25 years old - Portfolio/Life checkup

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Topic Author
rickyj
Posts: 9
Joined: Wed Jun 16, 2021 10:15 pm

25 years old - Portfolio/Life checkup

Post by rickyj »

Hey folks,

Curious to hear some thoughts on the best course of action given my current situation:

- 25 yr old living in Bay Area
- Software engineer with 2 YOE making $180k/yr (take home $8k/month)
- Rent $2k, all other expenses $1k, total expenses $3k/month
- Cash: $6k ($1k checking, $5k emergency)
- Taxable: $146k (70% VOO, 30% VXUS)
- Roth IRA: $13k (100% VNQ)
- Car fully paid off
- No debt

At this point I'm on autopilot just working and investing everything leftover after expenses. My next goal is to own a house so I can build equity and avoid paying rent, but the real estate market is very competitive in Bay Area. At what point should I cash out my investments to make a down payment on a house? Also any feedback on my asset allocation is appreciated, thanks.
dogagility
Posts: 1754
Joined: Fri Feb 24, 2017 6:41 am

Re: 25 years old - Portfolio/Life checkup

Post by dogagility »

rickyj wrote: Wed Jun 16, 2021 10:56 pm Curious to hear some thoughts on the best course of action given my current situation:

- 25 yr old living in Bay Area
- Software engineer with 2 YOE making $180k/yr (take home $8k/month)
- Rent $2k, all other expenses $1k, total expenses $3k/month
- Cash: $6k ($1k checking, $5k emergency)
- Taxable: $146k (70% VOO, 30% VXUS)
- Roth IRA: $13k (100% VNQ)
- Car fully paid off
- No debt

At this point I'm on autopilot just working and investing everything leftover after expenses. My next goal is to own a house so I can build equity and avoid paying rent, but the real estate market is very competitive in Bay Area. At what point should I cash out my investments to make a down payment on a house? Also any feedback on my asset allocation is appreciated, thanks.
Welcome to the forum.

No 401k? No HSA?

As for housing, owning vs renting is more about lifestyle than increasing wealth. However, your are very unlikely to find houses in the bay area that can financially match your 2k/month rent.

In your IRA, VNQ is a not the choice I would make for its lack of diversification. Invest in VTSAX instead.
The more flexibility you have the less you need to know what happens next. -- Morgan Housel
Topic Author
rickyj
Posts: 9
Joined: Wed Jun 16, 2021 10:15 pm

Re: 25 years old - Portfolio/Life checkup

Post by rickyj »

Welcome to the forum.

No 401k? No HSA?

As for housing, owning vs renting is more about lifestyle than increasing wealth. However, your are very unlikely to find houses in the bay area that can financially match your 2k/month rent.

In your IRA, VNQ is a not the choice I would make for its lack of diversification. Invest in VTSAX instead.
Company doesn't offer contribution matching for the 401k and I don't like the idea of locking away my money so far into the future. I'm also on H1B visa so although I have no plans to leave anytime soon, I may not stay in the US long term.
mikejuss
Posts: 1033
Joined: Tue Jun 23, 2020 1:36 pm

Re: 25 years old - Portfolio/Life checkup

Post by mikejuss »

rickyj wrote: Thu Jun 17, 2021 10:40 amCompany doesn't offer contribution matching for the 401k and I don't like the idea of locking away my money so far into the future. I'm also on H1B visa so although I have no plans to leave anytime soon, I may not stay in the US long term.
The benefit of a 401(k) isn't only about receiving an employer contribution; if you contribute to a 401(k), your overall tax bill is lowered by the amount of your contribution. And as for locking your money away for decades, I think you need to get used to that concept. It's essential to building a retirement nest egg.

You're doing amazing in your taxable account. A broad-based stock index would be better than a real-estate index in your Roth IRA.

You should never cash out your taxable or Roth IRA investments. If you want to buy a house--and I wouldn't recommend that you do, at your age--stop contributing to those accounts and start building up a cash reserve.
wetgear
Posts: 368
Joined: Thu Apr 06, 2017 10:14 am

Re: 25 years old - Portfolio/Life checkup

Post by wetgear »

@$180k salary you should be putting the maximum possible into your 401k each year in addition to the roth IRA. Don't buy a house until you decide if you are staying in the US long term and when you have decided that then start saving cash in taxable (after max 401k and rotth) for the down payment.
Topic Author
rickyj
Posts: 9
Joined: Wed Jun 16, 2021 10:15 pm

Re: 25 years old - Portfolio/Life checkup

Post by rickyj »

Thanks for the advice everybody.
Wedemeyer
Posts: 79
Joined: Mon Jan 25, 2021 11:14 pm

Re: 25 years old - Portfolio/Life checkup

Post by Wedemeyer »

I also live in the bay area and moved here when I was 30 in 2000, I'm 51 now so hopefully can lend some perspective. I was here for the 2000 dot com crash, the 2008 real estate crash, the tech bull run through now, and lastly COVID. I run a software business with a lot of foreign nationals working for us under a visa, so I appreciate this perspective as well.

If you are not sure you want to live in the bay long term, no need to buy a house and deplete all your savings and investments. Keep putting away money into your taxable account as much as you can, and you can think of this as a substitute for home equity. Owning a house is a long term inflation hedge and a near term tax write off with the mortgage interest, so you need a long term outlook for buying a home. Your $2K / month rent is quite reasonable for the area, and your salary is more than adequate. If you get to the point of buying a home, boost up your cash savings for the down payment, so you don't need to sell your taxable account investments. Treat the taxable as buy and hold forever. Now, I did buy a condo in 2006 and have about $700K in equity 15 years later, but had to ride out the 2008 downturn, which was scary right after I bought the biggest purchase of my life. So, I suggest you have a 15+ year commitment to live in the area if you want to buy.

+1 on the other posters' ideas on taking advantage of tax deductions. Understanding your tax burden and methods to reduce tax is very key. Take advantage of any and all opportunities available to you to deduct from your income. Definitely contribute to your company 401k. Look into an HSA, as this is another great opportunity for tax deferred savings. Maximize all your tax advantaged first before contributing to taxable. Even though most of your investments are in a taxable account today, you should treat these investments as long term tax deferred. These taxable investments will grow tax deferred until you sell them, with the exceptions of the dividends.

VNQ in Roth is OK and smart. REITs should go in tax advantaged accounts. Look at all your assets and accounts in total: cash, taxable, roth, and your upcoming 401k and HSA. REITS are 8% of your overall portfolio currently, which is reasonable, and this is another way to invest in real estate. I have 15% of my overall investment assets in REITs as an example. I suggest adding VXF to the mix (maybe 20% of overall portfolio), to complement VOO, and get exposure to mid and small cap in the US.

You are way ahead of where I was at 25 years old. So, great job and keep it up.
Topic Author
rickyj
Posts: 9
Joined: Wed Jun 16, 2021 10:15 pm

Re: 25 years old - Portfolio/Life checkup

Post by rickyj »

Wedemeyer wrote: Fri Jun 18, 2021 12:25 pm I also live in the bay area and moved here when I was 30 in 2000, I'm 51 now so hopefully can lend some perspective. I was here for the 2000 dot com crash, the 2008 real estate crash, the tech bull run through now, and lastly COVID. I run a software business with a lot of foreign nationals working for us under a visa, so I appreciate this perspective as well.

If you are not sure you want to live in the bay long term, no need to buy a house and deplete all your savings and investments. Keep putting away money into your taxable account as much as you can, and you can think of this as a substitute for home equity. The goal of a house is both a long term inflation hedge and a near term tax write off with the mortgage interest, so you need a long term outlook for buying a home. Your $2K / month rent is quite reasonable for the area, and your salary is more than adequate. If you get to the point of buying a home, boost up your cash savings for the down payment, so you don't need to sell your taxable account investments. Treat the taxable as buy and hold forever. Now, I did buy a condo in 2006 and have about $700K in equity 15 years later, but had to ride out the 2008 downturn, which was scary right after I bought the biggest purchase of my life. So, I suggest you have a 15+ year commitment to live in the area if you want to buy.

+1 on the other posters' ideas on taking advantage of tax deductions. Understanding your tax burden and methods to reduce tax is very key. Take advantage of any and all opportunities available to you to deduct from your income. Definitely contribute to your company 401k. Look into an HSA, as this is another great opportunity for tax deferred savings. Maximize all your tax advantaged first before contributing to taxable. Even though most of your investments are in a taxable account today, you should treat these investments as long term tax deferred. These taxable investments will grow tax deferred until you sell them, with the exceptions of the dividends.

VNQ in Roth is OK and smart. REITs should go in tax advantaged accounts. Look at all your assets and accounts in total: cash, taxable, roth, and your upcoming 401k and HSA. REITS are 8% of your overall portfolio currently, which is reasonable, and this is another way to invest in real estate. I have 15% of my overall investment assets in REITs as an example. I suggest adding VXF to the mix (maybe 20% of overall portfolio), to complement VOO, and get exposure to mid and small cap in the US.

You are way ahead of where I was at 25 years old. So, great job and keep it up.
Appreciate your insights.

A common suggestion in this thread is to contribute to cash savings for the purposes of a down payment, but I'm not convinced why this is the best approach. I don't understand the tax argument since we're only taxed on the gains that we make when we sell. Theoretically a person who invests their money over time and sells when they're ready for a down payment should still come out ahead of a person who saves cash over time (with the assumption that the market appreciates over time still holds true). Also cash loses value from inflation and there are opportunity costs associated with not investing it. The only reason I currently see where holding cash is optimal would be in the event of a long term market decline, but is the risk really worth missing out on the potential gains?

Is my thinking correct or is there something I'm missing here?
muffins14
Posts: 623
Joined: Wed Oct 26, 2016 4:14 am

Re: 25 years old - Portfolio/Life checkup

Post by muffins14 »

It depends when you want to purchase the house. If you want to purchase in 2023, but the market drops 50%, you can no longer afford the downpayment, so you have to wait for a recovery.

If you had put it into cash, you would be able to buy the house because you still have the full amount.

If you had flexibility with when you will purchase, then sure, the expected value will be higher with the money invested vs not invested.
Wedemeyer
Posts: 79
Joined: Mon Jan 25, 2021 11:14 pm

Re: 25 years old - Portfolio/Life checkup

Post by Wedemeyer »

What about the potential losses? You are not considering the downside risk. In the short term, houses and stocks are volatile, your cash and rent are not. If you're outlook is short term, you probably shouldn't buy a house at all. There are people that overextended themselves in the years prior to 2008, that are still digging themselves out of a hole. They bought a house they couldn't afford that then went down 50%.

You're on to a winning approach, so I don't think you should mess with it. You don't want to move backwards, you've done a good job investing in the taxable account. I suggest to not touch that for anything, keep investing in it, and let that grow. Secondly, start contributing to tax advantaged accounts (401k, SEP, etc), and let that grow. With those two alone, and your contribution abilities, you'll be on track to be financially independent by 45.

Timing is also important, do you want to buy a house today, 2 years from now, 5, 10 years? If you really want to buy a house within a two year period, I suggest putting cash aside for the down payment, take out as much as you can from the bank, and buy a house you can afford. Treat this separately from the other investments, so you stay diversified. That's what I suggest. If you're looking to buy short term, I am concerned that the housing market is red hot now, and if you empty your taxable for the down payment, buy an expensive house in a VHCOL area, that then goes down, you've lost all your equity. What if you lose your job? You don't want to exchange all your investment equity into your home, which many people in the bay do.

If it's in the future, and you use a small % of your investments for the down, and you have a long term outlook, that's fine.

Stay as diversified as you can to lower volatility risk. Don't be in a mindset that renting is bad. Equity is equity wherever you build it. And be mindful of the downside.
ivgrivchuck
Posts: 798
Joined: Sun Sep 27, 2020 6:20 pm

Re: 25 years old - Portfolio/Life checkup

Post by ivgrivchuck »

rickyj wrote: Wed Jun 16, 2021 10:56 pm Hey folks,

Curious to hear some thoughts on the best course of action given my current situation:

- 25 yr old living in Bay Area
- Software engineer with 2 YOE making $180k/yr (take home $8k/month)
- Rent $2k, all other expenses $1k, total expenses $3k/month
- Cash: $6k ($1k checking, $5k emergency)
- Taxable: $146k (70% VOO, 30% VXUS)
- Roth IRA: $13k (100% VNQ)
- Car fully paid off
- No debt

At this point I'm on autopilot just working and investing everything leftover after expenses. My next goal is to own a house so I can build equity and avoid paying rent, but the real estate market is very competitive in Bay Area. At what point should I cash out my investments to make a down payment on a house? Also any feedback on my asset allocation is appreciated, thanks.
As others have said 401k is an important consideration. If leaving U.S. is an option, you should check the bilateral tax-agreement between the U.S. and your home country to see if there are any double taxation concerns.

Buying a house in the Bay Area is a risky move which involves a lot of leverage. You can make some good money. You can also lose everything you currently have. So proceed with caution. Because none of us knows the future, it is impossible to tell when to proceed with it...
40% VTI | 40% VXUS | 13% I-bonds | 7% EE-bonds
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