Windfall / Sell of business - AA advice

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Windfall / Sell of business - AA advice

Postby logic88 » Thu Apr 04, 2013 9:09 pm

I've been a long-time fan of index investing and have maintained a simple lazy portfolio in my personal retirement accounts over the last 13 years. However, with the sale of my business I now have a very large amount of money in a taxable account and want to make sure I'm in the right funds.

I'm 35 and with the sale of my business have a total portfolio size of around $7m with $6.5m in a taxable account. I was thinking of an AA like this:

BND: 10%
VWIUX (tax-exempt): 10%
VAIPX: 10%
VTI: 40%
VWO/VEU Mix: 25%
VNQ/IVNQ Mix: 5%

My biggest questions concern taxes. I am/will be in the highest tax bracket since I'm still working for another few years with the company that acquired us. Is BND OK or should I have more in VWIUX or another muni fund? If I stop working at 40 and just live off dividends would the AA need to change? I don't have debt and we live modestly so I'm figuring $175-200k a year would be fine and this AA would deliver that plus growth.

I've been swarmed with investment/financial advisors, but would prefer to manage this myself in Vanguard. Perhaps I'm wrong?

Thanks for any advice Bogleheads.
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Re: Windfall / Sell of business - AA advice

Postby RenoJay » Thu Apr 04, 2013 9:43 pm

Congratulations on the sale! I don't have great advice for most of your questions, but I think you're absolutely right to try to manage this yourself. You're obviously a smart entrepreneurial type. There's very little the investment advisors can do for you that you won't learn on your own pretty quickly.
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Re: Windfall / Sell of business - AA advice

Postby jbdiver » Thu Apr 04, 2013 9:44 pm

I was in a similar situation a few years ago. I used an intermediate muni fund for all my bonds. If you are going to be in the highest tax bracket -- which is assured for 2013-- then you should strongly consider this route. The rest of your portfolio seems fine to me. Just rebalance as necessary. Also, you should reevaluate your risk tolerance. You've already won the game. There's no reason to take more risk than necessary. I went a little more conservative with my asset allocation. Make sure you take care of your estate planning. Maximize 529 investments for any kids. Purchase an umbrella liability insurance policy. Go on a big trip and treat yourself.

I would only use an advisor if you are really uncomfortable with investing. In that case, I would go with a very low cost advisor. I receieved phone calls from advisors every week for a couple months after selling my business. The sharks can smell fresh meat in the water.
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Re: Windfall / Sell of business - AA advice

Postby grabiner » Thu Apr 04, 2013 9:53 pm

Welcome to the forum!

logic88 wrote:BND: 10%
VWIUX (tax-exempt): 10%
VAIPX: 10%
VTI: 40%
VWO/VEU Mix: 25%
VNQ/IVNQ Mix: 5%

My biggest questions concern taxes. I am/will be in the highest tax bracket since I'm still working for another few years with the company that acquired us. Is BND OK or should I have more in VWIUX or another muni fund?


If you are in the top tax bracket (39.6% plus 3.8% ACA surcharge), or even the 33% tax bracket, you don't want BND; you should be using muni funds for all of your nominal bond holdings. Intermediate-Term Tax-Exempt is a well-diversified, high-quality fund, so it's fine for your entire holding. (If there is a muni fund for your state, you could save even more in taxes, but you probably wouldn't want to put more than half your bonds in one state.) If you change to a lower tax bracket when you retire, you can switch back to taxable bonds for little if any tax cost.

You should buy I-Bonds in preference to TIPS, because they are tax-deferred, but the $10,000 limit means that they won't make much of a difference. TIPS income is taxed at your full tax rate, but with the current low yields, there won't be much income to tax, and it is exempt from your state tax.

VWO/VEU (Emerging Markets; FTSE All-World Ex-US) is not a natural pairing of funds, as VEU holds emerging markets as well. It's probably better to either use Total International (VTIAX, or the ETF VXUS), or else 65% VEA/20% VWO/15% VSS to get a similar allocation that is more complicated but slightly more tax-efficient.

In your tax bracket, REITs are going to create a huge tax bill, probably 1.5% per year. If you want to hold them, you are one of the few investors who would be better off in a variable annuity; it's better to pay the 0.58% expense ratio on the Vanguard Variable Annuity REIT index, tax-defer your gains, and then pay regular tax on your gains when you withdraw. And as much as I like VNQI (Global Real Estate), I think you should limit your holdsing to what you can fit in an IRA.
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Re: Windfall / Sell of business - AA advice

Postby logic88 » Thu Apr 04, 2013 10:11 pm

Thanks for the great replies. It sounds like I do need to make adjustments in my thinking since this is in a taxable account. I'll move the REIT funds into my retirement accounts.

How does this look for my taxable account?

VWIUX (tax-exempt): 25%
VAIPX: 10%
VTI: 40%
VXUS: 25%

grabiner, thanks for your great insight. Can you explain how the mix of 65% VEA/20% VWO/15% VSS would be more tax-efficient than VXUS? My thinking with VAIPX in the bond mix is that over the long run some inflation protection might be nice. Am I wrong with trying to diversify that way?
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Re: Windfall / Sell of business - AA advice

Postby Riprap » Thu Apr 04, 2013 10:13 pm

jbdiver wrote:Also, you should reevaluate your risk tolerance. You've already won the game. There's no reason to take more risk than necessary. I went a little more conservative with my asset allocation.


At 35, I would be cautious about being too conservative due to possible ravages of inflation. I recommend reading Winning the Loser's Game by Charles Ellis for some perspective on this. As an entrepreneurial type, you're probably able to emotionally withstand market fluctuations better than most.

I would echo what others have said about estate planning and asset protection. You probably don't need a financial advisor. Keep things simple in the event you have dependents that will depend on your portfolio if you become incapacitated.
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Re: Windfall / Sell of business - AA advice

Postby grabiner » Thu Apr 04, 2013 10:31 pm

logic88 wrote:grabiner, thanks for your great insight. Can you explain how the mix of 65% VEA/20% VWO/15% VSS would be more tax-efficient than VXUS?


VEA is the ETF share class of Tax-Managed International, so it has 100% qualified dividends; the large-cap developed stocks in VXUS have only about 80% qualified dividends. Here is a more detailed analysis, in which I estimate that the three-fund portfolio might save you 0.07% in taxes and 0.08% total due to lower costs, but you may lose some of that advantage to capital-gains taxes if you have to rebalance.

My thinking with VAIPX in the bond mix is that over the long run some inflation protection might be nice. Am I wrong with trying to diversify that way?


No, I don't think it's wrong. If you aren't using the money now, you might also buy individual TIPS or use the ETF LTPZ to get longer-duration inflation protection. A 30-year TIPS will earn more than inflation over the next 30 years (before taxes), but it will be a bumpy ride.
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Re: Windfall / Sell of business - AA advice

Postby OZAR » Thu Apr 04, 2013 10:51 pm

I personally would do something like this (60/40), and keep a few years worth of cash on hand.......

28% VTI Vanguard Total Stock Market Index ETF
12% VBR Vanguard Small-Cap Value Index ETF
14% VEU Vanguard FTSE All-World xUS Index ETF
6% VSS Vanguard FTSE All-World xUS SmCp ETF
25% VWIUX Vanguard Inter-Term Muni Tax Exempt
10% VMLUX Vanguard Limited-Term Muni Tax Exempt
5% VIPSX Vanguard Inflation Protection Securities (Tax Sheltered Account)

This would give you a 70/30 Tilt between Large/Small in both US & International or you could go 50/50 on your tilt and do something like this

15% VTI Vanguard Total Stock Market Index ETF
15% VBR Vanguard Small-Cap Value Index ETF
15% VEU Vanguard FTSE All-World xUS Index ETF
15% VSS Vanguard FTSE All-World xUS SmCp ETF
25% VWIUX Vanguard Inter-Term Muni Tax Exempt
10% VMLUX Vanguard Limited-Term Muni Tax Exempt
5% VIPSX Vanguard Inflation Protection Securities (Tax Sheltered Account)
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Re: Windfall / Sell of business - AA advice

Postby OverTheHill » Fri Apr 05, 2013 9:54 am

I have just one comment: It's not a windfall when you sell a business that you created through hard work and sacrifice over a period of years. It's called a capital gain. Congratulations on your success. You seem to be on the right track in terms of making the most of it for you and your family. You'll get lots of advice here. My only real advice is don't give financial advisors or consultants a dime of what you've earned, plus take care of your principal. Good luck.
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Re: Windfall / Sell of business - AA advice

Postby KyleAAA » Fri Apr 05, 2013 10:05 am

Ditch BND in taxable, as others have said. But other than that, your AA looks fine to me if perhaps a bit on the aggressive side. I would advise you to keep VAIPX in your tax-deferred retirement accounts. REITs are also very tax-inefficient but on the other hand, it's only 5% of your portfolio. I'd either eliminate them completely or keep them in taxable. Not a big deal either way. You can afford the taxes and if you're going to be spending the distributions anyway, it makes no difference.
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Re: Windfall / Sell of business - AA advice

Postby Scooter57 » Fri Apr 05, 2013 10:11 am

With that kind of money at stake you would be nuts to design your portfolio based on advice from anonymous strangers many of whom are managing under $1 mil portfolios accumulated through decades of investing a couple hundred bucks a month.

They are basing their advice on how to deploy a lump sum on a few articles they've seen quoted. Or one person's experience in a different time.

Don't do anything rash. There's nothing wrong with sitting in cash until you have a very good understanding of the investing universe.

I'd suggest reading Bernstein's Four Pillars of Investing book first. Then take your time getting into an appropriate allocation.

Doing anything else is like buying the most expensive house in a town you never heard of before based on what the real estate agent tells you.
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Re: Windfall / Sell of business - AA advice

Postby YDNAL » Fri Apr 05, 2013 10:27 am

logic88 wrote:I'm 35 and with the sale of my business have a total portfolio size of around $7m with $6.5m in a taxable account. I was thinking of an AA like this:

BND: 10%
VWIUX (tax-exempt): 10%
VAIPX: 10%
VTI: 40%
VWO/VEU Mix: 25%
VNQ/IVNQ Mix: 5%

My biggest questions concern taxes.

I question 70% Equity risk and see plenty of reason for tax/estate planning.
  • Consider a low cost advisor.
  • When/IF the Stock Market tanks, I would be concerned with doing the wrong thing.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
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Re: Windfall / Sell of business - AA advice

Postby dbr » Fri Apr 05, 2013 10:30 am

If your biggest concern is taxes, you should hire professional tax advice.
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Re: Windfall / Sell of business - AA advice

Postby ge1 » Fri Apr 05, 2013 7:38 pm

Agree with landy, 70% equities seems too high. How would you feel if you lost 2.5m in a bear market?

Personally I would probably aim for 50% equities. Given how much the market went up recently, I would also think about how to put that money into market (lump sum vs DCA), I would suggest to DCA over an extended period (say 2 years).

Congrats on your success, well done!
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Re: Windfall / Sell of business - AA advice

Postby Watty » Fri Apr 05, 2013 11:55 pm

I've been swarmed with investment/financial advisors, but would prefer to manage this myself in Vanguard. Perhaps I'm wrong?
Scooter57 wrote:With that kind of money at stake you would be nuts to design your portfolio based on advice from anonymous strangers many of whom are managing under $1 mil portfolios accumulated through decades of investing a couple hundred bucks a month.
.


+1

Any of the financial "advisors" (AKA salespeople) that have approached you without you contacting them first should automatically be disqualified.

Once you get past them though you could really use professional advice. The trick is that you need to find a good one that you are paying so that they do not have a conflict of interest.
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Re: Windfall / Sell of business - AA advice

Postby jbdiver » Sat Apr 06, 2013 10:00 am

I've lived this scenario. You don't need to spend tens of thousands per year to get professional investing advice that will probably be significantly worse than what you would get from strangers on this forum. Yes, you need a good tax person and estate lawyer. Maybe you need an annual financial planning checkup session. Putting together a low cost, tax friendly, diversified investment plan isn't rocket science. The models developed by notable professionals are all over this forum and they are free. The only time you need a professional advisor is when you have no idea how to invest or you don't have the temperament to follow your investment policy.
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