Young, rich, hopefully not dumb

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Topic Author
adude
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Young, rich, hopefully not dumb

Post by adude »

I've casually perused these boards for a few years but I rarely see threads that deal with my situation. I'm a DIY, keep it simple type of guy, and I'm reaching out to see if there are other things I should be doing to ensure my family is protected for decades and generations to come.

Long story short I graduated with the right major at the right time and entered a lucrative industry . Through some combination of skill and luck (and without fleecing clients or customers) I've made a lot of money. My income has been volatile, so knowing when and how much to put into the market has been difficult. My career has probably reached its zenith so I I'm treating any future wages as icing/non-existent.

I am around 30, married, no kids yet. I own a 1mm home with no mortgage. I have about 20mm to work with. Currently, 35% in equities, 30% in bonds, 35% in cash.

Equities: all ETF, all indexes. about 65% US, 35% foreign. That's probably split about 20/25/55 small/medium/large cap.
Bonds: 90% Vanguard Total Bond fund, 10% Vanguard Total International Bond fund.
Cash: about half in CDs with 3-5 year maturity, half in high (ha) yield savings accounts. All properly FDIC insured with many beneficiaries.

A few reasons for carrying so much cash:
1) I was planning on moving into a bigger house, with substantial property
2) The combination of volatile income and an equity market that is straight up has made it emotionally difficult to plow money somewhere
3) At this point 3% 5 year CDs seem to make more sense than VBTLX - but talk to me in 2018 (hello inflation!)

I max my 401k with bonds, I max my IRA with bonds, I contribute to my nephews/nieces 529 plans, and in the past I have given the tax free gift amount to my immediate family members.I would like to help those people close to me instead of dying on top of a giant pile of money.

It is likely that my wife will continue to work after I am done. She currently makes $150/year but that will probably go down when we move, as will the cost of living.We would probably spend between 50-100k/year, but I'm not really sure, and I don't really know how much kids will cost. In the future I plan to pursue some hobbies as well as finding a way to give back in a larger sense.

I welcome thoughts and general criticisms. I don't want to get nit-picky about investments but I am open to discussing AA. I'm torn between being conservative (because I don't need to risk anything) and being aggressive (because I can risk a lot).

I am working with an attorney to set up my will and estate plans with a proper trust, which I fear will be somewhat complicated in nature. I also have a 2MM umbrella insurance policy for protection against.. stuff. What else should I be doing? Thanks.
MassInvestor
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Re: Young, rich, hopefully not dumb

Post by MassInvestor »

What are your goals? Do you plan to leave money behind to heirs or charity? Do you intend to spend most of the money?
Last edited by MassInvestor on Thu Jan 23, 2014 4:25 pm, edited 1 time in total.
BruDude
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Re: Young, rich, hopefully not dumb

Post by BruDude »

Do you plan on having kids or giving the money to family? If so, you really need to be working with a good estate planning attorney, and probably will need at least a $5M second-to-die life insurance policy to cover the estate tax that will be owed upon the second death between you and your spouse (current laws allow for up to $10M lifetime to be gifted tax-free per couple, though current laws could obviously change, and your net worth is a lot more likely to increase over time than decrease). I'd also look into asset protection options since $2M umbrella might be the max that your insurance company offers, and it is certainly possible that you could be sued for more than $2M, leaving the rest of your assets exposed. The insurer may have access to a secondary company like Lloyd's of London that will insure a greater amount than what the company itself allows. Here's a link with a list of each state's asset protection laws, which can vary significantly between states - http://www.assetprotectionsociety.org/s ... tion-laws/
Last edited by BruDude on Thu Jan 23, 2014 4:18 pm, edited 2 times in total.
solonseneca
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Re: Young, rich, hopefully not dumb

Post by solonseneca »

You are eminently collectable--meaning you should have an umbrella insurance policy of at least 1/2 your net worth. If you haven't set up trusts for you and your wife, you should.

Good luck.
Topic Author
adude
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Re: Young, rich, hopefully not dumb

Post by adude »

We both came from middle class+ families. We are not the kind of people that can spend this but we will live comfortably. It will go to my family, my children, and hopefully my children's children. However, I'm not ready to hand over 10-15mm to a trust and be hands off for 70 years. Perhaps I'm too controlling and/or worried about over-paying for a trust company I don't think I need yet.

I plan on being charitable but I'm not sure in what capacity. I have not gifted anything substantial to any particular cause in my lifetime. If I donate $100 I want $95 of it to HELP somebody and not the charity or the people that run it. Perhaps I'm being too optimistic, but I would love to run a non-profit, even though I have no idea how to run one or whom I may help.
solonseneca
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Re: Young, rich, hopefully not dumb

Post by solonseneca »

I can assure you that you can create trusts that don't tie your hands whatsoever.
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Meg77
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Re: Young, rich, hopefully not dumb

Post by Meg77 »

It sounds like you are doing everything right to me in general. With a $20MM portfolio, a third equities, a third bonds and a third cash seems appropriate enough to me, particularly considering your relatively low annual spend. You might let the equities portion rise over time (as it naturally will) rather than rebalancing to maintain this conservative mix though. A better sounding target to me might be 60% stocks, 20% bonds, 10% cash, 10% alternatives/real estate.

In my opinion it's way too early to be worrying too much about your estate plan. Not that you don't want to have a will and trust in place, because anything can happen, but don't overpay a bunch of drooling attorneys to put a super complex plan in place that will need updating on a near-continual basis as you have kids, neices, nephews, and maybe grandchildren one day. Also it's great that you are generous with family members, but you are young and don't even have your own family yet. I'd caution you to not make too many annual gifts a habit just yet, especially with extended relatives. Your family can and probably will grow exponentially, and they may come to rely on that money and get resentful if/when you opt to stop giving it. Being the family piggy bank is nice and feels like the right thing to do, but it can ruin people and family ties when that starts to define your relationships.

Your outlook and goals will evolve especially once you have a family. Leave the options open and try not to fret about the fact that you don't have specific goals anymore/yet. Maybe you want to start or fund a charity, or start a business, or just retire way young and focus on family, or some combination. It's an enviable position to be sure, and it sounds like you have your head on straight as far as dealing with it.
"An investment in knowledge pays the best interest." - Benjamin Franklin
J295
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Re: Young, rich, hopefully not dumb

Post by J295 »

I can appreciate your DIY attitude; however, in your circumstances you would likely benefit from having top notch legal, accounting, and insurance counsel on your team. Best of luck.
BruDude
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Re: Young, rich, hopefully not dumb

Post by BruDude »

adude wrote:We both came from middle class+ families. We are not the kind of people that can spend this but we will live comfortably. It will go to my family, my children, and hopefully my children's children. However, I'm not ready to hand over 10-15mm to a trust and be hands off for 70 years. Perhaps I'm too controlling and/or worried about over-paying for a trust company I don't think I need yet.

I plan on being charitable but I'm not sure in what capacity. I have not gifted anything substantial to any particular cause in my lifetime. If I donate $100 I want $95 of it to HELP somebody and not the charity or the people that run it. Perhaps I'm being too optimistic, but I would love to run a non-profit, even though I have no idea how to run one or whom I may help.
I'm not an attorney, but you need a trust to designate how the money is to be paid out, especially if you ever have kids since you probably don't want to have $20M being held up in probate in the event of death, and also probably don't want the kids to just be handed such a huge sum of money when they turn 18. The attorney will likely also suggest setting up an Irrevocable Life Insurance Trust (ILIT) along with a life insurance policy to pay the estate tax. Anything in excess of the $10M gifting limit is going to be taxed at 40%, and you probably want the money to stay in your family, not to be shared among the 300 million wonderful citizens of the US. There is also the possibility that the estate tax exemption gets reset to a lower amount with a higher tax rate at some point (it was a $3.5M lifetime exemption and 45% top tax rate just a few years ago), which could result in an even bigger bite. Some states have their own estate taxes in addition to the federal one.
Quickfoot
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Re: Young, rich, hopefully not dumb

Post by Quickfoot »

You've won the game, no need to take unnecessary risk, a 60/40 portfolio is more aggressive than I would be with my own money at that point. 30/70 which is roughly where you are it is reasonable, but 40/60 will keep up with inflation better and provide more opportunity for modest growth. At 20 million even a 3% withdraw rate is 600K per year and 2% is 400K, well above what you expect you need to be able to spend and should easily be sustained by your portfolio.

The worst thing to do at this point would be to take too much risk and lose the money you were fortunate enough to accumulate and the opportunity to help those you care about.
letsgobobby
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Re: Young, rich, hopefully not dumb

Post by letsgobobby »

We often discuss at what point individuals need professional guidance.

I don't know what the cutoff is, but in my opinion you've passed it.

FWIW, I think you're too conservative. You're pretty exposed to both dollar devaluation as well as inflation. I'd take steps to mitigate that, with a professional's help. I'd probably hold international bonds, and lots of international stocks, and I'd probably hold more stocks overall. With say a 60/40 portfolio (30% US stocks, 20% US bonds, 30% international stocks, 20% international bonds) you could draw 2% per year = $400k+ inflation forever, and basically never have to worry about anything.

Congratulations on your success!
Last edited by letsgobobby on Fri Jan 24, 2014 1:48 am, edited 1 time in total.
Nathan Drake
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Re: Young, rich, hopefully not dumb

Post by Nathan Drake »

Don't know many majors or industries that let you accumulate 20MM at 30.

Curious what it is that you do. Get lucky with a small start up?
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fatmike91
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Re: Young, rich, hopefully not dumb

Post by fatmike91 »

Based on what I've read, I would suggest a few things for you:

- Decide how much you want to spend on a house. Take that cash (and other cash needs) out of the asset allocation. That is short term stuff. For the long term investments, decide on an asset allocation and stick with it. I would do 50/50 and have a high percentage (50%) in international. But, I actually think it just doesn't matter. The dumb move for you is changing it once you decide based on market movements...
- 401K for you seems almost irrelevant (unless there was some significant windfall). I get the sense that the overwhelming majority of your money is in the taxable space? IF that is the case (please advise), maybe the question you should be asking is how to maximize your tax advantaged space over time? If so, consider iBonds, non-deductible IRA's (and back door roth), Munis and 529s.
- How much will kids cost? Seriously, are you worried about that? I respectfully suggest that shouldn't even enter the equation for anyone (much less you).
- Regarding your comment #2 about holding cash ( "2) The combination of volatile income and an equity market that is straight up has made it emotionally difficult to plow money somewhere"). That is what an asset allocation is for. You talk in terms of wanting to be aggressive, and also not taking risk. Clearly you need to find a balance. But the most important thing for you (I am repeating myself) is to stick to an asset allocation. If you wrap your head around that, then #2 goes away and you can sleep at night.
- I agree about getting some professional help and looking at estate planning.
- As was stated earlier, your umbrella policy is way too small.
- Consider buying a property or 3 (if it was me, I'd have a house in Aspen and maybe something overseas too). But only if this fits your lifestyle and will get use.

Good luck.
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hand
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Re: Young, rich, hopefully not dumb

Post by hand »

A minor piece of the puzzle may be to increase your tax advantaged space by pre-funding 529s for your expected future kids.
I believe you can open 529s in the names of you and your wife, and reassign to your kids when they are born.
Dandy
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Re: Young, rich, hopefully not dumb

Post by Dandy »

I wouldn't feel guilty about being conservative with your investment allocation. You don't seem to need to take more risk. Sometimes there is pressure because "smart people like you should be more aggressive". Trading/risk taking are often thought of as smart. Allocate they way you feel comfortable.
I like that you want to help people while you are alive and not die with a pile of money. I feel that way and try to help my children now and see them get ahead and have a bit less stress.
You have to look at what things can be a threat to your financial well being. Illness, disability, prolonged market slump, divorce, long term care, concentration of assets, leverage/debt, mother nature (hurricanes etc), law suits etc.

Many of the threats can me mitigated by insurance, some by diversification of assets, some self insurance and some by behavior. Get great insurance coverage, take care of your health, not get too risky with your assets or concentrate them and keep a focus on people not money.
Topic Author
adude
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Re: Young, rich, hopefully not dumb

Post by adude »

I appreciate all of the replies. I will try to address any pertinent comments and questions.

Asset allocation:
I don't change courses, but I do steer the wheel a little with time. It wasn't until this past year when I started considering international bonds. So, I've been steering bond money to the new Vanguard International Bond fund since it opened. Otherwise I plow money into whatever asset is most out of whack with my AA.The plan is to slowly grow the equity portion over time. I agree with some posts above that are aiming for 50/50 equities/bonds where 60% is domestic and 40% is international (or perhaps closer to 50/50).

I've never been quite certain how to treat cash. In a sense I consider cash to be 0 duration bonds (I think that might be the Bogle approach from a very dry book I read 10 years ago). CDs are a little more bond-like without the default risk.For those suggesting an AA of 50/50, are you implying that outside of my primary residence my cash should be minimal?

I have about 1.5% of my assets in tax advantaged accounts. I have been maxing them out for years. Tax shelters would be nice but I am not aware of any obvious options sans children. Pre-contributing to a 529 is a good idea especially because I already have accounts set up for nieces/nephews.

Insurance:
A few people seem to agree I am under insured. This is not something I have thought much about. I'm sure all umbrellas are not created equally, and honestly, aside from the $2mm amount I'm not sure what situations are covered or not covered. In short:
1. What do I need to know?
2. How much coverage do I need?
3. What does it cost?

Estate planning:
For me, this is where the water gets murky because I am uneducated and dipping my toe in for the first time. I agree with a commenter above that I should avoid anything overly complicated at this point. I think phase one would be wills, powers of attorney, and revocable trusts.Phase two would be irrevocable trusts for tax planning.

I've worked briefly with an estate planning lawyer before I was married and I feel comfortable with him, but I also plan to shop around. Some concerns:
1. I have no children but we plan on trying in the next year or so. I understand documents need to be updated as circumstances change, but I don't want to go through this whole thing twice. However, my lawyer says we can structure the documents today that account for hypothetical children in the future.
2. There is a good chance we will be leaving this state within five years. Do the documents need to change if we move? Are there certain laws that apply on a state by state basis? Is it important to use an attorney from the state we reside in? My lawyer says he can continue to represent us even if we move.
3. I live in a big city which comes with big city prices. He has quoted $5000 for wills, powers of attorney, and revocable trusts. Outside of buying a home and getting married I have had the fortune of not dealing with lawyers. Does this seem reasonable?

Thank you.
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retiredjg
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Re: Young, rich, hopefully not dumb

Post by retiredjg »

adude wrote: I'm torn between being conservative (because I don't need to risk anything) and being aggressive (because I can risk a lot).
Either of these could be the right answer for somebody. In reading your post, I didn't get any sense that the aggressive approach would be right for you. If that little piece of posting accurately reflects who you are, I'd suggest staying conservative. By that, I mean something up to about 40% stock/60% bonds and fixed.

I would have some concerns about having 35% in cash though. That is 35% of your money that you know will not keep up with inflation. My suggestion is to get this money invested (or at least the part that will not go to the new home).
sambb
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Re: Young, rich, hopefully not dumb

Post by sambb »

i would go very conservative in asset allocation - 50/50
Get a good estate planning attorney

Understand that everyone you meet will want a portion of your money so shop around.

don't enter into complex legal arrangement that you don't understand.

invest very simply.
linuxizer
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Re: Young, rich, hopefully not dumb

Post by linuxizer »

That much cash is scary. At least consider something like a short-term TIPS fund. Highly recommend the wiki for bonds, as well as potentially more reading if you're interested.

Second the need for more insurance plus an estate/tax lawyer.
sunnyday
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Re: Young, rich, hopefully not dumb

Post by sunnyday »

adude wrote:I'm torn between being conservative (because I don't need to risk anything) and being aggressive (because I can risk a lot).
You could split your net worth into two sections. One section would be your retirement section. This would be only for you and your wife's expenses and you could be extremely conservative with that AA. If you only need $100k a year to live off of, maybe $4-5 million in that section (you could run some numbers with firecalc)?

The other section could be used for your friends and family / 529s / charity. You could be much more aggressive since you want it to last for multiple generations and the more it grows, the more people you can help.

Congratulations on your success. :sharebeer
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Meg77
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Re: Young, rich, hopefully not dumb

Post by Meg77 »

adude wrote:I appreciate all of the replies. I will try to address any pertinent comments and questions.

Asset allocation:
I don't change courses, but I do steer the wheel a little with time. It wasn't until this past year when I started considering international bonds. So, I've been steering bond money to the new Vanguard International Bond fund since it opened. Otherwise I plow money into whatever asset is most out of whack with my AA.The plan is to slowly grow the equity portion over time. I agree with some posts above that are aiming for 50/50 equities/bonds where 60% is domestic and 40% is international (or perhaps closer to 50/50). I agree with this as well.

I've never been quite certain how to treat cash. In a sense I consider cash to be 0 duration bonds (I think that might be the Bogle approach from a very dry book I read 10 years ago). CDs are a little more bond-like without the default risk.For those suggesting an AA of 50/50, are you implying that outside of my primary residence my cash should be minimal? There are two types of cash: cash reserves for emergencies and short term planned expenditures, and cash as an investment part of your asset allocation. The first type shouldn't be included in your AA; it's there to spend (housing being included as an expense) and as a cushion for taxes and unexpected needs. The second type should be and can be viewed as "dry powder" for rebalancing and/or as a substitute for part of your bond portfolio. These days it makes more sense to have a portion of your bond allocation be actually held in cash, in my view, since some of the yields are comparable and the risk actually lower.

I have about 1.5% of my assets in tax advantaged accounts. I have been maxing them out for years. Tax shelters would be nice but I am not aware of any obvious options sans children. Pre-contributing to a 529 is a good idea especially because I already have accounts set up for nieces/nephews. If you can pre-contribute that is great, but be careful over-doing it until you actually have a child or two. Worst case I think you can always change the beneficiary to a niece or nephew, but you want to make sure there is not more set aside than you can actually use. Kids can get scholarships and things and may not need as much as you think.

Insurance:
A few people seem to agree I am under insured. This is not something I have thought much about. I'm sure all umbrellas are not created equally, and honestly, aside from the $2mm amount I'm not sure what situations are covered or not covered. In short:
1. What do I need to know?
2. How much coverage do I need?
3. What does it cost?

I'm not an insurance expert, but it seems to me that your insurance needs are very little. You have enough liquidity to self-insure as far as the event of your death goes; nobody will have trouble surviving or paying estate taxes if you die at this stage. Umbrella policies are good for if you get sued, but unless you have a bunch of rental property I would think $2MM would cover any claim (most claims against umbrella policies are for damages and medical bills if you hit another driver with your car). $2MM is also enough that the insurance company will fight any claim tooth and nail to avoid paying anything at all. If you seek out an insurance expert the first thing they will do is try to sell you on using life insurance as an investment, touting the tax deferred benefits (since you have enough money to pay the exorbitant premiums and also have no tax shelters, you are the prime candidate for these sales pitches). Maybe you are actually the 1% of people for whom this kind of "investment"/insurance is appropriate, but I'd do a LOT of research in advance if I were you before opening yourself up to the sales pitches.

Estate planning:
For me, this is where the water gets murky because I am uneducated and dipping my toe in for the first time. I agree with a commenter above that I should avoid anything overly complicated at this point. I think phase one would be wills, powers of attorney, and revocable trusts.Phase two would be irrevocable trusts for tax planning.

I've worked briefly with an estate planning lawyer before I was married and I feel comfortable with him, but I also plan to shop around. Some concerns:
1. I have no children but we plan on trying in the next year or so. I understand documents need to be updated as circumstances change, but I don't want to go through this whole thing twice. However, my lawyer says we can structure the documents today that account for hypothetical children in the future. I think that is true; it should be fairly cheap to amend a document or two to account for a new child after you've established trusts.
2. There is a good chance we will be leaving this state within five years. Do the documents need to change if we move? Are there certain laws that apply on a state by state basis? Is it important to use an attorney from the state we reside in? My lawyer says he can continue to represent us even if we move. This can be a consideration. Some states allow for different (better) types of trusts than others. I was just reading something about dynasty trusts in North or South Dakota (I think) and how lots of super rich people have their trusts maintain an office in that state just to be able to use their trust laws...I'm no expert but at your asset level this may be worth looking into. I can't find the article now but swear it was WSJ or NYT.
3. I live in a big city which comes with big city prices. He has quoted $5000 for wills, powers of attorney, and revocable trusts. Outside of buying a home and getting married I have had the fortune of not dealing with lawyers. Does this seem reasonable? This seems reasonable. It can cost $500-$1500 just to do online.

Thank you.
"An investment in knowledge pays the best interest." - Benjamin Franklin
tj
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Re: Young, rich, hopefully not dumb

Post by tj »

Tax shelters would be nice but I am not aware of any obvious options sans children
You could always open a Vanguard variable annuity, that would defer taxes on the gains. This assumes you don't need to access the $$ until after age 59.5 though, as otherwise there is an early withdrawal penalty.

https://investor.vanguard.com/what-we-o ... retirement
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Culture
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Re: Young, rich, hopefully not dumb

Post by Culture »

I am in a similar situation but older. You have reached the point where DIY is long longer the appropriate route. You need to hire competent Estate, Tax and Insurance assistance. You can afford to do so, and you can't afford not to. You should also considering hiring a competent Investment adviser to review your investment plan (not to run your investments, make sure they understand up front that is not going to happen).

You are on the edge of needing to set up a family limited partnership (perhaps not quite enough to justify). You cannot do this alone. Get help.

The nice thing about being a DIY (I am also), is that you can actually peer review the advice you getting to make sure is is reasonable and appropriate. Trust me on this, you need to get help.

With respect to investment allocation, there is no right answer. I am 60/30/10 equity/bonds/cash and sleep fine at night. Your answer might be different. The fact of the matter is we can take large risk without affecting our future. Some would say why take the chance? I say why not?
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Re: Young, rich, hopefully not dumb

Post by abuss368 »

I would consider looking at the following:

1) Umbrella policy - 2 million? This needs to be increased. Many policies need to be specially underwritten when in excess of $5 million but so what, you should have protection.

2) Cash - too much for me. I would probably have some amount at a bank under the $250,000 FDIC insurance limit. Another option would be to place a small amount at a bank and the balance of "cash" in a very short term bond fund. I would consider the Vanguard Limited Term Tax Exempt Bond Fund or Short Term Tax Exempt Bond Fund. I do not care for CD's and inflation will just wreck havoc on your cash balances at these artificially low interest rates.

3) HSA - I would be maxing the annual limit each year for future health care expenses. This will provide a tax benefit however small and compound tax free.

4) Investments - low costs passive index funds. Only a handful of funds are needed - Total Stock Index, Total International Index, US & International REITs, Total Bond Index/Tax Exempt Bonds. I would not consider an advisor with a stock picking strategy and active approach. The fees would be material in nature.

5) Trusts - that is your call. I would be wrestling with that at your age. Only you can make that decision.

6) Home - you should really ask yourself considering you presently have a $1 million dollar home, do you really need a larger residence. Consider reading "The Millionaire Next Door" and "Enough" by Jack Bogle.
Last edited by abuss368 on Sat Jan 25, 2014 9:10 pm, edited 1 time in total.
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sunnyday
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Re: Young, rich, hopefully not dumb

Post by sunnyday »

abuss368 wrote:
6) Home - you should really ask yourself considering you presently have a $1 million dollar home, do you really need a larger residence. Consider reading "The Millionaire Next Door" and "Enough" by Jack Bogle.
I'm not sure where the OP lives, but the median home in San Francisco is over $1 million. He has about 5% of his net worth in real estate, I don't think it's a big deal if that's increased a bit.
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adude
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Re: Young, rich, hopefully not dumb

Post by adude »

Meg, thank you for your thoughtful and detailed replies.I read that same article about a week ago. I even sent it to a few colleagues of mine. I don't know if I have the type of wealth where that setup would be appropriate, but that's what got me thinking along those lines in the first place.

In addition to insurance, annuities is another area of ignorance for me. I don't know enough about these subjects. They almost seem purposefully confusing.

I appreciate the different points of view on cash.

The money set aside for our future home is mostly to buy space, acreage, and freedom from immediate neighbors. Not a giant home for the sake of a giant home.
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Re: Young, rich, hopefully not dumb

Post by abuss368 »

At your level of wealth I would have no interest in annuities. The dividend income alone on your portfolio if properly allocated is approximately $20,000,000 x 3% = $600,000.

There is no need for annuities.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Young, rich, hopefully not dumb

Post by PoeticalDeportment »

retiredjg wrote:I would have some concerns about having 35% in cash though. That is 35% of your money that you know will not keep up with inflation.
abuss368 wrote:I would consider looking at the following:
I do not care for CD's and inflation will just wreck havoc on your cash balances at these artificially low interest rates.
Do we have a couple of people who are smarter than the market? 3% on a penfed 5 year CD is higher than the spread between TIPS and nominal treasuries for any maturity.

http://www.treasury.gov/resource-center ... ation.aspx

Would it be inappropriate for me to ask for stock tips and market timing advice from these two?
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Re: Young, rich, hopefully not dumb

Post by retiredjg »

adude wrote:In addition to insurance, annuities is another area of ignorance for me. I don't know enough about these subjects. They almost seem purposefully confusing.
Annuities are confusing. It may be purposeful, but more likely it is because the word "annuity" is used for a lot of different things. I don't know a lot about annuities, but here's a little bit to get you started.

1) An income annuity, such as a SPIA (single payment immediate annuity), is something you buy with a chunk of money and the company immediately starts paying you a specific amount of money every month/year for the rest of your life. There is a place for this product - people who may not have enough money to cover their lifetimes. With this type of annuity those people get some assurance that they won't outlive their money. This does not seem to be a product you need.

2) Another type of annuity is a container you put money into and the earnings are tax free till you take the money out. Often this is a "variable" annuity - the money is invested in stocks and/or bonds, so the value varies. At some later date, you can take a lump sum or "annuitize" this money and get a guaranteed payout for the rest of your life. Again, I don't see why this product would be useful for you. When the money comes out, it is taxed at your marginal rate instead of at the capital gains rate so you obviously would not want to put stocks there. As for putting bonds there, I don't see a reason - you could simple use tax-exempt bonds to avoid much or all of the tax on the income produced by the bonds.

3) One possible "good" use for a variable annuity could be for holding REIT funds. These are pretty tax-inefficient so you would not want to hold REIT in your taxable account. If you simply HAD to have a large chunk of REIT (over and above what is included in the total stock market), you could buy the REIT variable annuity from Vanguard. This is not a suggestion. I like REIT, but I would not recommend holding it in your case because whatever benefit you might get is likely to be washed away by the higher expense ratio. I think you'd do better (emotionally) with just the simple 3 fund portfolio often discussed here. Or if you just had to overweight something, overweight an asset class that comes in a tax-managed option (not available with REIT to my knowledge).

Short answer, I don't see a place for an annuity in your situation myself (keeping in mind I don't know everything). There are many people who will try to sell you one because they get a pretty good commission from the sale. Annuities are (reportedly) frequently products that are sold to people who have no particular need for them. The benefit goes to the salesperson.
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Re: Young, rich, hopefully not dumb

Post by retiredjg »

PoeticalDeportment wrote:Do we have a couple of people who are smarter than the market? ....Would it be inappropriate for me to ask for stock tips and market timing advice from these two?
Sorry. You jumped to the wrong conclusion, at least as far as my post. :D

I suggested getting the money invested. That does not have to mean stocks. It could be CDs or some other type of fixed income investment that might do a better job of keeping up with inflation than cash.
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Re: Young, rich, hopefully not dumb

Post by White Coat Investor »

Congratulations on your success. In many ways, you are similar to a lottery winner. Take your time and play a lot of defense. Be conservative. You can have a very nice life even if your money never makes a dime for you.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Re: Young, rich, hopefully not dumb

Post by abuss368 »

PoeticalDeportment wrote:
retiredjg wrote:I would have some concerns about having 35% in cash though. That is 35% of your money that you know will not keep up with inflation.
abuss368 wrote:I would consider looking at the following:
I do not care for CD's and inflation will just wreck havoc on your cash balances at these artificially low interest rates.
Do we have a couple of people who are smarter than the market? 3% on a penfed 5 year CD is higher than the spread between TIPS and nominal treasuries for any maturity.

http://www.treasury.gov/resource-center ... ation.aspx

Would it be inappropriate for me to ask for stock tips and market timing advice from these two?
I think you are not up to date on the Boglehead philosophy. "Stock Tips" and "Market Timing" advice have not been recommended based on a review of this thread. If you want a CD, by all means invest in one.

I would also recommend an excellent book by David Swensen entitled "Unconventional Success". Dr. Swensen notes that there are three options available to an investor individual or institution:

1) Asset Allocation
2) Market Timing
3) Security Selection

Asset Allocation has been proven to deliver in excess of 90% of a portfolios returns and sometimes in excess of 100%.

Best.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Young, rich, hopefully not dumb

Post by boggler »

At your level of wealth, you quality for the $5M minimum on the Vanguard Total World Stock Institutional share class. If I were in your shoes, I'd put my entire stock allocation into that fund, and put the rest of investable assets into bonds or something like TIPS.
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Re: Young, rich, hopefully not dumb

Post by chicagobear »

I would put a material amount into a gold bullion ETF (GLD, IAU, SGOL) "just in case."
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Re: Young, rich, hopefully not dumb

Post by abuss368 »

boggler wrote:At your level of wealth, you quality for the $5M minimum on the Vanguard Total World Stock Institutional share class. If I were in your shoes, I'd put my entire stock allocation into that fund, and put the rest of investable assets into bonds or something like TIPS.
Good advice. I would add if a taxable account consider Intermediate Term Tax Exempt.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Young, rich, hopefully not dumb

Post by MooreBonds »

It's a shame you don't have children yet - I believe (but am not certain) that you have to specifically name heirs in order to set up a GRAT (Grantor Retained Annuity Trust).
http://www.bbt.com/bbtdotcom/wealth/ret ... trust.page

While you mentioned you don't want to "give up control"....with your assets, a GRAT would be perfect in today's record low interest rate environment, and with your ability to specify a length of term that is long (30+ years).

The short of it is, you set up your own individual "annuity" in a GRAT. The IRS publishes the official rate that you use to calculate for investments held in a GRAT. Then, each year, you have to withdraw a certain amount from the GRAT - the amount is based on both the # of years of the annuity when you first set it up, as well as the rate that applies to the GRAT (the interest rate applies to the LIFE of the GRAT - it doesn't vary from month to month, which makes it great if you set it up now, but not so great if rates are higher).

The reason for doing this - by moving investments to a GRAT, you hope that the investments in the GRAT will grow faster than your mandatory withdrawals from the GRAT. Then, at the end of the GRAT term, ALL money leftover in the account is transferred over to your heirs that you named when you set up the GRAT.

Ideally, the longer term you specify the GRAT to be, the less you are required to withdraw from it....and the more assets can stay in the GRAT and hopefully grow faster than your withdrawals. This would allow you to pass on immensely huge amounts of assets if your investments do moderately well, if your GRAT term is long enough (ideally, 20-40 years), and if the IRS rate is sufficiently low enough.

The interest rate that is set for instruments like the GRAT is a composite of the various short-term rates from 5 years to 10 years Treasuries over the preceding month, with a 1.2 multiplier. So the current rate for January is 2.2%, with February's rate of 2.4% as rates have come up).

So with a VERY crude, back of the envelope rough example:

GRAT term of 20 years, 2.2% IRS interest rate:

Your 20 year term would require taking all of your principal over the 20 years, or roughly 4.3%/year in principle, along with an IRS-assumed 2.2% interest rate. That means your total annual withdrawals from the GRAT would total maybe 6.5%, So whatever return you can get above 2.2%/year, your GRAT will end the term with at least something left in it. The more return you get, the more that is passed gift-tax/estate-tax free to your heirs.


The downfalls:

1) If you die before the GRAT ends, then you don't get all of that great estate tax benefits, since it usually reverts back to your estate (this is a gray area - many estate lawyers will assume this, but I don't believe the IRS has definitively ruled on this, and it remains one of those assumptions until someone tests it in tax court).

One way around this is to set up several GRATs, for diversification - one GRAT with a 20 year term, one with a 30 year term, etc., so that way, if you pass on at age 55 or 64, at least some of your estate can pass on with reduced estate taxes with the shorter term GRATs.

2) The grantor (you or your spouse) is responsible for all income taxes owed from interest/dividends/capital gains earned in the trust, not just the amounts you withdraw each year. So you don't want to go crazy and daytrade in it, or buy tons of high-yielding, non-qualified dividends if you can help it.

3) The GRAT is irrevocable. You are allowed to withdraw the amount each year that the terms state, but that's it. You can control the investments, but not direct it to anyone other than who it was originally set up to benefit once the GRAT term ends.
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Re: Young, rich, hopefully not dumb

Post by mikefixac »

Just my $.02--also prove I probably should have my Bogle forum membership revoked.

I'd put all of it in a total stock index fund. Even if the fund went down 75%, big deal. Still have $5MM. But the odds of it going to $40MM and then $80MM are a lot higher then going to $5MM.

I'm sure the other commenters are right. It just seems wierd that with great success, things become more complicated. I would hope things would get more simple.
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Re: Young, rich, hopefully not dumb

Post by abuss368 »

mikefixac wrote:Just my $.02--also prove I probably should have my Bogle forum membership revoked.

I'd put all of it in a total stock index fund. Even if the fund went down 75%, big deal. Still have $5MM. But the odds of it going to $40MM and then $80MM are a lot higher then going to $5MM.

I'm sure the other commenters are right. It just seems wierd that with great success, things become more complicated. I would hope things would get more simple.
A few funds and you are set. The dividend income to your plan would still be huge.
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Re: Young, rich, hopefully not dumb

Post by Ged »

mikefixac wrote:Just my $.02--also prove I probably should have my Bogle forum membership revoked.

I'd put all of it in a total stock index fund. Even if the fund went down 75%, big deal. Still have $5MM. But the odds of it going to $40MM and then $80MM are a lot higher then going to $5MM.
That's a lot of unnecessary risk. With $20MM I would not be more than 50% in equities.
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Re: Young, rich, hopefully not dumb

Post by bsteiner »

adude wrote:...
Estate planning:
For me, this is where the water gets murky because I am uneducated and dipping my toe in for the first time. I agree with a commenter above that I should avoid anything overly complicated at this point. I think phase one would be wills, powers of attorney, and revocable trusts.Phase two would be irrevocable trusts for tax planning.

I've worked briefly with an estate planning lawyer before I was married and I feel comfortable with him, but I also plan to shop around. Some concerns:
1. I have no children but we plan on trying in the next year or so. I understand documents need to be updated as circumstances change, but I don't want to go through this whole thing twice. However, my lawyer says we can structure the documents today that account for hypothetical children in the future.
2. There is a good chance we will be leaving this state within five years. Do the documents need to change if we move? Are there certain laws that apply on a state by state basis? Is it important to use an attorney from the state we reside in? My lawyer says he can continue to represent us even if we move.
3. I live in a big city which comes with big city prices. He has quoted $5000 for wills, powers of attorney, and revocable trusts. Outside of buying a home and getting married I have had the fortune of not dealing with lawyers. Does this seem reasonable?
It's no more effort to provide for your children (if any) in your Will now than it would be once you have children. However, since you don't yet have any children, you might want to give some thought to where you would want your assets to go if you and your spouse both die before having children.

For the most part, the differences between states aren't substantial, unless you move from a common law state to a community property state, or vice versa. However, given the amount involved, if you move to another state, your lawyer might want to bring in local counsel in the other state in case any changes are appropriate for the new state.

The cost for the project can vary considerably from one client to another, depending upon the time involved in the decision making. Given the amount involved, you're likely to be more thorough in the process. For example, the lawyer would probably discuss whether you want to begin shifting assets out of your estate, and having any inheritances you might receive from your parents or your wife's parents come to you in trust rather than outright. Without knowing anything more, the estimate seems reasonable, except you haven't given any reason for creating a revocable trust. Revocable trusts make sense in some cases, and in some states, but they're overhyped and oversold and for most people, in most states, aren't worth the effort.
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Re: Young, rich, hopefully not dumb

Post by Laura »

For the OP, here is an interesting TED Talk on The Way We Think About Charities. This could challange the way you think or spark an idea about how you can contribute your human capital moving forward.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
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Re: Young, rich, hopefully not dumb

Post by adude »

My tax-advantaged accounts are relatively insignificant, which means I have a huge amount of taxable bonds. For fixed income, I'm mostly in the total bond market fund and gradually increasing my total international bond exposure. I want to end up around 60/40ish.

I recently became enlightened to the fact that the "total bond market fund" is not the total bond market. The most important missing piece are munis, which are obviously increasingly useful as tax rates go up. I think this exposure could help. But how much of my total fixed income should they cover?

I'm not doing this to chase yield. I'm doing this to diversify, cost effectively. The admiral shares of Vanguard intermediate-term tax exempt charges .12. I'm assuming I can't beat that. A "portfolio advisor" at JPM, who knows I am cost and active-management averse, claims a "customized muni portfolio" is something they can definitely compete in. I hear the same from Northern Trust, probably others. On a 5MM portfolio JPM charges .30 for "full customization, aligned with a client's state of residence, tax liability, and risk tolerance". No offense to him but that's probably a lot of smoke up my ass. The difference in cost is 9 grand a year. Any thoughts on where I should buy?
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Re: Young, rich, hopefully not dumb

Post by abuss368 »

adude wrote:My tax-advantaged accounts are relatively insignificant, which means I have a huge amount of taxable bonds. For fixed income, I'm mostly in the total bond market fund and gradually increasing my total international bond exposure. I want to end up around 60/40ish.

I recently became enlightened to the fact that the "total bond market fund" is not the total bond market. The most important missing piece are munis, which are obviously increasingly useful as tax rates go up. I think this exposure could help. But how much of my total fixed income should they cover?

I'm not doing this to chase yield. I'm doing this to diversify, cost effectively. The admiral shares of Vanguard intermediate-term tax exempt charges .12. I'm assuming I can't beat that. A "portfolio advisor" at JPM, who knows I am cost and active-management averse, claims a "customized muni portfolio" is something they can definitely compete in. I hear the same from Northern Trust, probably others. On a 5MM portfolio JPM charges .30 for "full customization, aligned with a client's state of residence, tax liability, and risk tolerance". No offense to him but that's probably a lot of smoke up my ass. The difference in cost is 9 grand a year. Any thoughts on where I should buy?
I would go with what you noted: The Vanguard Intermediate Term Tax Exempt Fund with Admiral Shares. Jack Bogle is worth a lot and I believe we can all agree on that. He noted in many interviews his taxable funds are invested in 1/3 Limited Term Tax Exempt and 2/3 Intermediate Term Tax Exempt. He shortened the bond duration by adding 1/3 to Limited Term Tax Exempt due to his age. You would probably be fine with just the Intermediate Term fund.
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Re: Young, rich, hopefully not dumb

Post by abuss368 »

MooreBonds wrote:It's a shame you don't have children yet - I believe (but am not certain) that you have to specifically name heirs in order to set up a GRAT (Grantor Retained Annuity Trust).
http://www.bbt.com/bbtdotcom/wealth/ret ... trust.page

While you mentioned you don't want to "give up control"....with your assets, a GRAT would be perfect in today's record low interest rate environment, and with your ability to specify a length of term that is long (30+ years).

The short of it is, you set up your own individual "annuity" in a GRAT. The IRS publishes the official rate that you use to calculate for investments held in a GRAT. Then, each year, you have to withdraw a certain amount from the GRAT - the amount is based on both the # of years of the annuity when you first set it up, as well as the rate that applies to the GRAT (the interest rate applies to the LIFE of the GRAT - it doesn't vary from month to month, which makes it great if you set it up now, but not so great if rates are higher).

The reason for doing this - by moving investments to a GRAT, you hope that the investments in the GRAT will grow faster than your mandatory withdrawals from the GRAT. Then, at the end of the GRAT term, ALL money leftover in the account is transferred over to your heirs that you named when you set up the GRAT.

Ideally, the longer term you specify the GRAT to be, the less you are required to withdraw from it....and the more assets can stay in the GRAT and hopefully grow faster than your withdrawals. This would allow you to pass on immensely huge amounts of assets if your investments do moderately well, if your GRAT term is long enough (ideally, 20-40 years), and if the IRS rate is sufficiently low enough.

The interest rate that is set for instruments like the GRAT is a composite of the various short-term rates from 5 years to 10 years Treasuries over the preceding month, with a 1.2 multiplier. So the current rate for January is 2.2%, with February's rate of 2.4% as rates have come up).

So with a VERY crude, back of the envelope rough example:

GRAT term of 20 years, 2.2% IRS interest rate:

Your 20 year term would require taking all of your principal over the 20 years, or roughly 4.3%/year in principle, along with an IRS-assumed 2.2% interest rate. That means your total annual withdrawals from the GRAT would total maybe 6.5%, So whatever return you can get above 2.2%/year, your GRAT will end the term with at least something left in it. The more return you get, the more that is passed gift-tax/estate-tax free to your heirs.


The downfalls:

1) If you die before the GRAT ends, then you don't get all of that great estate tax benefits, since it usually reverts back to your estate (this is a gray area - many estate lawyers will assume this, but I don't believe the IRS has definitively ruled on this, and it remains one of those assumptions until someone tests it in tax court).

One way around this is to set up several GRATs, for diversification - one GRAT with a 20 year term, one with a 30 year term, etc., so that way, if you pass on at age 55 or 64, at least some of your estate can pass on with reduced estate taxes with the shorter term GRATs.

2) The grantor (you or your spouse) is responsible for all income taxes owed from interest/dividends/capital gains earned in the trust, not just the amounts you withdraw each year. So you don't want to go crazy and daytrade in it, or buy tons of high-yielding, non-qualified dividends if you can help it.

3) The GRAT is irrevocable. You are allowed to withdraw the amount each year that the terms state, but that's it. You can control the investments, but not direct it to anyone other than who it was originally set up to benefit once the GRAT term ends.
This was an excellent post. I got a lot out of this.

Thank you.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Young, rich, hopefully not dumb

Post by Dave55 »

You ought to up the umbrella coverage to cover your total net worth. For bonds in taxable, I would split 50/50 between TBM and Vanguard Intermediate Muni.
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Re: Young, rich, hopefully not dumb

Post by retiredjg »

adude wrote: Any thoughts on where I should buy?
I don't see any reason to look beyond Vanguard myself.

Obviously, tax-exempt bonds would be a good choice if you are in a higher tax bracket (I'm not sure your tax bracket has been established yet). For tax exempt bonds, I'd look at 2 things. Is there a bond fund for your state? This would reduce your state taxes as well, but I would not put everything in one state's bonds. So perhaps a combination of a state tax-exempt fund and the intermediate term bond fund (and short if you want).

Second, if you are in a higher bracket, total bond market in taxable is not optimal as it throws off dividends that increase your taxable income. But you could consider a Vanguard Total Bond Market Variable Annuity. The earnings inside the VA would not be taxable (at this point) and Vanguard's VAs are very low cost and not the shameful product sold by some other VA sellers.

Above, I said there may be no reason to look beyond Vanguard, but if they don't have a tax-exempt fund for your state, that may be a reason to look elsewhere. However, you certainly don't need to pay .30 for "customization" that you can figure out for yourself.
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Re: Young, rich, hopefully not dumb

Post by retiredjg »

P.S. I realize I have contradicted myself in this thread. First I said don't consider variable annuities and then I said do consider the ones at Vanguard. Sorry. Sometimes I think different things than other times. :D
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Re: Young, rich, hopefully not dumb

Post by mathwhiz »

My guess is you got lucky in a Silicon Valley startup? I can't think of any other industry outside of music/entertainment where someone your age can make that kind of bank.

Get residency in a state with no state income tax ASAP. 10% of your income thrown away each year on taxes at your income level is predatory. You only need to spend six months + 1 day there to get the tax benefit. Spend the other six months wherever else in the world you desire. Florida would be my pick but there are also nice areas in Nevada (Lake Tahoe), Wyoming (Jackson Hole), and Texas (Austin) to consider.
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Re: Young, rich, hopefully not dumb

Post by Zabar »

"I plan on being charitable but I'm not sure in what capacity. I have not gifted anything substantial to any particular cause in my lifetime. If I donate $100 I want $95 of it to HELP somebody and not the charity or the people that run it. Perhaps I'm being too optimistic, but I would love to run a non-profit, even though I have no idea how to run one or whom I may help."

First, congratulations on your financial success. Your problems are ones that other people would kill for!

I spent part of my career as the executive director of a $700MM foundation, so I have significant experience in the nonprofit sector. In most situations, your desire that 95% of a donation go for direct services is unrealistic. Nonprofits have to pay for overhead, salaries, etc. These vary significantly with the type of work done by the nonprofit. State attorneys general and groups like Charity Navigator can give you evaluations of whether individual nonprofits are wasteful by their respective standards.

If you'd like to dip your financial toe in the nonprofit waters, you might wish to look into setting up a donor-advised fund either at Vanguard/Fidelity/Schwab or through a local community foundation. This gives you an immediate tax deduction for your contribution and allows you to function like a foundation but without the horrific paperwork. You can dole out the money to qualified nonprofit organizations (not individuals) over the course of several years and in any areas you wish to support. You simply advise the custodian where and for how much you'd like to send a check.
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Re: Young, rich, hopefully not dumb

Post by abuss368 »

Dave55 wrote:You ought to up the umbrella coverage to cover your total net worth. For bonds in taxable, I would split 50/50 between TBM and Vanguard Intermediate Muni.
I am curious why you would add taxable bonds from Total Bond Market to a taxable account? Why not place the bond allocation in Intermediate Term Tax Exempt?
John C. Bogle: “Simplicity is the master key to financial success."
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