My Net Worth Allocation

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.

net worth 5

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?


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2 thoughts on “My Net Worth Allocation

  1. All depends on what your goals are. If you want to retire early, and that is goal #1, it makes perfect sense to have so much in your retirement accounts. It’d be worth doing an analysis on the retirement accounts of the penalty on early withdrawls, your tax rate now, expected tax rate later, blah blah blah. I have no idea, but maybe it’d still be worth it to go whole hog.

    You should also break it down by asset class going forward. I started out measuring retirement accounts vs. all our other investments, and it got pointless after a few years. If you look purely at financial assets, our retirement accounts are over 2/3 of it and will only be increasing as a percentage since almost all of our investing is done inside retirement accounts now, and our liquid accounts will probably stay stable. This method doesn’t tell you how the underlying assets will perform.

    Now I only look at my asset class allocations – Stocks (US & foreign), bonds (US & foreign), Lending Club, and REITs.

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    • I’ve always tracked my asset classes, and going forward I think I will look at the two together.

      You’re right that I should take a look at penalties to really get a good understanding of the retirement accounts.

      Like

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