I think I just won the game … have I and what do I do next?!

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I think I just won the game … have I and what do I do next?!

Postby upsydaisy » Mon Jul 15, 2013 8:41 pm

SOME EDITS FOR CLARITY

First of all, a hearty thanks for all the advice shared almost a year ago when I first started posting here. My eventual portfolio (60:40 equity:bonds with weightings towards Emerging Markets, Small Cap US and lots of TIPS on the bond size) was based heavily on your feedback and has performed precisely as could be expected.

Two changes have occured in the last two months:
1) The restriction on company stock sales was removed and I sold all stock in my previous company. This has brought me, after tax $3M. Currently sitting in three checking accounts, but soon will be moved to a short-term ladder with $250k limits in each institution.
2) We have moved. We still own our previous home ($1.5M, fully paid), but we no longer use it and so could sell it at any point. We also own our new home outright (similar value), and believe it'll be a comfortable home for the rest of our lives.

This brings our overall picture to:

Boglehead Portfolio of 60:40 (stocks:bonds): $1,500,000
Cash: $3,000,000
Unnecessary property (could be sold): $1,500,000
Current Out-goings: $120k pre-tax ($70k post-tax).

Based on things I’ve read here, my recent reading of Bernstein’s Ages of the Investor and things I have modeled on Firecalc, etc, the advice, para-phrasing, seems to be ‘once you’ve won, step away from the table’ and, if I was over 60, I think I would now start to build a rolling ladders (perhaps of TIPS) and essentially head happily into retirement.

However, my wife and I are actually 35 and we both currently work (making around $400k together). On the one hand we love our work and will probably want to keep doing it at some level over the coming decades. On the other hand we have young kids and the thought of spending more time with them, traveling, etc is also very tempting, so we’re looking at either ‘downgrading’ our jobs (still working, but fewer hours, less responsibility, lower pay) and/or taking breaks (one year, or six month career gaps, etc), doing some work for non-profit organizations we are passionate about, although we'd probably work in between too.

I’ve looked hard, but I can’t find any literature that deals with what you do in this position. Fundamentally, the question is, given this has happened early and we may work again, do we a) worry about inflation and so keep with a boglehead-ish portfolio, perhaps age-in-bonds b) follow the standard ‘retirement advice’ and roll things into a ladder of Bonds and CDs (obviously re-investing in years we work and so do not need the proceeds). Obviously the former carries risk, but presumably is a decent inflation hedge given how long we have to go; the latter sounds very sluggish from a growth perspective but is ultra-safe ... no 2008-like disasters.

Out of interest, the other option I’ve been looking at is going for something that I believe will follow inflation but create an income (real estate being the obvious option – our second home is in San Francisco, so some super-prime real estate like that is tempting … it’s likely to give off 3-4% in rental income and track inflation in times to come), but I realize that’s not very boglehead-ish, so not really main focus of this post.

Thanks in advance and just let me know if you’d like me to do a fuller version of my portfolio.

-ud
Last edited by upsydaisy on Mon Jul 15, 2013 9:44 pm, edited 1 time in total.
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Re: I think I just won the game … have I and what do I do ne

Postby Leesbro63 » Mon Jul 15, 2013 8:47 pm

50% cash plus 25% "Boglehead type portfolio" actually equates to something much more conservative than a Boglehead type portfolio. And I'd ignore the second house...like your first...not part of your investment portfolio.

I am in a similar situation, but am 53. I'm between 50 and 55% equity (currently 54%) and 45-50% fixed income. If I were your age with your assets and your income, I'd be 60/40. That includes the cash. I don't get the second house thing...but that's a lifestyle choice. So I'd take the 75% that you have for investment and go 60/40. That would be aggressive enough to capture much of any equity growth over the next generation until you need the money, but conservative to recognize/protect that you've "won the game early". Too much fixed income at your age might be MORE risky than too much equity.

Just my .02.
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Re: I think I just won the game … have I and what do I do ne

Postby MN Finance » Mon Jul 15, 2013 9:08 pm

A more detailed post than this is in order, but there are a couple concerns. If you have 3M in cash, 1.5M in investments and a home that's 1.5M, I don't know that you have "won". If you take lower paying jobs and/or sabbaticals that don't sustain your lifestyle, then the situation is concerning (mildly anyway). If you take different employment that still covers expenses, that's another story. Assuming the former, you are not invested in a way that will generate enough income for the next 60 years. That's a long time horizon with a lot of risks. A portfolio of 20% stocks, 13% bonds and 66% cash has a nearly 100% failure rate assuming you need 1) 75k/year, 2) healthcare costs, and 3) kids go to college. If you actually invest the money, then you start to see success rates improve. As it stands now, cash will cause failure (slowly, not dramatically like stocks). Invested and it's a different story.
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Re: I think I just won the game … have I and what do I do ne

Postby livesoft » Mon Jul 15, 2013 9:12 pm

At age 35 perhaps you really do not know your risk tolerance or your willingness, ability, and need to take risk in the Larry Swedroe sense. Without lots more experience you may not come to a good equilibrium on these characteristics of your psyche and portfolio.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: I think I just won the game … have I and what do I do ne

Postby upsydaisy » Mon Jul 15, 2013 9:38 pm

Sorry - people seem to have got the wrong end of the stick with regard to my portfolio. The 50% cash just appeared. Until then I had 50% of my net worth in a second home (which we don't use - it's where we used to live - and so are happy to sell) and 50% in a fairly standard Boglehead portfolio. The new $3M just appeared because I was finally able to sell the remainder of my old company stock. My question is really do I put that new $3M (plus perhaps proceeds from the second home) into my boglehead portfolio or do I cash everything in and turn to bonds/etc.

Will update my original post to reflect this better.
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Re: I think I just won the game … have I and what do I do ne

Postby Kevin M » Mon Jul 15, 2013 10:28 pm

I wouldn't think of the $3M as a separate pot of money to do something with. I'd just revisit my ability and need to take risk, establish a target asset allocation based on what I came up with, and deploy the cash accordingly.

The thing is that with an additional $3M, your need to take risk has gone down, but your ability to take risk has gone up. I believe Swedroe recommends basing your AA on whichever of ability, need and willingness is lower. That's what I do. My allocation to stocks is only 30% based on (lack of) need to take risk. I probably wouldn't own any stocks unless I had the ability to take the risk.

I'd also include the second house as part of my portfolio, since as you say, you could sell it at any time. Until you sell it, it is an undiversified investment in SF real estate. With your other house, you still have a pretty big chunk of your net worth in Bay Area real estate, so you need to evaluate if that is appropriate for you. Before I retired I realized I had way to much of my net worth in BA real estate, so sold two of three rental houses I owned.

Personally, I would not add more physical real estate, certainly not in the Bay Area, if I were in your situation. Also consider that rental real estate involves some work.

Since you are still working with high incomes, I assume you still will be adding to your portfolio, so some of the comments about taking more risk in stocks because you are so young don't make that much sense to me.

You don't have to rush into anything, but I certainly wouldn't leave the money sitting in checking accounts unless they're paying about 1% interest. EDIT: and do whatever is necessary to ensure you are 100% Federally insured ASAP (see below).

EDIT: As CA residents with high incomes, I would put at least some into one or both of the Vanguard CA Tax-Exempt funds, which would be included in your allocation to fixed income. You could shift more from safer fixed income, like CDs, into the bond funds if/when rates continue to increase. You could also use one or more of the national TE bond funds to diversify away some of the CA-specific risk.

Note that you can get much more than $250K federal insurance at one institution with different ownership categories, such as a living trust (which you should have, since CA probate is expensive and complicated compared to settling a trust), joint and single accounts.

Speaking of probate reminded me that your current net worth already is above the Federal estate tax exemption, so it might make sense to work with a good estate planning attorney if you haven't already.

Kevin
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Re: I think I just won the game … have I and what do I do ne

Postby lhl12 » Tue Jul 16, 2013 6:00 am

If you sell the second home for $1.5mm and reallocate all $4.5mm into a Boglehead portfolio then you will have $6mm of investable assets.

At your age a 1.5-2% SWR would not be an unreasonable assumption. That's 90-120k/ year, or not enough for no one to work. So, I would say you have not yet won the game (though you clearly have a huge lead in the locker room at halftime).

I'd suggest something along the lines of a 60/40 or 50/50 portfolio, especially since interest rates are at historic lows and are likely to rise over the long term (which is an argument against putting everything into long terms bonds at present).

I'd also suggest continuing to work (perhaps at a slower pace, but not not at all) so as to reduce the amount of cash you'll need to withdraw from your portfolio for living expenses and thereby allowing it to continue to build.

Then, revisit in ten years. At that point, you really might be done, and can stop working entirely if you wish. Alternatively, you could view yourself as working for your kids (so as to grow their inheritance) or for charity (so as to boost your level of charitable contributions).
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Re: I think I just won the game … have I and what do I do ne

Postby Call_Me_Op » Tue Jul 16, 2013 6:16 am

All I can say is that people spend way too much money. My annual expenses are about $32k, so with the Op's assets I would have won many times over.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: I think I just won the game … have I and what do I do ne

Postby Rainier » Tue Jul 16, 2013 6:27 am

If you can't make $6m work for the rest of your life that is kind of scary.

$6m in munis averaging 3% gives you $180k per year tax free. If you spend $120k per year you still plow $60k back into savings. I think I could pull it off.

Now, if somebody could keep working the minimum possible to get health insurance you'd also have access to tax advantaged accounts, and possibly tax credits.
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Re: I think I just won the game … have I and what do I do ne

Postby supersharpie » Tue Jul 16, 2013 6:33 am

Call_Me_Op wrote:All I can say is that people spend way too much money. My annual expenses are about $32k, so with the Op's assets I would have won many times over.


Whoa, that comment was inappropriate imo. I am sure the billions out there making a small fraction of your annual expenses think you spend "way too much money" as well. The OP saves 75% of his gross. You only live once and "winning the game" is not defined as dying with the biggest pile of cash.
Last edited by supersharpie on Tue Jul 16, 2013 6:54 am, edited 1 time in total.
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Re: I think I just won the game … have I and what do I do ne

Postby retired recently » Tue Jul 16, 2013 6:37 am

I retired in 2008 at 40 with $4.25 million plus enough to purchase our home which is around $500K. My wife, 2 kids and I have lived a pretty nice life since then and our assets have grown to $5.3 million plus the house. We spend about $100-$125K per year. We are somewhat frugal on most things but spend quite a bit on vacations/recreation.

I stopped working as I no longer enjoyed the work and because I really was unable to spend any time with my family. I have really enjoyed retirement but if I had it to do over again I probably would have worked part-time as since I have been out of my work for 5 years, if something were to happen I would probably not be able to get a job.

So I think you can do whatever it is you want to do as long as you are comfortable with your risk tolerance and the approximate amounts you will need to spend annually.
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Re: I think I just won the game … have I and what do I do ne

Postby Chan_va » Tue Jul 16, 2013 6:51 am

Folks, lets stop raining on OP's parade. Congratulations are in order. With a $6M portfolio he could generate $70k post tax from dividends alone. Certainly sustainable almost in perpetuity. Op has the means to do what most of us only dream about. Travel, spend time with kids, and work only on things he is passionate about.

I see three options, give or take

1. Standard boglehead portfolio of stocks and bonds
2. Won the game Tips or annuity type portfolio
3. Pp type portfolio with real estate and commodities

If it were me, I would opt for option 1. Interest rate outlook is too dim for option 2 at this point (re evaluate in 10 years). Option 3 is too much work and has too much tracking error for me.

I would also move out of the Bay Area if possible and work enough for one of the spouses to get health insurance. If you stay in the bay, not only is your cost of living high, but you will always be comparing yourself against your former peers.

Congrats again.
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Re: I think I just won the game … have I and what do I do ne

Postby linuxizer » Tue Jul 16, 2013 7:08 am

1) Congratulations!
2) Inflation risk is substantial for you. Five years ago, I'd have said buy a bunch of 30 year TIPS at 4% real and be done with it. No such option now, unfortunately. Still, some TIPS might be in order. If you really wanted to go this way even though rates are miserable right now, I guess you could do something like buy a far out-of-the-money option on the possibility that real interest rates rise to 3% again, depending on pricing. Even without the option option, knowing that you have, say, $1MM at 1.3% real for the next 30 years isn't the worst outcome if you need it to sleep at night.
3) Sell the un-used house ASAP.
4) Lawyer recommendation is a good one. Fee-only financial planning wouldn't be a terrible idea either.
5) Don't forget disability insurance and the usual stuff if you're still depending on either income stream.
6) Larry Swedroe's mostly-FI portfolio might interest you. 85% bonds, 15% SV if I remember correctly.
7) Take your time and think things through. Except for the house, there's no real rush. Don't take forever, though. Cash pays nothing right now.

This is advice from someone on the polar opposite of your financial situation, so usual grain of salt warning is in order.
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Re: I think I just won the game … have I and what do I do ne

Postby YDNAL » Tue Jul 16, 2013 7:12 am

upsydaisy wrote:Boglehead Portfolio of 60:40 (stocks:bonds): $1,500,000
Cash: $3,000,000
Unnecessary property (could be sold): $1,500,000
Current Out-goings: $120k pre-tax ($70k post-tax).

However, my wife and I are actually 35 and we both currently work (making around $400k together).

Confused here... $120K - $70K = $50K taxes (I'd leave comments to others). How do you make $400K and "current outgoings" are $70K post-tax living in a $1.5M house ?

1) I believe that you are too young to retire - I tried it at 50, did not enjoy it for 2 years, so I'm still working at 61.

2) The above said, unless you can tell me your consumption (my question above), I don't know what else to say here.
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Re: I think I just won the game … have I and what do I do ne

Postby supersharpie » Tue Jul 16, 2013 7:27 am

YDNAL wrote:
upsydaisy wrote:Boglehead Portfolio of 60:40 (stocks:bonds): $1,500,000
Cash: $3,000,000
Unnecessary property (could be sold): $1,500,000
Current Out-goings: $120k pre-tax ($70k post-tax).

However, my wife and I are actually 35 and we both currently work (making around $400k together).

Confused here... $120K - $70K = $50K taxes (I'd leave comments to others). How do you make $400K and "current outgoings" are $70K post-tax living in a $1.5M house ?

1) I believe that you are too young to retire - I tried it at 50, did not enjoy it for 2 years, so I'm still working at 61.

2) The above said, unless you can tell me your consumption (my question above), I don't know what else to say here.


You are making a value judgement with #1. There are plenty of people out there who can find plenty of travel, volunteer, reading, etc opportunties to fill the rest of their days.

The only thing that OP wants to know is whether he can afford to retire. With a $6,000,000 portfolio he only needs a 2% withdrawal rate to maintain his quality of life. Firecalc gives him a 100% success rate over a 65 year withdrawal period at that rate.
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Re: I think I just won the game … have I and what do I do ne

Postby Murdoch » Tue Jul 16, 2013 7:30 am

John 'Hannibal' Smith from the A-Team would say 'I love it when a plan comes together.' :D

Congrats on getting to where you are. I assume it took some careful planning and dedication sticking to that plan.
I don't have any advice to give, but best of luck figuring this new phase out.
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Re: I think I just won the game … have I and what do I do ne

Postby RadAudit » Tue Jul 16, 2013 7:36 am

First of all, congrats.

Have you won the game? I guess the answer is it depends. It's an interesting question. The problem seems to be market forces keep changing the game, the method of scoring and the shape of the field.

Another thread on a related subject has two links to interesting articles. Here's the thread

viewtopic.php?f=10&t=119764&newpost=1750285

The first link would indicate that you are way ahead of the game on points.

http://wpfau.blogspot.com/2011/08/safe- ... -life.html

The second link might suggest may be not so much.

http://papers.ssrn.com/sol3/papers.cfm? ... id=2286146

Good luck
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Re: I think I just won the game … have I and what do I do ne

Postby sometimesinvestor » Tue Jul 16, 2013 7:41 am

once your youngest kid is at least a first or 2nd grader I would check out the feasibility(as far as your work and your spouses) of taking at least a month off during the summers for family travel and go on trips you will all remember.

As to asset allocation: Here is a link to a longish (around 10 pages) article you may or may not wish to read in full but I direct your attention to the table on page 7. http://www.merriman.com/wp-content/uplo ... ng2011.pdf
Notably it shows that a 25% us ,25% foreign 50% bond lost 20% in 2008(a sort of likely worst case scenario)
and a 60 40 lost about 25% and a 40-60 lost about 15%. All 3 losses are recoverable in a reasonable amount of time and I think any of the three would be reasonable for someone in your position. As others have suggested inflation may be an issue so over weighting bonds to more than 60% is probably not wise and I would not buy long term bonds at this time.

Finally I think winning the game permits one to hedge bets so I would dollar cost average into putting money in IAU,a gold etf, over the next 3 years until I had invested 100k(2.5% of your portfolio). Another sensible hedge might be a national muni fund in preference or in addition to a California if the states bond rating drops. That will also work if you choose to leave California as one poster suggested though I suspect you won't do that till you stop working or your kids are in college.
Anyway congratulations and good luck.
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Re: I think I just won the game … have I and what do I do ne

Postby YDNAL » Tue Jul 16, 2013 8:10 am

supersharpie wrote:
YDNAL wrote:1) I believe that you are too young to retire - I tried it at 50, did not enjoy it for 2 years, so I'm still working at 61.

You are making a value judgement with #1. There are plenty of people out there who can find plenty of travel, volunteer, reading, etc opportunties to fill the rest of their days.

"Travel, volunteer, read, etc opportunities" all take capital - in one form and another - and the timeframe in which to carry-out these opportunities, for a 35yo, is likely 50, 60 years.

supersharpie wrote:The only thing that OP wants to know is whether he can afford to retire. With a $6,000,000 portfolio he only needs a 2% withdrawal rate to maintain his quality of life. Firecalc gives him a 100% success rate over a 65 year withdrawal period at that rate.

They make $400K and pay $50K in taxes, have one young child, and two (2) each $1.5M houses, as far as I can tell from available information. How do you know their "quality of life" ?

That is essentially the reason for my post ↑, until you chose to express your opinions and chose my quote to do so.
supersharpie wrote:Confused here... $120K - $70K = $50K taxes (I'd leave comments to others). How do you make $400K and "current outgoings" are $70K post-tax living in a $1.5M house ?....

2) The above said, unless you can tell me your consumption (my question above), I don't know what else to say here.
Last edited by YDNAL on Tue Jul 16, 2013 8:18 am, edited 2 times in total.
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Re: I think I just won the game … have I and what do I do ne

Postby Leesbro63 » Tue Jul 16, 2013 8:15 am

Rainier wrote:If you can't make $6m work for the rest of your life that is kind of scary.

$6m in munis averaging 3% gives you $180k per year tax free. If you spend $120k per year you still plow $60k back into savings. I think I could pull it off.

Now, if somebody could keep working the minimum possible to get health insurance you'd also have access to tax advantaged accounts, and possibly tax credits.


This is folly, esp at age 35. Muni's at 3% and inflation around 3% is a REAL return of zero, perhaps for 50-65 years. Spending 3% per year will leave the poster in the poor house just at retirement time.
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Re: I think I just won the game … have I and what do I do ne

Postby ML 59 » Tue Jul 16, 2013 8:43 am

Congrats OP! You've not only won, but are young enough to keep winning. :D :D

I think that a combination of a trusted CPA and a fee-only financial adviser would be appropriate in your position.

Enjoy!
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Re: I think I just won the game … have I and what do I do ne

Postby supersharpie » Tue Jul 16, 2013 8:44 am

Leesbro63 wrote:
Rainier wrote:If you can't make $6m work for the rest of your life that is kind of scary.

$6m in munis averaging 3% gives you $180k per year tax free. If you spend $120k per year you still plow $60k back into savings. I think I could pull it off.

Now, if somebody could keep working the minimum possible to get health insurance you'd also have access to tax advantaged accounts, and possibly tax credits.


This is folly, esp at age 35. Muni's at 3% and inflation around 3% is a REAL return of zero, perhaps for 50-65 years. Spending 3% per year will leave the poster in the poor house just at retirement time.


How do you figure that he will be in "the poor house just at retirement time?" That would only be if he was spending 3% of his principle on an annual basis for 33 years.
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Re: I think I just won the game … have I and what do I do ne

Postby Grt2bOutdoors » Tue Jul 16, 2013 9:15 am

$400K pre-tax less $35K = $365K - $5.250 HSA - $2.5K FSA = $357.25K pre-tax, you are likely paying AMT and my guesstimate on take home pay is about $225K. So, my first question is: if you are living on $70K post-tax money, where is the other $150K after-tax money going each year?
Until you put pen to paper and work through your monthly expenditures: cash inflow - cash outflow = zero, I can't say that you are even close to winning the game, especially at age 35 - a lot can happen between now and 67. Though, you certainly are better off than 90% of your fellow Americans.
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Re: I think I just won the game … have I and what do I do ne

Postby archbish99 » Tue Jul 16, 2013 10:00 am

I would look at it this way: You have enough money to fund your living expenses off your portfolio for the remainder of your life. 2% can be sustained indefinitely (see http://retirementoptimizer.com/Whitepapers/PerpDist.pdf, which is targeted more at institutions but the idea is the same), so $6M => $120k. Taxes are probably going to be in the $20-40k neighborhood depending on the tax-efficiency of your investments, so with $70k of usual living expenses, you're about right.

That doesn't mean you must retire -- but it means you have absolute freedom with what you choose to do. Your job does not need to pay your living expenses, it can be for fun. Basically, your job needs to pay for itself -- commuting and any associated expenses -- and the balance is fun money. High-paying jobs usually come with a requirement to live in high cost-of-living parts of the country. It also means that your job is no longer tying you to a location -- you can live anywhere and your income is unaffected.

(Of course, there's a lady in our church who's been having this conversation with her kids: "Mom, you're retired, you can live anywhere you want! Why don't you move somewhere cheaper?" "Because I'm retired, I can live anywhere I want, and I want to live here!")
I'm not a financial advisor, I just play one on the Internet.
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Re: I think I just won the game … have I and what do I do ne

Postby KyleAAA » Tue Jul 16, 2013 10:33 am

So if you sold the unused house, you'd have something like $5.5 million after taxes. I think 60/40 is a very appropriate portfolio for somebody in your situation. Just stay the course. Even if you stopped working completely today, that portfolio would fund your lifestyle at a 2% withdrawal rate. But you aren't planning on stopping work completely, so chances are you won't need to pull all (or even most) of that $75k post-tax income from your portfolio. If you're concerned, feel free to go to 50/50 or even 40/60. Won't make a huge difference either way so long as your income needs stay modest.
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Re: I think I just won the game … have I and what do I do ne

Postby Leesbro63 » Tue Jul 16, 2013 10:37 am

KyleAAA wrote:So if you sold the unused house, you'd have something like $5.5 million after taxes. I think 60/40 is a very appropriate portfolio for somebody in your situation. Just stay the course. Even if you stopped working completely today, that portfolio would fund your lifestyle at a 2% withdrawal rate. But you aren't planning on stopping work completely, so chances are you won't need to pull all (or even most) of that $75k post-tax income from your portfolio. If you're concerned, feel free to go to 50/50 or even 40/60. Won't make a huge difference either way so long as your income needs stay modest.


+1. That. Zackly.
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Re: I think I just won the game … have I and what do I do ne

Postby Leesbro63 » Tue Jul 16, 2013 10:40 am

supersharpie wrote:
Leesbro63 wrote:
Rainier wrote:If you can't make $6m work for the rest of your life that is kind of scary.

$6m in munis averaging 3% gives you $180k per year tax free. If you spend $120k per year you still plow $60k back into savings. I think I could pull it off.

Now, if somebody could keep working the minimum possible to get health insurance you'd also have access to tax advantaged accounts, and possibly tax credits.


This is folly, esp at age 35. Muni's at 3% and inflation around 3% is a REAL return of zero, perhaps for 50-65 years. Spending 3% per year will leave the poster in the poor house just at retirement time.


How do you figure that he will be in "the poor house just at retirement time?" That would only be if he was spending 3% of his principle on an annual basis for 33 years.


Basically it's a real return of zero and spending of 3%. You have 33 years of inflation ravaging the principal. If you had a $6Million in 1980, what would it be worth today? Less than half that in real terms.
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Re: I think I just won the game … have I and what do I do ne

Postby Leesbro63 » Tue Jul 16, 2013 10:42 am

As a side note observation: One big (unsolvable?) problem with large taxable accounts and relatively small annual spending is that taxes can be your biggest expense. It is what it is but it's painful to only consume $70K yet pay $20K or $30K in taxes
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Re: I think I just won the game … have I and what do I do ne

Postby spotty_dog » Tue Jul 16, 2013 11:10 am

My observation would be that your kids are small and you live in an expensive area. I would expect your expenses to increase, dramatically, over the next 10-15 years. I hear from my parent friends of teens that older kids are mind-blowingly more expensive than littles, from food to clothes to entertainment and activities. In particular, I hear from my parent friends in the BA that it's worse than elsewhere. Public schools presume that children will have iPads to bring to math class. Sports leagues will advise "a little extra one-on-one coaching" at parents' expense to bring players up to snuff outside of practice hours. It sounds brutal. I would not count on your current expenses to determine your necessary withdrawal rate, but would pad them significantly.

Anyway, congratulations! I hope you and your spouse find that this extra financial cushion affords you a lot of flexibility and family time. :)
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Re: I think I just won the game … have I and what do I do ne

Postby danwhite77 » Tue Jul 16, 2013 11:19 am

Congrats on the windfall, that's great. I only have one constructive comment. You didn't win the game when you came into a large sum of money. This is when you won the game:

upsydaisy wrote:
... we love our work and will probably want to keep doing it at some level over the coming decades.



That's great, congratulations.
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Re: I think I just won the game … have I and what do I do ne

Postby Randomize » Tue Jul 16, 2013 11:26 am

Congratulations! You've inspired me to get out of the public sector :P
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Re: I think I just won the game … have I and what do I do ne

Postby MN Finance » Tue Jul 16, 2013 12:27 pm

Based on your edit, a $6M portfolio, even if 75% in cash will achieve 100% success rate in a monte carlo run given your 75k expense figure. If you don't sell the unnecessary property, you can still achieve success but money must be invested (in "something"). Assuming it's invested, you then have a tough choice how to invest the money. You can take a low level of risk (ie, you've won) which means probably leaving growth/legacy potential on the table, but giving yourselves a smoother ride. OTOH, you can take a moderate risk in equities, still winning and having the chances of failure at/near 0, but a ride with more volatility and certainly greater upside potential for growth/legacy (or other eventual "living legacy" goals). There won't be a right answer to the portfolio since 20/80 and 80/20 and everything in between are ok. It will come down to your appetite for risk. If I were 35 with 6 to invest, I'd be inclined to take a healthy amount of market risk, but that's very personal.
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Re: I think I just won the game … have I and what do I do ne

Postby upsydaisy » Wed Jul 17, 2013 3:03 pm

Hi all,

Thanks for the flood of responses. As always, I'm blown away by how much people here want to (and are able to) help.

Don't worry about those who appear to 'rain on my parade' .. I've gained too much valuable insight from Call_me_op's posts over the last year to be too disheartened by his chastizing of our spending levels. To be honest, when I calculated the $70k number I was fairly shocked that it was so high ... however the good news is that further investigation suggests that it is perhaps on the higher end (we happened to have a few very one-time events last year). In the interest of being conservative, I think that I will keep that as our required number, but it may actually be 20k less than in many years.

To clear up a few points of confusion:

YDNAL wrote:Confused here... $120K - $70K = $50K taxes (I'd leave comments to others). How do you make $400K and "current outgoings" are $70K post-tax living in a $1.5M house ?


Gross income, combined, is $400k. We pay close to half of that out in taxes. We live off $70k of the net $200k and the rest (around $130k) currently goes into 401ks, IRAs and then just regular taxable investments. The $120k/70k numbers are our expenses (and therefore the number I need to make sure my 'retirement' portfolio can support). I don't want to include these saving rates in future calculations because we may well not make this much in the future.

Also, per some other comments, we are in the middle of leaving California (for a less sunny but cheaper clime). The house we used to live in (the 'second home' in my OP) is still in California, obviously. I think this actually fixes the fear of escalating costs of staying the Bay Area and also our current home is not in California, so minimizes the real estate diversification issue that someone mentioned. Having said all of that, I really don't think being a landlord (even with an agent) is for me, so I will likely sell the California home at some point in the next year. We're leaving the Bay Area because although it's an amazing place to build wealth if you're in the right industries, it's a competitive place with a very strong 'keeping up with the Joneses' drag. My wife and I have managed to battle that fairly well, but we worry about the kids growing up in such a place.

"Retired Recently": thanks for posting here. I've just read your journey by looking at your previous posts and I think our situation is extremely similar to yours, so I will ultimately head for a strategy very similar to yours. It's good to hear it's working for you.

For those interested, I'll post a follow-up in a few months once we've decided precisely what to do, but my guess is that we'll sell the second home and invest everything in a fairly simple Vanguard-based portfolio with either a 50:50 or a 40:60 split. We'll keep tabs on ourselves using a formula similar to Retired_Recently's (ie track if the balance is the same as starting balance plus inflation plus 1% or so) and when we are seriously out-performing, take some out to put into a ladder. Between the occasional job and living on around a 2% withdrawal rate, we should hopefully be able to make it.

Thanks again,
-UD.
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Re: I think I just won the game … have I and what do I do ne

Postby DiscoBunny1979 » Wed Jul 17, 2013 4:07 pm

I too offer Congrats to the OP, but one concern is about the properties the OP owns. What are the yearly property taxes and what are the insurance costs? Does the OP have earthquake insurance? For instance on a 1.5 Million house, that would be at least 1% taxes or $15,000 per year plus bond issues (what did they OP buy the CA house for and is that $1.5 an estimate of what they could sell it for, and if so, what is the gain on the property?). What's the property taxes on the other property? Another concern is that living in a house does not mean there won't be repairs or upgrades wanted, unless they have already been done. But even then, roofs need replacing maybe every 15 years even if it's a 30 year roof. So, what kind of roof does the OP have? An expensive tile roof over such square footage that it requires $30,000 every 15 years to replace the roof? Another issue I see is that the OP will no longer be able to contribute to an IRA if not receiving income. Therefore, while taxable investments options are ok, to stop working, gives up the ability to put tax advantaged savings away each year. As we know, savings rate is important and therefore putting $12,000 away each year in an IRA over 20 or 30 years can add up to good deferred savings. Work also gives one something to do . . . and what has happened to America whereas once we have hit a certain point of $$$ that we just want to do nothing . . . not that taking care of kids is doing nothing, but really, have we gotten so lazy that everyone wants an easy way out? Of course I'm not suggesting that we need to work ourselves to death like Steve Jobs apparently did, but on the other hand, we all need goals and things that motivate us to enjoy this life. I would imagine that the OP and spouse making $400K a year are doing something "important" to generate such income - so are they not enjoying way they are doing? What degrees do they have and why would they not want to keep those skills current? Would that mean any cost to go to college to 'learn' what they might be providing this current employer would be for nothing?
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Re: I think I just won the game … have I and what do I do ne

Postby Hector » Wed Jul 17, 2013 5:54 pm

DiscoBunny1979 wrote: Work also gives one something to do . . . and what has happened to America whereas once we have hit a certain point of $$$ that we just want to do nothing . . . not that taking care of kids is doing nothing, but really, have we gotten so lazy that everyone wants an easy way out? Of course I'm not suggesting that we need to work ourselves to death like Steve Jobs apparently did, but on the other hand, we all need goals and things that motivate us to enjoy this life.


It is not necessary to work (work that pays money) to achieve all goals.

DiscoBunny1979 wrote: What degrees do they have and why would they not want to keep those skills current?

Some people get bored of doing same thing all the time
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Re: I think I just won the game … have I and what do I do ne

Postby upsydaisy » Wed Jul 17, 2013 6:04 pm

DiscoBunny1979 wrote:What are the yearly property taxes and what are the insurance costs? Does the OP have earthquake insurance? For instance on a 1.5 Million house, that would be at least 1% taxes or $15,000 per year plus bond issues (what did they OP buy the CA house for and is that $1.5 an estimate of what they could sell it for, and if so, what is the gain on the property?). What's the property taxes on the other property? Another concern is that living in a house does not mean there won't be repairs or upgrades wanted, unless they have already been done. But even then, roofs need replacing maybe every 15 years even if it's a 30 year roof. So, what kind of roof does the OP have? An expensive tile roof over such square footage that it requires $30,000 every 15 years to replace the roof?


The short answer is the house we live in now is extremely cost effective (low property tax, extremely well-built, no association fees, no earthquake concern, etc). The second home (which we lived in until recently) is the diametric opposite. We bought it for around $1.2M and the $1.5 is a conservative estimate based on market prices in the neighborhood including a neighbor selling an almost identical unit a month ago. It brings with it the pleasure of $12k a year in property tax, $3,500 in annual Home Owner's fees, no earthquake insurance and due to age and low-quality build, we've had to replace a lot already and I see more coming. The only good thing is square footage is low - just over 1000 sqft (welcome to the madness of the SF property market). This, along with the hassle that comes with renting anything is why I'm pretty certain we'll sell it. More a question of precisely when and how than if.

I will say, though, the very, very tempting thing about renting properties is that if you do it somewhere mature and popular (like SF, but also NYC or London or central Boston, etc) then you tend to get between 3-5% in annual income from rents and the underlying capital asset tends to track inflation (and so, therefore, does rent). Obviously maintanence and tax always detract from the income and you either have to do the work to support renters or give to an agency (who take around 10-15% off the top in those sorts of markets). It isn't a terrible option, but I've decided probably not for me.

Another issue I see is that the OP will no longer be able to contribute to an IRA if not receiving income. And what has happened to America whereas once we have hit a certain point of $$$ that we just want to do nothing . . . not that taking care of kids is doing nothing, but really, have we gotten so lazy that everyone wants an easy way out?


Totally agree which is why I said in the OP that we love our work and will most likely continue to do it in for many of the years from here through death. On the other hand, the knowledge that we don't have to and also can certainly walk out in the event of a bad boss, a position that disagrees with your morals, can take care of kids/parents/family if and when needed, etc is pretty amazing. I don't think there's anything wrong with that and I really think we've managed to pack into 12 years of working what many people do over 20 years or more. We were lucky to be in the position and have the talent to have had the option to do so and we accepted the challenge knowing what we were doing, but I don't think stopping the 80 hour weeks, 50% travel, stress of running a business with hundreds of employees depending on you, etc, etc necessarily means we're 'lazy' and/or want 'an easy way out'. In fact, I'd argue there are many ways one can do a lot more for America (or any other affiliation) than just working yourself to death.
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Re: I think I just won the game … have I and what do I do ne

Postby Leesbro63 » Wed Jul 17, 2013 6:06 pm

upsydaisy wrote: For those interested, I'll post a follow-up in a few months once we've decided precisely what to do, but my guess is that we'll sell the second home and invest everything in a fairly simple Vanguard-based portfolio with either a 50:50 or a 40:60 split. We'll keep tabs on ourselves using a formula similar to Retired_Recently's (ie track if the balance is the same as starting balance plus inflation plus 1% or so) and when we are seriously out-performing, take some out to put into a ladder. Between the occasional job and living on around a 2% withdrawal rate, we should hopefully be able to make it.

Thanks again,
-UD.


It sounds like you are SERIOUSLY on the RIGHT track and have pretty much done everything right! High income jobs/professions while maintaining a middle-middle class lifestyle is your true golden key. The kids will get more expensive but you'll manage that like you've managed everything else...spend what you need to spend without getting carried away. You're gonna make it after all!
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Re: I think I just won the game … have I and what do I do ne

Postby inbox788 » Wed Jul 17, 2013 11:14 pm

First off, congrats on reaching a major milestone. I'd say you won a game, now what's the next game you want to play?

The standard answer is to follow your IPS. Whether you have $3 or $3K or $3M, you should contribute to the accounts so as to balance you AA to your desired risk tolerance. Wait? What? Your IPS doesn't specify when you've topped out your game? Guess it's back to the drawing board and coming up with a new IPS. In the mean time, you can work a few more years and add some more to your emergency fund, I mean retirement savings. Or you could be looking at a luxury spending spree or padding your heirs inheritance.

Seriously, in the mean time, no reason to rush anything. First sell your unused home. What's the case for keeping it? If an identical home were available for sale in the old neighborhood for 5% off, would you buy it? Why? If not, why are you keeping a home you don't use? If the rental case is strong, take out a loan and do buy a neighboring home and rent both out for double the income stream. You need to scale up enough rentals to make the rental business really worth it. Having too few properties just gives you random problems to deal with. At least with a number of properties, you have a stream of problems and a steady critical mass of problem solvers (property managers, handy persons, etc.).


Buy bonds instead of bond funds and hold them to maturity (manage your own bond). You have enough scale to make individual bonds part of your portfolio, but learn about them first. Try and get a hold of some of these discounted bonds (lower price, higher yield).
http://www.theregister.co.uk/2013/06/21 ... rice_fall/

Kevin M wrote:The thing is that with an additional $3M, your need to take risk has gone down, but your ability to take risk has gone up. I believe Swedroe recommends basing your AA on whichever of ability, need and willingness is lower. That's what I do. My allocation to stocks is only 30% based on (lack of) need to take risk. I probably wouldn't own any stocks unless I had the ability to take the risk.


I would agree with the above, but my allocation would increase (less risk than before, but still not minimal risk), so I wouldn't keep less than 50% in equities, more likely 70% and higher if the pot grew bigger (also growing the emergency fund to scale).

You're quite rich, but you haven't quite reached the ranks of the wealthy yet, IMO. That requires 8 figures to join the club these days, but you're almost there. There's that old joke about what's the difference between the rich and the wealthy? The rich work for the wealthy.

One last thing, you can now add many more things to your bucket list. You'd be surprised as to the dumbest things people come up with, so be picky.
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Re: I think I just won the game … have I and what do I do ne

Postby fatlittlepig » Wed Jul 17, 2013 11:21 pm

I guess you have "won" if the game is to amass a large amount of money at a young age.
Personally to me the game to win, is to have a rewarding, healthy and financially secure life.
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Re: I think I just won the game … have I and what do I do ne

Postby fishnskiguy » Wed Jul 17, 2013 11:35 pm

fatlittlepig wrote:I guess you have "won" if the game is to amass a large amount of money at a young age.
Personally to me the game to win, is to have a rewarding, healthy and financially secure life.


Got any other condescending things to say? :oops:

Jeez!

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Re: I think I just won the game … have I and what do I do ne

Postby fatlittlepig » Thu Jul 18, 2013 12:00 am

Not meant to be.

fishnskiguy wrote:
fatlittlepig wrote:I guess you have "won" if the game is to amass a large amount of money at a young age.
Personally to me the game to win, is to have a rewarding, healthy and financially secure life.


Got any other condescending things to say? :oops:

Jeez!

Chris
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Re: I think I just won the game … have I and what do I do ne

Postby WhyNotUs » Thu Jul 18, 2013 12:18 am

Leesbro63 wrote:
supersharpie wrote:
Leesbro63 wrote:
Rainier wrote:Basically it's a real return of zero and spending of 3%. You have 33 years of inflation ravaging the principal. If you had a $6Million in 1980, what would it be worth today? Less than half that in real terms.


Hmm, a quick backtesting exercise says that a 50/50 portfolio of $6M in 1983 would be worth about $28.6M in real dollars today. Even after deducting for annual expenditures and thus lost growth, I think the OP would be fine.
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Re: I think I just won the game … have I and what do I do ne

Postby LFKB » Thu Jul 18, 2013 1:10 am

Geez, some awful responses in this thread, ranging from condescending to ridiculous (1.5 SWR?). Some people around here tend to be a bit jealous of these types of situations.

It sounds like you can retire and live quite well. My unexpert recommendation would be to sell the second home and invest in a portfolio something like this:

25% total stock market
20% total international stock market
5% Small cap value and/or emerging markets (just for fun)
40% US intermediate term tax exempt and/or state intermediate term tax exempt
10% REIT
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Re: I think I just won the game … have I and what do I do ne

Postby lhl12 » Thu Jul 18, 2013 2:37 am

LFKB wrote:Geez, some awful responses in this thread, ranging from condescending to ridiculous (1.5 SWR?). Some people around here tend to be a bit jealous of these types of situations.


I stand by my 1.5 SWR suggestion (which is not driven by condescension, jealousy or inexperience) and will explain why. The primary reason is the extended, more volatile and uncertain lifetime that OP and his family have left to live, not purely by financial return considerations. This situation is quite different from that of (say) a 55 year old whose kids are grown and gone.

First, several others have suggested that 2.0% is not unreasonable, so while 1.5 may be more conservative, it is not excessively so.

Meanwhile, certain very bad, uninsurable things can happen. For example, divorce. That may seem inconceivable now, but much stranger things have happened. In that case, a 1.5% SWR immediately becomes 3.0%.

Another possibility is the development of more expensive tastes, such that 120k becomes 150k. (Private school for all the kids?). Perhaps unlikely, and certainly controllable, but not at all crazy. Also, such an increase could be driven by a very happy reason, like starting or getting heavily involved with a charity that does great work but requires additional funding.

Another possibility is more kids, such that 120k goes higher for happier reasons. (Or a divorce followed by remarriage and more kids).

Another possibility is a severely disabled child, or spouse, requiring a greater estate to be set aside in perpetuity.

Another possibility is extended hyperinflation. Perhaps unlikely, but a greater (and more negatively burdensome) possibility over the next 65 years than would be the case for an older retiree with only (say) 35 years to plan for.

It may have been mixing apples and oranges to suggest guarding against these sorts of outcomes with a lower SWR, but the math is the same. My point is simply that OP and his family are very young to be making such a weighty, irrevocable decision as getting on the retirement train at this time. I counsel a bit of additional prudence until life has crystallized more, and certain low-probability (but high cost) risks are mitigated.
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Re: I think I just won the game … have I and what do I do ne

Postby BHCadet » Thu Jul 18, 2013 3:19 am

Congrats!!!
Yes, you won the game.
I would pick a lazy portfolio and enjoy life...
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Re: I think I just won the game … have I and what do I do ne

Postby fatlittlepig » Thu Jul 18, 2013 8:57 am

[OT comments removed by admin LadyGeek]
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Re: I think I just won the game … have I and what do I do ne

Postby YDNAL » Thu Jul 18, 2013 9:27 am

upsydaisy wrote:To clear up a few points of confusion:

YDNAL wrote:Confused here... $120K - $70K = $50K taxes (I'd leave comments to others). How do you make $400K and "current outgoings" are $70K post-tax living in a $1.5M house ?

Gross income, combined, is $400k. We pay close to half of that out in taxes. We live off $70k of the net $200k and the rest (around $130k) currently goes into 401ks, IRAs and then just regular taxable investments. The $120k/70k numbers are our expenses (and therefore the number I need to make sure my 'retirement' portfolio can support). I don't want to include these saving rates in future calculations because we may well not make this much in the future.

Also, per some other comments, we are in the middle of leaving California (for a less sunny but cheaper clime).

Thanks for the response, UD.

Wow... spending $70K with young kids, in Bay Area CA, and $1.5M house !!
  • This was surprising to me because - since no State tax in FL - we pay 2% of assessed value in real estate taxes - this alone is $30K annually on a $1.5M house here. Homeowners insurance is also high, presumably high in Bay Area also.
  • Throw-in basic necessities of life, and I was quite surprised with $70K post-tax originally, and impressed now.
With regards to the original post, you are a young couple faced with so many unknowns, over such long a timeframe (perhaps 60+ years), that my only suggestion is to proceed with caution but continue as you have - congratulations!
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Re: I think I just won the game … have I and what do I do ne

Postby Bacchus01 » Thu Jul 18, 2013 12:18 pm

fatlittlepig wrote:just a thought:
in a time of economic hardship for many people, posting that you have millions of dollars and stating that you have won the game seems a bit tacky. no offense meant, but just a perspective.


On a financial board? Give me a break.

My guess is those people who are having a huge economic hardship probably aren't here.
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Re: I think I just won the game … have I and what do I do ne

Postby Leesbro63 » Fri Jul 19, 2013 11:30 am

WhyNotUs wrote:
Leesbro63 wrote:
supersharpie wrote:
Leesbro63 wrote:
Rainier wrote:Basically it's a real return of zero and spending of 3%. You have 33 years of inflation ravaging the principal. If you had a $6Million in 1980, what would it be worth today? Less than half that in real terms.


Hmm, a quick backtesting exercise says that a 50/50 portfolio of $6M in 1983 would be worth about $28.6M in real dollars today. Even after deducting for annual expenditures and thus lost growth, I think the OP would be fine.


Agreed. I was commenting, however, on an all muni bond portfolo (0/100). You made my point...a balanced portfolio probably provides the best...er...balance between the competing needs for stability and for growth. Maybe that's why it's called a balanced portfolio.
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Re: I think I just won the game … have I and what do I do ne

Postby nepats » Fri Jul 19, 2013 11:45 am

Congrats on the success! I am sure it feels great to have options so early in life :) I think you can use a hedged approach, in a sense that take some risks but keep enough aside for a rainy day.

1. Keep the second home and rent it out. You said it will generate 4-5% in income. Also, a good chance that it will appreciate in value in the years to come. This is assuming you don't really "need" the money right now. It will also work as diversification from your other investments.

2. Keep 1M or so in the CDs/etc, and keep the rest invested in a boglish 70-30/60-40 portfolio. Since you both enjoy the work, and won't be drawing on the capital anytime soon, I think it's worth taking a "risk".

Just my .02.. Good luck!
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