Help with asset allocation post-windfall

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Topic Author
jimbob56
Posts: 16
Joined: Fri Sep 14, 2012 5:17 pm

Help with asset allocation post-windfall

Post by jimbob56 »

Our family (we're both 39, married with 2 young kids) just had a windfall that multiplied our net worth by about 7x (after 2014 federal and California taxes are paid off).

I already read the windfall section of the wiki, so we're already pretty much in tune with most of the recommendations there...

Pre-windfall Financial Situation
* Rent a house and own two cars outright.
* Have zero revolving debt of any kind, just credit cards that are paid off every month.
* Have around 6 months of emergency reserve in money mkt account.
* Have been saving for purchasing a home. Prior to windfall, had about 3/4 of necessary 20% down-payment already saved up.
* Have a 529 account already on pace to cover bulk of college costs for oldest kid (currently 3 years old)
* Our retirement accounts are on-track for retirement at 65. We max out IRAs, 401k and 457b each year.

Post-windfall Actions to Date
* Both of us obtained adequate life insurance policies.
* Increased umbrella insurance policy to cover all post-windfall assets + an amount equal to my wages for next 15 years.
* Hired an estate planning attorney to set up an Estate Plan, Living Trust and all the other legal arrangements needed to keep the family afloat should something happen to me or my wife.
* Hired an accountant to handle this year's taxes and next: Planning to pay estimated taxes quarterly to CA this year (i.e. 30/40/0/30). Federally, paying 110% of 2013 taxes to cover safe harbor provisions.
* Current windfall proceeds are sitting @ Vanguard in Tax-Exempt Money Market Fund (VMSXX)

Current Retirement Portfolio
* Current asset allocation is about 80/20 equities/fixed, with a mix of VG Total Stock Mkt Index, Int'l Index, REIT Index and Bond Index, almost exclusively in tax-deferred accounts: two IRAs, a 401k and a 457b.

Updated Goals/Expectations
1. Wife who already cut back from 40 hour work week when we had first kid, wants to semi-retire to a lower stress/low hours job that will bring in maybe 20% of original salary (or 40% of what she currently makes).
2. I'd like to retire by 55.
3. We want to buy a house this year. I'm now in a position that I could theoretically buy the house we want without a mortgage.
4. I want to buy one new or lightly used car to replace 11 year old car I currently drive.
5. Plan to fund another 529 for second kid.
6. Wish to have federal and CA tax proceeds in very safe accounts for withdrawal quarterly over next 12 months.
7. Plan to create a charitable/endowment fund.
8. Plan to maintain a combined taxes/vacation/discretionary fund.

Planned Allocations
So I'm not sure if this is the right way to think about things, but I'm thinking of setting up asset allocation plans for each of the above goals. Here's how I'm thinking it might break down:
1. Took a chunk of the windfall necessary to make up wife's salary loss at a 5% withdrawal rate and gave it a fairly conservative 35/65 equities/fixed asset allocation. (i.e. Treating wife as semi-retired. Not too worried if this draws down a bit over the years as it only needs to last until we're both retired.)
2. Plan to approximately double current retirement savings to help reach my retirement goal of 55. Windfall funds would have to go in taxable accounts for now. I would move 10 years ahead on my current retirement glide path, putting retirement investments at 70/30 equities/fixed. This would glide toward 25/75 allocation over next 16 years.
3. Put additional house down-payment funds in a Money Mkt account for quick withdrawal (i.e. 0/100). Plan to set aside other 80% of house funds in Money Mkt as well, prior to determining whether to purchase with cash or get a mortgage (mostly depends on whether we believe we can exceed the mortgage rate by investing the 80% long-term).
4. I will buy a car this year with cash, so those funds will probably sit in Money Mkt until that time. (i.e. 0/100)
5. Since second kid is newborn, I will start with 100/0 allocation for the new 529 and glide toward all fixed/cash allocation by the time he's 18.
6. Tax funds will be in CDARS/brokered CDs/money mkt or something of this sort. Not sure to be honest at the moment, but all need to be safe investments (i.e. 0/100)
7. I plan to setup a fund from which we'll give the bulk of interest/dividends toward charitable causes annually. Planned allocation: 70/30.
8. Thinking I will allocate discretionary fund at 50/50. It will be used for ongoing property taxes, house/car maintenance, emergency fund, discretionary spending, vacations, etc.

Questions
1. Does above asset allocation plan (goals and allocation percentages) seem reasonable and is this a good way to go about allocating the windfall?
2. Since this is almost exclusively taxable investing and my long-term marginal tax rate will be 28% or higher federally, am I best off using tax-exempt index funds where possible? CA taxes you the same in either case, so not sure whether this would work out in our favor or not, since tax-exempt index funds seem to deliver lower returns over time.
3. Since for the most part I intend to use VG index funds here (except for very short-term funds which might go into CDs/money mkt), I could simply consolidate most of these into say one or two mutual fund accounts at Vanguard by appropriately averaging out the asset allocations. Is it best practice to keep say short/medium/long-term funds in separate accounts versus a consolidated account? Does it matter?
4. Related to above, should I go so far as to strategically mix the short-term investments in with VG IRA accounts in order to avoid having to put say bond index in a taxable account, assuming that I can manage to get overall asset allocations to break-out as desired?
5. Should I hire a (fee-only) financial adviser?

Sorry for the length of this post. Any help/advice appreciated.
--Jim
cherijoh
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Joined: Tue Feb 20, 2007 3:49 pm
Location: Charlotte NC

Re: Help with asset allocation post-windfall

Post by cherijoh »

This seems overly convoluted to me. Remember that money is fungible.

1) Anything needed in a year or less should be in savings account with "high" interest rate or very short term treasuries. Brokered CDs sound too complicated to me for something very short term. Also I think I have seen recommendations here that you should keep brokered CDs to maturity.
2) in your pre-windfall days, how was your wife's salary used? Was it integral to paying the bills or was it being used to increase your savings or fund your IRA? If it is needed to pay bills then keep it in something safe. But if your salary covers the bills, then your proposed allocation to replace your wife's salary is way too conservative. If you sell $5500 in TSM in taxable and put an equivalent amount in your IRA, it doesn't really matter what the price of TSM was at the time. You still have the same amount invested in the TSM, now it has the opportunity to grow in a tax-deferred account (Traditional) or tax-free (Roth).
Topic Author
jimbob56
Posts: 16
Joined: Fri Sep 14, 2012 5:17 pm

Re: Help with asset allocation post-windfall

Post by jimbob56 »

Ok, so maybe I'm over-thinking the whole thing, but how else should I set asset allocation for a chunk of funds I didn't have a month ago, but which will be with me going forward? Clearly, the short-term stuff gets put in ultra-safe investments (taxes, car, house downpayment). College and retirement funds are fairly straight forward too as I already have well defined glide paths for each. How else would I come up with a reasonable asset allocation for the rest of it? Do I just bundle it all up, call it medium-term and shoot for say 60/40 and leave it at that?
livesoft
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Joined: Thu Mar 01, 2007 7:00 pm

Re: Help with asset allocation post-windfall

Post by livesoft »

I'd just bundle it up. Set up something like a 60:40 portfolio that includes 100% of all your investable assets and don't worry about it.
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Topic Author
jimbob56
Posts: 16
Joined: Fri Sep 14, 2012 5:17 pm

Re: Help with asset allocation post-windfall

Post by jimbob56 »

Ok, so given that 90% of the overall portfolio will have to be in a taxable account, converting all tax deferred account space to fixed would still leave me with 30% fixed to put in a taxable account... What would you suggest for that 30%?
livesoft
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Re: Help with asset allocation post-windfall

Post by livesoft »

A bond fund? There are many to choose from. It could be a tax-exempt muni bond fund or not depending on your tax situation.
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DualIncomeNoDebt
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Joined: Wed Jul 18, 2012 3:38 am

Re: Help with asset allocation post-windfall

Post by DualIncomeNoDebt »

and is this a good way to go about allocating the windfall?
Not really. The "planned allocations" is a major labyrinth. Pick a simple allocation plan you are comfortable with, and stick to it. Short-term needs, cash or low tenor CD. Your time and energy would be much better spent analyzing how much house you can afford and choosing an appropriate home with no to minimal defects or repairs, school districts, commute time and cost, etc., since this will likely to be your largest financial transaction to date, and one with lasting impact on your life, your wife's life, and your kids' lives.

Also, you rent a home, have two young kids, including a newborn, and may be purchasing a home and a car in pricey California. Ditch any notion of some "charitable contribution" fund until you've purchased your new home, your car, are paying taxes and fees and costs on these major purchases, and also have money set aside for college educations (if you intend to pay for college). I speak from my colleagues' experience, who were quite surprised how expensive home ownership can be once taxes, maintenance fees, possible Mello-Roos, insurance, energy, and general maintenance, all of which is a steady wallet drain. Also surprising may be how damn expensive college is once the FAFSA is submitted and the "expected family contribution," i.e. the amount you or the kid has to pay, is a number that will make you choke.
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