25% mortgage on our second home. For asset allocation we keep 100% in stocks in both retirement and taxable accounts.
Because of satisfactory stream of income, which will increase when wife begins her RMDs, growth is our priority rather than dividend income or preservation of capital. As a result 5 years ago I shifted focus from passive to active investing. I manage a portfolio of stocks, growth ETFs, and derivative products which averages about 25% a year and provides steady cash flow which allows me to continue systematic investing of about $40-50K a month. What is not reinvested in stocks goes into T-bills averaging 4.8-5.2%. This extra cash comes in handy to add to positions during selloffs like we had last August and to pay estimated taxes.
I think investors with sufficient income including dividends and other sources could easily keep 80% or more in stocks even in retirement. This will allow them to cruise through retirement without selling a share (other than RMD) and pass their assets to children and grandchildren, or charitable causes.
Ed Thorpe, the math genius and investment guru that actually invented a better version of option pricing formula, had mentioned in a Tim Ferriss podcast, that a 90/10 allocation of stock index/cash and 2% withdraw rate, has a very good chance to last forever (and grow perpetually).
Thanks for the article Vaughn. Currently 47 and FIRE’d a few months ago. Similar to some of the previous posts, my essential and discretionary expenses are covered by income I receive from rental properties. That has allowed me to remain aggressive with investments in the stock market. I have been and plan to remain 100% in stocks (currently invested 97%VOO/VTI and 3%VEU). I don’t see the need for dividend ETFs or bonds at this time.
Good for you. I’m so impressed by the FIRE crowd. I may have retired early, but didn’t earn it in the same way that many of you have. I likely would have positioned myself similarly to you, but do need some income from the account. The yield from VOO/VTI wasn’t quite enough, so I grossed it up slightly higher.
Great article Vaughn, I agree with the 80-20 allocation. I recommend for anyone in their 20s to have an emergency fund of six months expenses and then a 100% stock allocation until the age of 40. Compound interest and growth is real and so many young people are under invested. Every $100 invested at 20 can be worth thousands at middle age and if people buy bonds when they are young they miss out on massive growth.
My allocation is at 70%-30% and I use income from T-bills to pay my monthly expenses and any left over interest money gets invested in the markets in a taxable brokerage. This allows me to have both stable income and growth for the future.
As you say Vaughn the only way to beat inflation over the long term is with a large amount of equity exposure and people should keep a ton of equities for their whole lives even in their retirement years. The growth does not have to stop.
The growth in equities can be used to supplement social security and seniors should only withdraw what they need in retirement for the current year to avoid extra taxes. Many people make the mistake of withdrawing their 401ks in a lump sum and then they get hit with a huge tax bill and also have nothing left to live on as they get older.
Also for those of us that retire early you never want to withdraw Roth or 401k money early as you can receive insurance subsidies and other benefits if you have a lower taxable income in early retirement. You can be rich and be very low income if you structure your withdrawals correctly in early retirement.
Can you please elaborate on the “other benefits” if you have lower taxable income in early retirement? I am new to that boat and just want to learn from others that have come before. Thanks!
There are so many programs for low income seniors. In my state they have property tax assistance, heat and utility bill assistance etc. All you need to qualify for those things is a low income. Medicaid Expansion is also on the table for low income folks that retire early. You can actually take withdrawals to maximize the benefits. You can do a mix of Roth withdrawals and 401k withdraws in retirement to maximize the cost savings. The ACA is the gift of a lifetime in early retirement and people need to use it to their advantage. A ton of people get laid off or lose their jobs for health reasons in their 50s and 60s and it is important to use the government programs as a bridge to make it to Medicare when necessary.
People always think they can work until 65 but that is not the norm actually. I know a ton of people including my parents that were forced out of careers much earlier and that is a damned shame. Again keeping the taxable income as low as possible in early retirement is the way to go. I try to keep my tax rate below 10% and that keeps more money in my pocket for the later years if I am lucky enough to live a long time.
Thank you!
Thanks Will. Agreed about starting early with aggressive equity exposure. I’ve made so many investment mistakes that I’ve lost track. The biggest was not remaining fully invested at a super early age. Frequently “trying to beat the market”. In the short-term I frequently could outperform the indexes, but over every 2-3 year period I would always underperform by a decent margin
Sam, thank you so much for allowing me to post this. It’s kind of funny, as I read it I can see where some of my thinking has been shaped by your posts over the years.
Thanks again for all that you do,
Vaughn
Thank you for contributing Vaughn! It was a pleasure to work with you on producing and editing this post.
This is a GREAT topic b/c logically speaking, if the S&P 500 index is a historically strong performer for almost 100 years, then why wouldn’t we heavily weight it in our investment portfolio and in retirement?
Your situation is similar to mine in that I have rental income and online income to pay for my living expenses. As a result, I should be more aggressive with my stock investments. However, historically, I have felt the fear of going all-in and haven’t as a result.
The point of your post that stood out was this: “To me, true risk is the permanent impairment of capital—losing money for good.” At the very least, I am personally going to continue buying any dips any chance I can get.
So long as we can gut through the downturns, we should be able to come out ahead in the end.
Best,
Sam
Sam, do you have any foreign exposure? I have virtually none, and I think most of reasons are fairly valid, but also realize that my decision has been partially informed by the run-up in U.S. equites over the last 15 years. Just curious
I own some Chinese Internet stocks.
Related: Home Country Bias
Thanks for sharing! Everyone definitely has their own unique risk tolerance. Mine is pretty conservative/typical at roughly 60/40 which I’ve been maintaining for a while. When I was younger, I went through some fairly brief periods of 70/30-80/20. But the highest I’ll go now is 70/30, which is my upper comfort zone at this later stage in my life.
Funny, this is me. It’s been me for about 5 years now, having been retired for 3 years. I used to be an active trader, but I saw the light eventually. I sleep like a baby.
A couple of points.
It’s good to see you’ve re-examined this, Sam. A few years ago, we had an exchange and you seemed confident dividends were in a perpetual downtrend.
That is, if I recall correctly, you mentioned you had spoken to industry insiders which led you to the conclusion that, because dividends were not necessary to attract capital, dividends would continue to languish. That’s what I recall, anyway.
But my liquid portfolio is 100% stocks.
I have zero debt and view my home and investment property as “bonds.”
I live off of dividends and don’t ever plan on selling a single share. My yield is about 2.5% and grows yearly by about 8%. As it is, I have more than enough and save more and more each year.
These days, my equity allocation is roughly:
33% VOO
29% DGRO
27% SCHD
11% VUG/VGT
But here’s the thing–this allocation changes over time. Indeed, when I started this portfolio the core holdings (VOO/DGRO/SCHD) were all about equally weighted. Not surprisingly, over the last few years, those allocations changed.
My only real critique of your post, from my own experience, is that you need to figure out what your minimum dividend needs are first rather than spending any time worrying about the allocation. That is, what’s the number you need to generate to live comfortably? Then add at least 10% to that number for a cushion and life’s inevitable surprises.
And, then see if you can come up with a reasonable allocation to achieve that goal.
Just know, in the long run, VOO will naturally outgrow the other two ETFs and make up a larger share of your portfolio (so no need to start at 70%, as you suggest), but it won’t matter because you will have created a perpetual money machine that comfortably funds your life.
I also recommend keeping an emergency fund of about 3-6 months of expenses, independent of your portfolio.
“It’s good to see you’ve re-examined this, Sam. A few years ago, we had an exchange and you seemed confident dividends were in a perpetual downtrend.
That is, if I recall correctly, you mentioned you had spoken to industry insiders which led you to the conclusion that, because dividends were not necessary to attract capital, dividends would continue to languish. That’s what I recall, anyway.”
I don’t recall this exchange or making this argument. I have made the argument that investing in growth stocks is superior than dividend stocks for younger investors.
But even as an older investor, I’m overweight growth stocks. Check out the linked post. Being in San Francisco, I can’t help but investing in tech stocks, which are all growth stocks. Now I’m investing a decent amount in private artificial intelligence companies.
I’m not sure who the “industry insiders” you are referring to.
But after you built up your capital and no longer want to take as much risk, you can shift more of your allocation to dividend stocks.
I’m glad your portfolio has worked well for you. It’s been such a good time for investors. I hope it continues to last.
I started with individual equities, and as the individual equities got to 5% of my portfolio started putting the dividends from the 5% equities into SDY, until I decided the expense ratio was too high, and moved to SCHD. I’ve been pretty happy with the results, and will continue with this strategy for the foreseeable future.
Good read, and I particularly appreciate you not ignoring the timing elements of this discussion (your concluding paragraphs).
I’m over 55 and doing well. I agree I wouldn’t suddenly pivot to this during times of such high valuations and geopolitical uncertainties.
When times are good, it’s easy to confuse brains with a bull market. At the very least, the takeaway from this post is to buy the corrections and bear markets.
I like the idea of drawing down from dividends (qualified dividends) and supplementing this with ordinary income from REITs / Rentals / Bonds / Covered call ETFs as the case may be. I think the importance of tax efficiency cannot be understated given the increasing fiscal deficits at the federal government level.
As a Boglehead, my preference is to have a combination of VOO, VYM instead of SCHD and VIG instead of DGRO.
I wrestled with VYM + VIG over SCHD and DGRO for a while. I think I went with the latter because there was a little less overlap with VOO. At some point I realized I was splitting hairs bc the two portfolios were so similar.
i’d go with more growth: 20% QQQ, 50% VOO, the other dividends growers, the same percentages.
I like more growth too, being in San Francisco and being surrounded by growth companies. QQQ is one of my core holdings.
Sam, once again a spot on post. My wife and I have been 100% stocks since we retired at age 61. Most people think we are crazy until I explain that we both have a defined benefit plan that covers all our basic needs. (I am retired military and my wife has a pension from a school system). While 100 % equities, if we are up 10-15% like this year, I rotate the next year’s draw into a bond fund. That way if the market turns south we are protected. Inflation is our biggest enemy and 100% stocks gives us a way to combat it.
Ed, you gotta love your lifetime pension! Thank you for your military service.
If I can fund all my expenses through a pension, I’d probably be close to 100% equities as well. It’s like investing with the house’s money in a way. But boy.. those 20%+ downturns sure can be painful sometimes.
How long have you been retired?
Pragmatic, personally insightful, and balanced. Great article and something I’ve been wrestling with myself as I recently cut the W-2 income cord and just so happen to be 44 myself. Thank you and Sam too for lending the platform!
Glad you enjoyed it! I appreciate Vaughn’s point of view. I have been battling with fear and greed for a while. I’m trying to spend more and invest more aggressively at the same time. Weird situation to be in.
Congrats on cutting the chord! I hope you find something you enjoy doing with all your newfound free time.
Congratulations! I too wrestled with the correct approach for a while. I was slow to make the commitment to this strategy which likely helped. Mainly because I was able to see how the portfolio performed in several market cycles before really understanding what I was taking on.