Portfolio Review. 25 MILLION windfall; help me not lose it

[longview]

Hello everyone, I've been a long time lurker here and have found this forum extremely great and useful. The base question is: how do I invest the 25 million I recently got from a company sale such that I can confidently retire early. And, just to make the question a bit of a challenge, I do have exceptionally high expenses (expensive area, private school, caring for multiple sets of parents, etc).

Stats:
Emergency funds (6 mo): yes
Debt: none. House/cars paid off.
Tax Filing Status: Married w/ Children
Tax Rate: 35% Fed (will be 39.6%?), 9.3% State
State of Residence: CA
Age: 39
Desired Asset allocation: 30% stocks / 70% bonds
Desired International allocation: 50% of stocks

This is not my historic AA, but one I think may "cover all the bases." I'm looking for safe retirement to cover my extreme overhead. I would like to handle the case where the United States fades from the relevant world economic stage.

Portfolio/Current retirement assets:
The FAQ seemed to imply not giving dollar values -- but imo it's key to the questions for me. Given that, here is the current portfolio:

Taxable (everything is taxable except a small, old 401k -- also some 529s for the kids):

70.11% (25m) CASH - Vanguard Prime MM Fund Institutional (VMRXX) (.09)

12.59% (4.49m) Vanguard California Intermediate-Term Tax-Exempt Admiral (VCADX) (.12%)

.46% (163k) Vanguard Total Stock Market ETF (VTI) (0.06%)
7.44% (2.65m) Vanguard Tax-Managed Capital Appreciation Admiral (growth slant) (VTCLX) (.12%)
6.99% (2.49m) Vanguard Total Stock Market Index Fund Admiral (VTSAX) (.06%)

.63% (225k) Vanguard FTSE All World EX US ETF (VEU) (.18%)
.60% (214k) Vanguard Tax-Managed International (no emerging) (VTMGX) (0.12%)


Questions
1. According to FIRECalc, I can support my 800k/yr for 50 years with 20% equites (just under the wire). Does this sound right to everyone? I don't expect to stay at 800k/yr -- but it would feel great knowing that I could (continue) handle helping as people in my life get sick, etc.

2. What is the best way to invest in the "rest of the world." I love indexing -- but when it comes to things like emerging markets I wonder who is choosing them and are we capturing all the emerging markets? Are we capturing all the international markets? This is what I meant above about handling the case of the US economy/equities becoming a non-factor. Whats the simplest way to capture it?

3. Is it bad to have this much money in Vanguard (or any single institution)? Should I move 10 million to Fidelity?

4. Is it bad to have so many bonds in CA munis? If so, given the large tax penalty, which other bonds fund(s) would you take on?

5. I'm a very buy-n-hold, rarely look, investor. Should I hire someone to watch over my money? I tend to think not, other than the case of hackers getting into my accounts (presumably a professional would notice more quickly).

6. Is 30% too much equities? If I could get away with 20% I'd do it.

7. I think I should move all this stuff to a Trust? Should I do it before or after investing? Does it matter? Any advice on doing it?

8. Any advice on choosing a trustee?

9. Is there a gold standard in medical that I could get now for retirement? I've never had medical that wasn't from my employer.

EDIT (I didn't make my plans clear given some of the responses -- Here's the key Q):
10. My thinking is to invest such that the equities become 30% (50% of that international/emerging). The rest would go into tax-exempt CA Munis, or a combination of tax-exempt and intermediate term bonds. The total portfolio value at that point would be ~35 million (old portfolio + 25 windfall). Can I retire early on that?

Thanks a lot for your time,
longview

[livesoft]

I'd work on an estate plan with attorneys for a little while before I decided on an investment portfolio.

[RenoJay]

Congrats on the sale! I'm sure more knowledgeable Bogleheads will give you specific asset allocation advice, but I'd like to invite you to Nevada. I made the move from CA about 8 years ago. At my first stop, Incline Village, I met lots of entrepreneurs who moved for tax reasons. You'lll automatically save the 9.3%/year in CA taxes if you move, and there are lots of families your age with school-age children. Just a thought.

[Littlefinger]

Why do I hear Dr. Evil in my head when I read your title?

[Raymond]

Congratulations! Protecting the money you now have is the most important thing - you're in the position where you don't need to take risks. For example, if you were to put the $25 million into Vanguard California Intermediate-Term Tax-Exempt Fund Admiral Shares (VCADX), with a SEC yield of 1.75% (as of 9/14/2012), this would throw off $437,500 per year tax-free.

You are essentially in the position of many lottery winners (although you worked hard to make your fortune a reality), and an earlier thread addressed this issue:

"I feel like my friend just won the lottery..."

Some good advice there.

High-earning professional sports figures (another group of people with financial bonanzas) can fall into similar traps:

"How (and Why) Athletes Go Broke" - Sports Illustrated.com

Some random thoughts:

Financial advisors - there are several with good reputations on this board (see the lottery thread above). However, if you want to do it yourself (and there's no reason you can't), then I would go with 25% stocks/75% bonds. Beware of insurance products masquerading as financial investments.

How many people know about your fortunate situation? Expect long-lost friends and relatives to come wandering by with their hands out, wanting you to finance their dream of starting up a deep-fried peanut butter sandwich restaurant or a combination life raft/sofa factory

Consult an attorney in the trust and estate field to protect the money from lawsuits, and umbrella liability policies.

I am sure some older heads will be by to offer advice

[livesoft]

See that little box up there on the right that has the the magnifying glass and text "Google..."? Type "windfall" into it and then the <enter> key.

[damjam]

Congratulations!

I would start by reading this: Managing a windfall.
Definitely peruse the links. I don't think you can overestimate the psychological fallout from your new found wealth.

To be honest your level of assets gives me pause as to giving advice. There are tax and estate issues of which I am not aware. It might be worthwhile to have an advisor at least initially. There are a few advisors that post here that you might consider. As you may be aware Vanguard has CFPs that will work with you free of charge, but I don't know if they have experience with your level of wealth. I would be cautious with whomever you consult.

1. According to FIRECalc, I can support my 800k/yr for 50 years with 20% equites (just under the wire). Does this sound right to everyone? I don't expect to stay at 800k/yr -- but it would feel great knowing that I could (continue) handle helping as people in my life get sick, etc.

I like FIRECalc, but I'm a little suspicious of 800k/yr for 50 yrs with only 20% equities. It might work. Obviously if you only spend income your golden, but at current returns you need to invade principle. 50 yrs is a long time. I think any projection is going to be a guess at best.

2. What is the best way to invest in the "rest of the world." I love indexing -- but when it comes to things like emerging markets I wonder who is choosing them and are we capturing all the emerging markets? Are we capturing all the international markets? This is what I meant above about handling the case of the US economy/equities becoming a non-factor. Whats the simplest way to capture it?

I think this could be a thread on its own.

3. Is it bad to have this much money in Vanguard (or any single institution)? Should I move 10 million to Fidelity?

This is also thread worthy. If you feel more comfortable spreading it around then why not? It will be a little more work to keep track of but if it gives you piece of mind...

4. Is it bad to have so many bonds in CA munis? If so, given the large tax penalty, which other bonds fund(s) would you take on?

If I read your post correctly you have ~12.5% of your portfolio in CA munis, doesn't seem unreasonable. Of course if you hired an advisor he/she could probably create a custom bond ladder for you which might be worthwhile.

5. I'm a very buy-n-hold, rarely look, investor. Should I hire someone to watch over my money? I tend to think not, other than the case of hackers getting into my accounts (presumably a professional would notice more quickly).

I covered this. As to hackers, the more people you can trust monitoring your accounts the better I suppose. It would be nice to have a manager/advisor to take care of things when you travel, etc.

6. Is 30% too much equities? If I could get away with 20% I'd do it.

I don't think 30% is too much. Some research suggests that 25% equities should be your minimum. Again this is thread worthy.

7. I think I should move all this stuff to a Trust? Should I do it before or after investing? Does it matter? Any advice on doing it?

8. Any advice on choosing a trustee?

No clue.

9. Is there a gold standard in medical that I could get now for retirement? I've never had medical that wasn't from my employer.

Don't have an answer for this one either.

I wish you and your family the best.

[longview]

Thanks for the feedback everyone, I really appreciate it. Feedback feedback...

I really like the other links, thanks Raymond. As to VCADX, that's not adjusted for inflation though? That's what messes with me in all of this, dealing with 50 years of inflation. That's why I like using FIRECalc... at least it says it would have worked.

livesoft, I'll do the windfall search, but I have read all the windfall threads I found. Good advice in there, like spend 5% on nonsense (the wife really liked that one), and take your time (which I'm doing now). But I've been surprised by the lack of specific info (although now I understand why).

As for those not comfortable giving advice due to the amount, I totally understand. Accountants, etc I've spoken to seem in the same boat. They know the rules for corporations and big money, but not so much when it comes to individuals. So go ahead and give whatever your thoughts are, I'll take it with a grain of salt.

RenoJay, that may be a tough sell on the wife... but I'll check it out as opportunities permit and maybe she'll like it.

Thanks for the feedback, keep it coming.

[harikaried]

RenoJay, that may be a tough sell on the wife... but I'll check it out as opportunities permit and maybe she'll like it.

Ski? Lake? Trees? Quiet?

My wife and I were thinking about moving to Incline Village from the Bay Area, but we might check out Reno first.

[l2ridehd]

Step 1. Move out of CA. Why pay 9% of your going forward income to the state? Even if you have to move your parents and others out of the state with you. Go to a low tax state. This would be your biggest expense saving available.
Step 2. Hire a good estate planner to minimize costs should something happen to you.
Step 3. Find a low cost financial manager with indexing philosophy. Ferri or Bernstein would meet that objective.
Step 4. You can handle an AA a bit more aggressive then 25/75 based on your time window of 50 years and your expensive life style. Probably 50/50 would be more appropriate. But nothing less then 40/60 IMHO.
Step 5. Once you move and have paid for a nice place to live, cut your expenses. It's hard to imagine anyone needing to spend 800K a year for day to day living expenses, even if supporting an extended family. Even half that is high and difficult to spend unless you are buying "things"
Step 6. Relax, enjoy life, travel, have fun, stay in good health and with the above in place you should never have to worry about tomorrow.

[bigred77]

I'm with others in that I would consider a slightly more aggressive asset allocation (something in the 40/60 - 50/50) range given that you have such a long time horizon.

50/50 can make things really simple where you can go:

25% Total Stock market
25% Total international
25% California Intermediate tax exempt bonds
25% Short term tax exempt bonds

Throw everything else you have thats tax deferred in TIPS. I would start throwing the max allowed into Ibonds from here on out but it likely has a very minimal impact.

By the way (since your familiar with FIRECalc), a 50/50 asset allocation starting with a 4% withdrawl rate held constant over the first 10 yrs (in your case, withdrawing 1M/yr on a 25M portfolio each of the first 10 yrs with no adjustment for inflation), followed by annual inflation adjustments starting in year 11 forward for the next 40 yrs (using the CPI) has never failed in any of FIRECalcs scenarios going back to 1871 and the most likely scenario is that you leave quite a large estate.

Take it with a grain of salt but I think a simple 50/50 AA and taking the 800k/yr you want to take (as long as you hold that 800k constant for a few years) sounds like a pretty safe plan.

[JW Nearly Retired]

longview,
Following bolded answers are just my off the cuff opinions.

1. According to FIRECalc, I can support my 800k/yr for 50 years with 20% equites (just under the wire). Does this sound right to everyone? I don't expect to stay at 800k/yr -- but it would feel great knowing that I could (continue) handle helping as people in my life get sick, etc.

I would have at least more like 40% equities. Bonds are making peanuts and hard to see how they will beat inflation for a long time. Sure losers some say. There was a AA poll here recently and retirement age Bogleheads are averaging around Age-10 in bonds.

2. What is the best way to invest in the "rest of the world." I love indexing -- but when it comes to things like emerging markets I wonder who is choosing them and are we capturing all the emerging markets? Are we capturing all the international markets? This is what I meant above about handling the case of the US economy/equities becoming a non-factor. Whats the simplest way to capture it?

Some mix of http://www.bogleheads.org/wiki/Lazy_Portfolios + your muni's .................. and some extra emerging mkts if you want.

3. Is it bad to have this much money in Vanguard (or any single institution)? Should I move 10 million to Fidelity?

I would do that to diversify the (miniscule) risk and just to keep VG on their toes. I have a split between the two and it works fine. You might like Fido service better. Be sure to use only the low cost Spartan funds.

4. Is it bad to have so many bonds in CA munis? If so, given the large tax penalty, which other bonds fund(s) would you take on?

I would diversify CA risk somewhat into non-CA muni funds. Or you could move to Nevada. Hopefully you won't do that because we need the money here in CA.

5. I'm a very buy-n-hold, rarely look, investor. Should I hire someone to watch over my money? I tend to think not, other than the case of hackers getting into my accounts (presumably a professional would notice more quickly).

As long as it is a low cost indexer like Rich Ferri it can't hurt much to hire one. But I think you would be better off to do it yourself. Won't you have enough spare time?

6. Is 30% too much equities? If I could get away with 20% I'd do it.

IMO, it's too little.

7. I think I should move all this stuff to a Trust? Should I do it before or after investing? Does it matter? Any advice on doing it?

Consult with estate attorney re trust. I think you should have one but I don't think before or after investing matters. You just have to change the name of the accounts to the trust.

8. Any advice on choosing a trustee?

You and spouse.

9. Is there a gold standard in medical that I could get now for retirement? I've never had medical that wasn't from my employer.

Don't know about gold standard. We have consulted with HICAP and when I finally retire and lose employer medical we will do so again. Might be somewhere to start. http://www.cahealthadvocates.org/HICAP/index.html

JW

[richard]

If I'm calculating correctly, you want to be able to withdraw $800,000/year from a $35 million portfolio, which is 2.2%. That's a low withdrawal rate, but not incredibly so, especially for a 39 year old, especially if you want to leave much to your children. Does the $800,000 include taxes?

1. Firecalc is useful to the extent the past is a good predictor of the future. Older data is less reliable than more recent data. If you're planning for 50 years (or more), you have approximately two good independent data points. Two is not a lot.

2. The simplest way to invest in the rest of the world is one of Vanguard's international funds. See http://www.bogleheads.org/wiki/FAQ_on_V ... onal_Funds

3. Having everything in Vanguard should be fine. Put a chunk into Fidelity if it makes you feel better.

4. I'd diversify muni holdings. The tax penalty is likely smaller than you think. State taxes are deductible on your federal return.

5. Vanguard has various enhanced security procedures (e.g., secondary passwords, voice recognition) if you're worried about hackers.

6. I'm a fan of Ben Graham's dictum to never hold less than 25% or more than 75% in stocks. At lower withdrawal rates, asset allocation become less important, based on history and on monte carlo simulations.

7. Why would you move things to a trust?

You likely would benefit from a competent tax advisor and trusts and estates lawyer. Beware of most financial planners, who can be very convincing and then charge a substantial amount.

Move slowly and read up on these issues.

[RenoJay]

RenoJay, that may be a tough sell on the wife... but I'll check it out as opportunities permit and maybe she'll like it.

Ski? Lake? Trees? Quiet?

My wife and I were thinking about moving to Incline Village from the Bay Area, but we might check out Reno first.

Let me know when you arrive. We'd love to have some new friends. I left CA 8 years ago when I was earnings millions and a new tax was imposed on incomes over $1 MM/year. I remember talking to all my friends and no one could even conceive that forcibly requiring wealthy people to pay more when the taxes were already high could have an adverse effect by driving them out of state.

[Grt2bOutdoors]

Try Baird Tax-Free Intermediate Institutional - a slightly higher level of credit quality in the fund, if you don't like Vanguards offering.

[Taylor Larimore]

Longview:

You will probably be besieged by family, friends and purveyors of "can't lose" investments. They will all offer a good reason for their recommendation. If it were me, I would invest in the simple Three-Fund Portfolio and spend my time helping others and enjoying life.

The Three Fund Portfolio

Best wishes.
Taylor

[mikep]

The most important thing is to get as much umbrella insurance as you can. After 5M it gets expensive, but you need it.

[hand]

Hello everyone, I've been a long time lurker here and have found this forum extremely great and useful. The base question is: how do I invest the 25 million I recently got from a company sale such that I can confidently retire early. And, just to make the question a bit of a challenge, I do have exceptionally high expenses (expensive area, private school, caring for multiple sets of parents, etc).

Stats:
Emergency funds (6 mo): yes
Debt: none. House/cars paid off.
Tax Filing Status: Married w/ Children
Tax Rate: 35% Fed (will be 39.6%?), 9.3% State
State of Residence: CA
Age: 39
Desired Asset allocation: 30% stocks / 70% bonds
Desired International allocation: 50% of stocks

Congrats!

While your base question is appropriate for this forum, and you have already gotten lots of good advice, I can't help but hope that you are not overlooking some other implications of a "windfall."

If I were in your shoes, I would address the "challenge" as follows:
1) How do I protect my assets
a) Now that I am the proverbial deep pockets that attract lawsuits, how do I protect against liability
b) Do I have a plan to deal with all those who will approach with their hands out
2) Are there any reasonable steps I can take this year to minimize the one time and ongoing tax bite
a) Residency location
b) Income deferral options / tax advantaged savings
c) Charitable Trust (https://www.vanguardcharitable.org/giving/tax_benefits_donor_advised_funds.html)
3) What are my financial goals
a) Needs - i.e. minimum standard of living for you and your immediate family
b) Nice to haves - care for extended dependents
c) Wants
i) Charity
ii) Legacy / Future generations
4) What are my personal goals / goals for my family, and how will this wealth impact them
5) What is the investment strategy that will best meet my needs / nice to haves / wants and my personal goals.


In terms of immediate steps to address some of the above I would consider:
1) Ensuring I have several million wort of umbrella insurance in place (cost is de minimus)
2) I would consider donating some appreciated shares of my company to a charitable trust rather than cashing out to reduce the tax bite and fund my future charitable endevors
3) I would work to define "minimum" financial needs for my immediate family and fund in an ultra stable fashion
4) I would then spend a bit more time evaluating an effective investment approach

I also wanted to comment on your focus on international equities given that you "would like to handle the case where the United States fades from the relevant world economic stage."
1) It is unlikely you have the expertise to beat the market on a macro bet against the US
2) Many "US" companies already have significant international exposure (http://www.forbes.com/sites/rickferri/2011/08/14/going-foreign-with-the-sp-500/)
3) A view that the US will underperform seems incompatible with $4+M in California debt!

[epilnk]

The problem is of course the bonds. With our state tax rate we need to use the CA munis, but a quick look at the state of the state can give even the most sanguine person second thoughts about putting too many eggs into that basket. Even staying with high quality bonds I'm not sure I'd call a 20/80 portfolio low risk if it were all CA munis.

You're going to be overly heavy on the CA munis no matter what, but there's a few ways to lighten that a bit. First, obviously, by having less than 80% bonds. You've already been given lots of good reasons to tilt more toward equities, and it would improve tax efficiency. I split my muni allocation between national and CA, taking the extra tax hit in exchange for more diversification. Max out the 529s and put it all into bonds - you're paying for college anyway, so forget the age appropriate portfolio. You can use TBM but I like to split bond funds by tax efficiency so I'd probably just put corporates and/or TIPs there. Same with whatever retirement accounts you have. You can also keep contributing to nondeductible IRAs and take the max in I bonds as well but those are drops in the bucket for you.

You can of course leave. I wouldn't move for tax purposes, though. What's the point of having $25 million if you can't live where you want?

[kramer]

RenoJay, that may be a tough sell on the wife... but I'll check it out as opportunities permit and maybe she'll like it.

Ski? Lake? Trees? Quiet?

My wife and I were thinking about moving to Incline Village from the Bay Area, but we might check out Reno first.

Let me know when you arrive. We'd love to have some new friends. I left CA 8 years ago when I was earnings millions and a new tax was imposed on incomes over $1 MM/year. I remember talking to all my friends and no one could even conceive that forcibly requiring wealthy people to pay more when the taxes were already high could have an adverse effect by driving them out of state.

Just to correct the tax rates quoted earlier on this thread, they are probably too low. There is a California proposition on the November ballot (leading by a lot in the polls, Prop. 30) that proposes to raise California state income taxes to the following levels for a given level of income:

$300-$500K: 11.3%
$500k-$1M: 12.3%
> $1M: 13.3%

and also increases sales tax (will be 10.0% sales tax where my mom lives). The new income brackets would be retroactive to Jan. 1, 2012. So add that to your calculations.

There is an old saying about not staying where you are not wanted . . .

[1210sda]

Longview.......Pay particular attention to Taylor Larimore's post. He is wise beyond his years....
1210

[Noobvestor]

I'm with others in that I would consider a slightly more aggressive asset allocation (something in the 40/60 - 50/50) range given that you have such a long time horizon.

50/50 can make things really simple where you can go:

25% Total Stock market
25% Total international
25% California Intermediate tax exempt bonds
25% Short term tax exempt bonds

Throw everything else you have thats tax deferred in TIPS. I would start throwing the max allowed into Ibonds from here on out but it likely has a very minimal impact.

By the way (since your familiar with FIRECalc), a 50/50 asset allocation starting with a 4% withdrawl rate held constant over the first 10 yrs (in your case, withdrawing 1M/yr on a 25M portfolio each of the first 10 yrs with no adjustment for inflation), followed by annual inflation adjustments starting in year 11 forward for the next 40 yrs (using the CPI) has never failed in any of FIRECalcs scenarios going back to 1871 and the most likely scenario is that you leave quite a large estate.

Take it with a grain of salt but I think a simple 50/50 AA and taking the 800k/yr you want to take (as long as you hold that 800k constant for a few years) sounds like a pretty safe plan.

This looks like a great portfolio to me. Simple, balanced, diversified, but also tax-efficient. I would not (as a previous poster suggested) put everything in one state's muni bonds - concentration AND interest rate/inflation risks. If you want to reduce risk of just being in Vanguard (tiny risk, but why not?) you could get one or both of the first two funds a Spartan index, and do the rest at Vanguard.

[Clearly_Irrational]

One thing you have to decide is how passive you want your investing to be vs. how much income you want to generate. If you're comfortable living on a 2% withdrawal rate ($500k/yr) then just dump the money into a 50/50 stock/bond portfolio with tax advantaged funds and low fees, rebalance regularly and enjoy the rest of your life with little to worry about. If you need to generate higher returns, which it sounds like you do then it gets progressively more complicated depending on how much you want to make.

For example, rental real estate tends to throw off about 6% net cash flow when purchased outright, however it's only mostly passive even with a property management company. Obviously you've already owned a small business so you're aware there is plenty of money to be made there but it's hardly what one would call fully passive even with good managers. At your level of wealth tax management is going to be a significant factor. You should be putting together a team of experts to assist you (accountant, lawyer, financial advisor, etc.)

Faced with a similar situation I'd probably do something along these lines:

1) Inflation indexed SPIAs (amount equal to state insured maximum or enough to generate 100k in income, just enough to be sure you never have to work again even if you lose most of the rest of the money)
2) Guaranteed funds (bank deposits, cdars, CDs, etc.) equal to at least 3 years worth of spending (gives you plenty of time to adapt in case of emergencies without having to sell anything)
3) Rental properties (about 1/3 of remaining funds, generates a hefty reliable income stream without too much work)
4) Stock/bond portfolio (about 1/3 of remaining funds, generates nice capital gains over time and some income)
5) One or more low involvement businesses (whether you're a full owner with management or more of a silent partner who just attends board meetings the idea is to keep collecting profits) This could be done directly or through venture capital, private equity etc.

I'd strive to keep your overall work load to less than a half day per week, preferably not location sensitive so that you can keep up if you travel. This mix should give you the highest income and growth of wealth but have plentiful opportunities for tax management while requiring just enough involvement to ensure things are running smoothly. At an off the cuff guess, I'd say that should net you around a million a year or so after taxes pretty much in perpetuity.

[Neal]

Congrats! You are set.

Take some time and really think about WHO you want to know about your windfall. Of course wife and children will know, but you might want to control who else is privy to the amount of money you actually have. I'm sure many would argue you may never want your children to know the actual amount until they are much older.

If it were me, I would tell as few people as I possibly could. It's fine to let your parents know that they don't have to worry financially, but if word begins to spread that Uncle Longview is sitting on $35 million dollars, you may have long lost friends and relatives coming out of the woodwork.

[abuss368]

Congrats.

I would consider starting with the Three Fund Portfolio as Taylor noted.

Use the tax exempt bond fund in place of Total Bond for taxable accounts. Use Total Bond in tax advantaged.

You may be able to do better, but you could do a lot worse.

Stay the course.

[staythecourse]

The OP needs to get a good accountant, estate lawyer, A LOT of personal liability coverage, and tell as few as possible about your windfall.

Good luck.

[letsgobobby]

I want to add my congratulations!

I'd also agree that in your case, estate/tax/liability planning need to be done first or at the very least in conjunction with investment planning.

[abuss368]

I want to add my congratulations!

I'd also agree that in your case, estate/tax/liability planning need to be done first or at the very least in conjunction with investment planning.

+1

[Easy Rhino]

out of curiosity, has your 800k a year in spending level been that way, or has it been higher or lower?

[longview]

If I'm calculating correctly, you want to be able to withdraw $800,000/year from a $35 million portfolio, which is 2.2%. That's a low withdrawal rate, but not incredibly so, especially for a 39 year old, especially if you want to leave much to your children. Does the $800,000 include taxes?

1. Firecalc is useful to the extent the past is a good predictor of the future. Older data is less reliable than more recent data. If you're planning for 50 years (or more), you have approximately two good independent data points. Two is not a lot.

Good point. Now I'm depressed. The 800k is more a fictional upper bound number, which is post-tax (I'm assuming the FIRECalc number is post-tax as well). I'd say the real number is closer to 300-500k depending on the year, but 800k is the number I'd like if I were to retire (again, just so I have that room to really help people. If I couldn't help people in my retirement I'd want to keep working so I can.)

Thanks for the other tips, I'll run it through the tax check.

5. Vanguard has various enhanced security procedures (e.g., secondary passwords, voice recognition) if you're worried about hackers.

What are these secondary passwords of which you speak? I even made a suggestion to them that they have the mobile security like gmail and BoA (where they text your phone to check access from any new computers).

As far as I know you have a name and pw, and that's it.

6. I'm a fan of Ben Graham's dictum to never hold less than 25% or more than 75% in stocks. At lower withdrawal rates, asset allocation become less important, based on history and on monte carlo simulations.

Good point, I think I'll go with Ben and go 25%.

Thanks a lot. I've been too slammed at work (irony) to catchup on all the great feedback on this thread, so I'll be responding now.

[longview]

Step 1. Move out of CA. Why pay 9% of your going forward income to the state? Even if you have to move your parents and others out of the state with you. Go to a low tax state. This would be your biggest expense saving available.

This is an interesting point -- I realize I'm not familiar with tax expenses for retirement much at all. My thinking was munis are tax free, and equities are chosen to be pretty tax efficient (and only 30% to begin with), so what kind of tax bills do people get hit with in retirement?

Step 2. Hire a good estate planner to minimize costs should something happen to you.

Thanks, looking for good recommendations now.

Step 4. You can handle an AA a bit more aggressive then 25/75 based on your time window of 50 years and your expensive life style. Probably 50/50 would be more appropriate. But nothing less then 40/60 IMHO.

This is the stuff that really messes with my head. FireCALC gives possible outcomes of 20 million or 100s when I die. If I increase the equities then the numbers when I'm dead go up. But I'm not trying to make my kids trust fund babies, it would just be nice to spend more time with them growing up. So do I really need to take the risk?

[longview]

One thing you have to decide is how passive you want your investing to be vs. how much income you want to generate. If you're comfortable living on a 2% withdrawal rate ($500k/yr) then just dump the money into a 50/50 stock/bond portfolio with tax advantaged funds and low fees, rebalance regularly and enjoy the rest of your life with little to worry about. If you need to generate higher returns, which it sounds like you do then it gets progressively more complicated depending on how much you want to make.

Extremely passive would be the preference. Maybe I could take a more active role with a small piece, but I'd want everything to work out if my activity turns out to be a bad thing.

Everyone seems to think 30/70 is the minimum, and 50/50 is no big deal. That seems like a lot of risk to me (losing 25% of your total on a bad day -- that's a pretty bad day). I lived with that kind of risk in the past because I needed to -- do I still need to? If I could convince myself that the 50% bonds would be able to handle my minimum expense then I guess I'd be able to sleep at night.

For example, rental real estate tends to throw off about 6% net cash flow when purchased outright, however it's only mostly passive even with a property management company.

Are you talking more about a rental property as in an apartment complex, as opposed to renting a house? I've thought about renting but I've read several horror stories of people getting in a bad situation. FWIW, I do have a house I rent with a prop management company which does a little better than even (it's a previous house we loved and didn't want to sell after the bubble burst).

At your level of wealth tax management is going to be a significant factor. You should be putting together a team of experts to assist you (accountant, lawyer, financial advisor, etc.)

I'm working on this now, but it is really tough. Basically you want to know all the answers before talking to these guys so you can properly vet them. I've seen friends make a lot of money and watched them wind up with (what I consider) very bad financial advisers, etc. They're in hedge funds, doing all kinds of complicated rich people things, and I just have a feeling it's going to end badly (not for the professionals -- they'll make their money).

So the professionals are more for the execution, but I have to have the good plan.

Faced with a similar situation I'd probably do something along these lines:

1) Inflation indexed SPIAs (amount equal to state insured maximum or enough to generate 100k in income, just enough to be sure you never have to work again even if you lose most of the rest of the money)
2) Guaranteed funds (bank deposits, cdars, CDs, etc.) equal to at least 3 years worth of spending (gives you plenty of time to adapt in case of emergencies without having to sell anything)
3) Rental properties (about 1/3 of remaining funds, generates a hefty reliable income stream without too much work)
...
5) One or more low involvement businesses (whether you're a full owner with management or more of a silent partner who just attends board meetings the idea is to keep collecting profits) This could be done directly or through venture capital, private equity etc.

Thanks for all the great info -- now I need to do research to understand it.

1) I have no experience/knowledge of SPIAs, I thought annuities were frowned upon as a sucker move? Do you have any idea what kind of money it takes to guarantee 100k inflation adjusted?

2) Is there a cheap/easy way to have a perpetual CD going with top rates? I know it's not hard to do, it is just one of those things you need to stay on top of and not let any part of the ladder lapse... so is there a cheap way to get a perpetual ladder?

3) I'd love to hear more on what you are thinking in terms of rental property.

5) Do you have any examples of low involvement businesses? I tend to be a hands-on guy, and have trouble imagining a business that is working so great I couldn't help in any way but yet they need my money.

I'd strive to keep your overall work load to less than a half day per week, preferably not location sensitive so that you can keep up if you travel.

Good call. I'm writing this one down.

Thanks a ton for all the great info.

[Clearly_Irrational]

Extremely passive would be the preference. Maybe I could take a more active role with a small piece, but I'd want everything to work out if my activity turns out to be a bad thing.

Given that, you may want to lower your spending requirements a bit. More passive = less return.

Everyone seems to think 30/70 is the minimum, and 50/50 is no big deal. That seems like a lot of risk to me (losing 25% of your total on a bad day -- that's a pretty bad day). I lived with that kind of risk in the past because I needed to -- do I still need to? If I could convince myself that the 50% bonds would be able to handle my minimum expense then I guess I'd be able to sleep at night.

There are different kinds of "risk", so it gets complicated. "safe" investments, TIPS for example, tend not to return much so generally it's more about what kinds of risks are you willing to live with.

Are you talking more about a rental property as in an apartment complex, as opposed to renting a house? I've thought about renting but I've read several horror stories of people getting in a bad situation. FWIW, I do have a house I rent with a prop management company which does a little better than even (it's a previous house we loved and didn't want to sell after the bubble burst).

Yes, though I personally tend to prefer small multi-unit buildings in the 2-4 unit range since that market is pretty inefficient and there is a chance for me to actually generate alpha by making good decisions. Rental property is what I would describe as "mostly passive". Most months I just have to verify my deposits and check to see if there were any reported problems so I can authorize repairs. Once in a while it's less fun, especially if you have a lot of repairs or an eviction, but the steady cash flow makes up for it. My experience is that you can break even at 100% leverage, anything you pay down is basically trading capital for a cash stream. Definitely less passive than stocks, though not too bad with a decent property management company. (I had to fire one last year, but overall they're not too bad if you look around, kind of like finding a decent mechanic)

At your level of wealth tax management is going to be a significant factor. You should be putting together a team of experts to assist you (accountant, lawyer, financial advisor, etc.)

I'm working on this now, but it is really tough. Basically you want to know all the answers before talking to these guys so you can properly vet them. I've seen friends make a lot of money and watched them wind up with (what I consider) very bad financial advisers, etc. They're in hedge funds, doing all kinds of complicated rich people things, and I just have a feeling it's going to end badly (not for the professionals -- they'll make their money).

So the professionals are more for the execution, but I have to have the good plan.

I don't know if you need all the details, but yeah being able to vet them is important.

1) I have no experience/knowledge of SPIAs, I thought annuities were frowned upon as a sucker move? Do you have any idea what kind of money it takes to guarantee 100k inflation adjusted?

They kind of are since they return less than the market, and yet they're still handy in some ways. Basically it's like buying a pension, you're essentially paying for an extra level of safety. The contracts are somewhat complex, so I'd involve a lawyer.

5) Do you have any examples of low involvement businesses? I tend to be a hands-on guy, and have trouble imagining a business that is working so great I couldn't help in any way but yet they need my money.

Obviously, if you want to put in more hours there are plenty of places that would welcome a partner instead of just an investor. For low involvement, it's going to mostly revolve around your ability to pick competent managers if you're doing it direct, or doing angel investing / venture capital stuff instead.

Thanks a ton for all the great info.

Happy to share, no one has all the answers, but there are plenty of people on this board who know quite a bit.

[plan]

1) Inflation indexed SPIAs (amount equal to state insured maximum or enough to generate 100k in income, just enough to be sure you never have to work again even if you lose most of the rest of the money)

You seem to loathe equities risk. How comfortable are you with the assumption that an insurance company is around 50 years from now? With an equities fund you at least spread the risk among a few thousand corporations (and keep investing in new ones, as old ones go).

[Clearly_Irrational]

You seem to loathe equities risk.

Loathe is a pretty strong word, I'd say that I'm cautious of any investment that can go down 50% in a short period of time and still be within it's normal range. Despite that my portfolio is 50% equities with a strong SCV and emerging market tilt.

How comfortable are you with the assumption that an insurance company is around 50 years from now?

Not particularly, but if you spread it over a couple of companies and make sure you stay under the state insurance limit you've got a fair chance that you'll collect. I wouldn't recommend it for the bulk of anyone's money, but once you start having a big enough pile of cash you can afford more kinds of guarantees.

With an equities fund you at least spread the risk among a few thousand corporations (and keep investing in new ones, as old ones go).

Right, but why not do both?

[HJG0989]

Step 1. Move out of CA. Why pay 9% of your going forward income to the state? Even if you have to move your parents and others out of the state with you. Go to a low tax state. This would be your biggest expense saving available.

With the kind of money the OP has, I think I would live where ever I was the happiest and not worry about the 9% going to state taxes. The OP can afford a lot of luxuries.

Best of luck to you, OP.

[stemikger]

That is great. Here is what I would do. Go to Atlantic City or Vegas and put it all on 7 black. No wait, put it all on 7 red. .

Wait scratch that, put half on 4 red and half on 7 black. That's it.

Reality check. As silly as my response was I think it is just as silly for you to ask such an important question to a bunch of strangers over the internet. We are talking 25Million dollars here. Go to a professional and get real advice, you have to much at stake.

P.S. By the way, this is a pretty great problem to have.

[ofcmetz]

That is great. Here is what I would do. Go to Atlantic City or Vegas and put it all on 7 black. No wait, put it all on 7 red. .

Wait scratch that, put half on 4 red and half on 7 black. That's it.

Reality check. As silly as my response was I think it is just as silly for you to ask such an important question to a bunch of strangers over the internet. We are talking 25Million dollars here. Go to a professional and get real advice, you have to much at stake.

P.S. By the way, this is a pretty great problem to have.

I've gotten better and and more informed answers on this site than anywhere else. Even if I was vetting some professionals for advice, I would still ask the question here.

[Grt2bOutdoors]

That is great. Here is what I would do. Go to Atlantic City or Vegas and put it all on 7 black. No wait, put it all on 7 red. .

Wait scratch that, put half on 4 red and half on 7 black. That's it.

Reality check. As silly as my response was I think it is just as silly for you to ask such an important question to a bunch of strangers over the internet. We are talking 25Million dollars here. Go to a professional and get real advice, you have to much at stake.

P.S. By the way, this is a pretty great problem to have.

I normally agree with you, but this is one of the times, I don't.

First, these bunch of strangers are twice published by a well-known firm based in Hoboken - maybe you heard of them, John Wiley & Sons. This is not a greenhorn operation here.

Second, all of the concepts posted on the forum and in the books are widely known investment principles, also published in countless books by Wiley and other publishing companies, taught in colleges and universities globally and practiced on a daily if not hourly basis at wealth management shops, banks, trust companies, mutual fund firms, corporations and individuals.

Third, as someone who plays with numbers on a daily basis, whether you invest $10, $100K, $1MM, $10MM or $100MM and larger, the criteria remains the same. BTW, many of us on the board are established professionals seeking to enlighten others, amazingly for zero compensation, including quite a few other notable and published authors (let me know if you need some names ). Ask your neighbor if he'd do anything for you for zero price.


The OP is free to compare unbiased and free advice offered on this forum against the best in the business, there is no obligation on their part to follow through on the requested suggestions. An informed consumer is a prepared consumer who won't get the wool pulled over their eyes by some of those with less than good intentions.

Finally, you Stemikger have been taking our advice based on John Bogle for the past year and longer, the last thread was "I'll stay the course" - funny, it's the same quotation used in Taylor's numerous posts, it's the same quotation stated in The Boglehead Guide to Investing", the same quotation mentioned numerous times by John Bogle.

[Grt2bOutdoors]

That is great. Here is what I would do. Go to Atlantic City or Vegas and put it all on 7 black. No wait, put it all on 7 red. .

Wait scratch that, put half on 4 red and half on 7 black. That's it.

Reality check. As silly as my response was I think it is just as silly for you to ask such an important question to a bunch of strangers over the internet. We are talking 25Million dollars here. Go to a professional and get real advice, you have to much at stake.

P.S. By the way, this is a pretty great problem to have.

I've gotten better and and more informed answers on this site than anywhere else. Even if I was vetting some professionals for advice, I would still ask the question here.

+1 - Hope you don't mind, I needed to expand on it a bit.

[LadyGeek]

There's a new wiki page that addresses everything you need: Managing a windfall

Take your time (one of the recommendations...) and read it carefully. You'll see a lot of similarity to what's already been mentioned.

[smackboy1]

7. I think I should move all this stuff to a Trust? Should I do it before or after investing? Does it matter? Any advice on doing it?

8. Any advice on choosing a trustee?

I would recommend immediately seeking out a lawyer who specializes in estates and trusts/wealth planning. Taxes may be a concern. Currently the federal estate/gift tax lifetime exemption is just over $5 MM per person and the tax rate is 35%. On Jan 1, 2013 unless Congress acts, that reverts to $1 MM exemption per person and the tax rate jumps to 55%. Of course we have no way of knowing how future laws will change the estate/gift tax, but a little planning before Dec 31, 2012 could possibly result in significant future tax savings.

So in theory, if you wanted to, before the end of the year you and your spouse could move around $10 MM, tax free, out of your taxable estate into a trust (or trusts).

I didn't bring them up but other taxes to be concerned about would be state estate/gift taxes and generations skipping taxes.

Vanguard offers trustee services (PA domiciled) in addition to asset management services. There are other options too, many of which are located in DE e.g. Wilmington Trust, Fiduciary Trust Int'l.

[stemikger]

Deleted by Mr. Bogle.

[dmcmahon]

That seems like a lot of risk to me (losing 25% of your total on a bad day -- that's a pretty bad day).

Well, if inflation gets out of control you could lose 25% of your total in a bad couple of years (as inflation destroys the purchasing power of your bonds that are paying low interest rates). 50 years is a long time, and inflation should be considered yet another risk. I would try to look at your investments and needed income in real terms, then add inflation in as an overlay. You might be shocked at how parts of your portfolio are producing negative real returns especially net of taxes.

[second-guesser]

To Stemikger - I bet many readers had your first impression to OP ; I know I did. The $800,0000 dollar budget
is uncharacteristic for a Boglehead. Incidently I enjoy your posts (like who is passing you )

To OP - I notice you have been investing $10 million dollars prior to windfall ; why not continue on
as before with lowering equity allocation. Read William Bernstein M.D. 's recent e -book on taking risks
when you have enough. Or you might hire someone like Allan Roth to review your investment plan if you
do not want someone to manage your funds. ( no connection with Roth , I have read his moneywatch
blog and he is fee only. ) My bet if is that you would have a hard time as a conservative investor losing
several million dollars. I do not think the amoount of money to invest really changes a person's risk temperment ;
risk tolerance is wired in your brain. (Bernstein's recent ideas have been summarized on Bogleheads)


S-G

[longview]

Thanks again for all the replies. I have a followup question due to some changing circumstances...

I'm moving to a new state that doesn't have a Vanguard muni fund. What would you recommend I do with the 70% fixed income that is in taxable?

Thanks again for any help on this one.

[bsteiner]

The estate and gift tax exempt amounts are $5,120,000 now, and are scheduled to revert to $1 million in 2013. The Administration has proposed to make the estate tax exempt amount permanent at $3.5 million and the gift tax exempt amount permanent at $1 million. You may want to take advantage of this window of opportunity and make a substantial gift to a trust or trusts that will be out of your estate for estate tax purposes. We and many other trusts and estates lawyers have been swamped with these transactions this month.

[sschullo]

Longview.......Pay particular attention to Taylor Larimore's post. He is wise beyond his years....
1210

+1

[Noobvestor]

Thanks again for all the replies. I have a followup question due to some changing circumstances...

I'm moving to a new state that doesn't have a Vanguard muni fund. What would you recommend I do with the 70% fixed income that is in taxable?

Thanks again for any help on this one.

I think I mentioned this before, but I wouldn't worry it overly - I would just go with their intermediate- or long-term municipal bond index. Sure, you won't get the state exemption, but you will get the federal, which should be much larger anyway, PLUS it gives you more diversification than holding only muni bonds from one state!

[longview]

That's a good point -- and I'm not all in on 1 state.

I still would love to avoid those state taxes though. Is it a no brainer to go munis over bonds when it's just federal tax savings?