Situation Review

[vfinx]

I could use some help evaluating my situation, and hopefully coming up with an IPS. I have specific questions, but for now I'd rather leave this open-ended so I can get raw feedback. Thanks!

Objectives

• Financial independence by 55 to have the freedom to decide whether to keep working.

• Pay for our 2 kids’ education from now until their desired level (hopefully college).

• Live on $150k per year (in 2020 dollars) indefinitely. This includes rent, assuming we still don’t own the house we live in.

Assets

• Partner A 401k: $455k -- VITNX(46%), VWILX(46%), VBITX(8%)

• Partner A Roth IRA: $26k -- VTSAX(100%)

• Partner B 401k: $260k -- VINIX(80%), VEMAX(20%)

• Partner B Roth IRA: $105k -- VGSLX(40%), VTIAX(40%), VTSAX(20%)

• Partner B Taxable: $980k -- VFIAX(50%), VTSAX(38%), VSMAX(5%), VTIAX(4%), VIMAX(3%)

• 529 Plans: $65k -- VITPX(100%)

• Cash: $800k -- “high” yield savings accounts

• Real Estate: $750k -- $1.1M value - $350k mortgage

Loans

• $350k mortgage @3.375% (15yr)

• $20k student loans @2%

Investment Contributions

• Partner A and B’s 401ks are maxed out every year.

• $4k / week into VTSAX (taxable). The rest goes into bank accounts.

Spending

• $150k per year to live. Dominated by $70k rent and $40k pre-school. Hope to enroll in public Kindergarten asap. Excludes the following:

• $3.6k / month mortgage payment on rental house

• $10k / year property taxes on rental house

Income

• Partner A Job: $150k

• Partner B Job: $230k cash + $400k RSU at current (highly volatile) stock price

• Rental: $3.6k / month

Other Info

• Late thirties

• Married, filing jointly

• Two kids, between 0 and 5. No more kids planned

• Live in VHCOL area in CA

• We plan to sell the rental house asap which will eliminate mortgage, property insurance and rental income. Not sure what to do with proceeds of sale.

• We got lazy and stopped doing backdoor roths a few years ago. Both partners can do mega-backdoors if desired.

• Prior to Covid, we were going to buy a vhcol house. Now we don't know.

• Cash balance is due to recent sale of RSUs and fear of market.

[RocketShipTech]

150k at a 4% withdrawal rate is 3.75M. Let’s just round up to $4M.

After you sell the house you’ll be at 3.4M in liquid assets.

You save 300k per year? 400k?

Net net, you’ll be financially independent way before 55. How about 40?

Btw, you should read the comments I got in my first post, we are in a similar position: viewtopic.php?f=1&t=317614&p=5312690#p5312690

[retired@50]

• We got lazy and stopped doing backdoor roths a few years ago. Both partners can do mega-backdoors if desired.

• Cash balance is due to recent sale of RSUs and fear of market.

These are the two most concerning things I see in your post.

I don't understand the "lazy" bit. How much effort is it, really.

The "fear of market" is a red flag. Perhaps you don't have the proper asset allocation?

Regards,

[RocketShipTech]

• We got lazy and stopped doing backdoor roths a few years ago. Both partners can do mega-backdoors if desired.

• Cash balance is due to recent sale of RSUs and fear of market.

These are the two most concerning things I see in your post.

I don't understand the "lazy" bit. How much effort is it, really.

As someone who makes almost as much as OP does, it makes sense to me.

When you’re saving $300k/yr, why bother shifting a measly $12k into tax-advantaged?

[vfinx]

150k at a 4% withdrawal rate is 3.75M. Let’s just round up to $4M.

After you sell the house you’ll be at 3.4M in liquid assets.

You save 300k per year? 400k?

Net net, you’ll be financially independent way before 55. How about 40?

If my children are lucky enough to get into college, I would like to pay for it (though I won't tell them that until they're done, and I'll just pay off their loans). That, and a multitude of child-related expenses over the next ~20 years, will eat up a major chunk of assets, and is why I have to be less aggressive with my timelines.

The "fear of market" is a red flag. Perhaps you don't have the proper asset allocation?

To clarify, I had allowed the cash balance to build up prior to Covid. It's been at that level for about a year. So I was already conservative. If anything, I am trying to convince myself to be less so. I must admit that the cash helped me sleep at night during the last few months of extreme volatility.

[RocketShipTech]

150k at a 4% withdrawal rate is 3.75M. Let’s just round up to $4M.

After you sell the house you’ll be at 3.4M in liquid assets.

You save 300k per year? 400k?

Net net, you’ll be financially independent way before 55. How about 40?

If my children are lucky enough to get into college, I would like to pay for it (though I won't tell them that until they're done, and I'll just pay off their loans). That, and a multitude of child-related expenses over the next ~20 years, will eat up a major chunk of assets, and is why I have to be less aggressive with my timelines.

But your $150k includes $40k in daycare? That will go away soon enough.

4 years of Stanford * 2 is $600k in 2020 dollars. You guys can save that much in two years. So FI at 42 instead of 40.

[vfinx]

150k at a 4% withdrawal rate is 3.75M. Let’s just round up to $4M.

Forgot to respond to this point - I don't think a 4% withdrawal rate can be used as an FI gauge in one's 40s or 50s? I don't know what the right number is, but 4% seems too high.

But your $150k includes $40k in daycare? That will go away soon enough.

Only to be replaced by after-school programs, because both partners are still working

I get your general point though. FI may be attainable before my stated goal, and there are real "costs" to not realizing that in terms of sub-optimal career/lifestyle choices.

[RocketShipTech]

150k at a 4% withdrawal rate is 3.75M. Let’s just round up to $4M.

Forgot to respond to this point - I don't think a 4% withdrawal rate can be used as an FI gauge in one's 40s or 50s? I don't know what the right number is, but 4% seems too high.

Kitces suggests 3.5%, and even then you have a 95% chance of ending up with at least 2x your initial amount after 50 years:

https://www.kitces.com/blog/the-problem ... ing-rules/

The only thing I would caution is that these studies assume an unemotional stay-the-course 60/40 allocation, which you may have some trouble with?

Only to be replaced by after-school programs, because both partners are still working

After school activities cost $20k per kid? Good lord.

[neverpanic]

The "fear of market" is a red flag. Perhaps you don't have the proper asset allocation?

If they cashed out some RSUs, that has nothing to do with any fund, right?

After school activities cost $20k per kid? Good lord.

Easily. If the kids get into sports, a mid-level comp team can run $8000-10000/season. There are many who are in the $20-30k/year club once all the travel is factored in. A running joke (that's actually a truism) among veteran parents when talking to newcomers is that they'd be better off saving the sports money to fund college directly. We paid big for those memories.

[babystep]

I could use some help evaluating my situation, and hopefully coming up with an IPS. I have specific questions, but for now I'd rather leave this open-ended so I can get raw feedback. Thanks!

Objectives

• Financial independence by 55 to have the freedom to decide whether to keep working.

• Pay for our 2 kids’ education from now until their desired level (hopefully college).

• Live on $150k per year (in 2020 dollars) indefinitely. This includes rent, assuming we still don’t own the house we live in.

Assets

• Partner A 401k: $455k -- VITNX(46%), VWILX(46%), VBITX(8%)

• Partner A Roth IRA: $26k -- VTSAX(100%)

• Partner B 401k: $260k -- VINIX(80%), VEMAX(20%)

• Partner B Roth IRA: $105k -- VGSLX(40%), VTIAX(40%), VTSAX(20%)

• Partner B Taxable: $980k -- VFIAX(50%), VTSAX(38%), VSMAX(5%), VTIAX(4%), VIMAX(3%)

• 529 Plans: $65k -- VITPX(100%)

• Cash: $800k -- “high” yield savings accounts

• Real Estate: $750k -- $1.1M value - $350k mortgage

Loans

• $350k mortgage @3.375% (15yr)

• $20k student loans @2%

Investment Contributions

• Partner A and B’s 401ks are maxed out every year.

• $4k / week into VTSAX (taxable). The rest goes into bank accounts.

Spending

• $150k per year to live. Dominated by $70k rent and $40k pre-school. Hope to enroll in public Kindergarten asap. Excludes the following:

• $3.6k / month mortgage payment on rental house

• $10k / year property taxes on rental house

Income

• Partner A Job: $150k

• Partner B Job: $230k cash + $400k RSU at current (highly volatile) stock price

• Rental: $3.6k / month

Other Info

• Late thirties

• Married, filing jointly

• Two kids, between 0 and 5. No more kids planned

• Live in VHCOL area in CA

• We plan to sell the rental house asap which will eliminate mortgage, property insurance and rental income. Not sure what to do with proceeds of sale.

• We got lazy and stopped doing backdoor roths a few years ago. Both partners can do mega-backdoors if desired.

• Prior to Covid, we were going to buy a vhcol house. Now we don't know.

• Cash balance is due to recent sale of RSUs and fear of market.

Looks to me that you are not thinking rationally or maybe just fearful and that your thoughts are all over the place. Selling RSUs, change of plan to not buying the house anymore, selling the rental dis-regarding prop-13, not doing mega-backdoors, keeping 800k in cash, and not paying off 20k student loan.
Maybe something else is going on which is not obvious from your post. I assume taxes are taken for the RSUs sold.

[luminous]

• We got lazy and stopped doing backdoor roths a few years ago. Both partners can do mega-backdoors if desired.

• Cash balance is due to recent sale of RSUs and fear of market.

These are the two most concerning things I see in your post.

I don't understand the "lazy" bit. How much effort is it, really.

As someone who makes almost as much as OP does, it makes sense to me.

When you’re saving $300k/yr, why bother shifting a measly $12k into tax-advantaged?

Money is money, and I think that having investments growing tax free for the rest of my life is pretty valuable. It is a great mega-emergency fund, will provide me the ability to chose my tax rate in retirement, and in the end if I have any left it is a wonderful tax free gift to my children when I die. I'm doing backdoor and megabackdoor roths while earning more than OP. There is almost no work involved.

[vfinx]

I'm doing backdoor and megabackdoor roths while earning more than OP.

The laziness has nothing to do with income which we have no delusions of being anything special, especially in our area. It was just a bad habit that became the norm over a few years as we got busy. I've just committed to fixing it, and will do the full backdoors going forward. We have zero traditional IRAs in the way so it should be straightforward.

[tashnewbie]

It’s a relatively minor point, but I’d nix that student loan ASAP. Assuming you’re paying at least 40% in combined federal and state taxes and are unable to deduct student loan interest, that 2% is after tax or at least 3.3% pre-tax.

I’d start doing all backdoors that are available. Regular ones and the mega variety (won’t the latter offer you up to at least a combined $100k in additional tax-advantaged space?).

I’d reevaluate my asset allocation so that I could get the liquidated RSUs into the market as soon as they’re liquidated.

You have great incomes and are able to save a lot. I’m sure you’ll reach your goals sooner than you think. Good luck!

[retired@50]

The "fear of market" is a red flag. Perhaps you don't have the proper asset allocation?

To clarify, I had allowed the cash balance to build up prior to Covid. It's been at that level for about a year. So I was already conservative. If anything, I am trying to convince myself to be less so. I must admit that the cash helped me sleep at night during the last few months of extreme volatility.

My only suggestion would be to invest the money into your preferred asset allocation as soon as is practical.

I'm not trying to dictate your asset allocation, If you're using Covid as an excuse to delay investing, this suggests to me that you might want to hold a more conservative asset allocation. It's not wrong to hold 50% or 60% in bonds if that's what you need to do to relieve the "fear" feelings.

Regards,

[retired@50]

• We got lazy and stopped doing backdoor roths a few years ago. Both partners can do mega-backdoors if desired.

• Cash balance is due to recent sale of RSUs and fear of market.

These are the two most concerning things I see in your post.

I don't understand the "lazy" bit. How much effort is it, really.

As someone who makes almost as much as OP does, it makes sense to me.

When you’re saving $300k/yr, why bother shifting a measly $12k into tax-advantaged?

I'm struggling to understand why paying additional taxes on an investment "makes sense" to you?

I also don't think of $12k as "measly" but that's me.


Regards,

[RocketShipTech]

• We got lazy and stopped doing backdoor roths a few years ago. Both partners can do mega-backdoors if desired.

• Cash balance is due to recent sale of RSUs and fear of market.

These are the two most concerning things I see in your post.

I don't understand the "lazy" bit. How much effort is it, really.

As someone who makes almost as much as OP does, it makes sense to me.

When you’re saving $300k/yr, why bother shifting a measly $12k into tax-advantaged?

I'm struggling to understand why paying additional taxes on an investment "makes sense" to you?

I also don't think of $12k as "measly" but that's me.


Regards,

For very HNW individuals the calculation can be different.

1. The OP’s marginal income tax rate is probably over 50%. Saving the $12k in taxable and then donating to a DAF could deliver significant tax savings now vs doing Backdoor Roth and donating that money as cash in retirement.

2. If the $12k were invested in taxable, investing in growth funds make sense to minimize taxable distributions. Annual tax cost would be minimal (~0.2%).

3. With a large taxable account, tax loss harvesting becomes ever more important. The $12k would be much more useful in taxable to offset capital gains if the OP ever wanted to cash out some taxable investments for spending.

4. With such a large taxable account, it’s likely the money will never be spent, ending up passed down to heirs with a stepped up basis. Inherited Roth IRA distributions are taxed on the earnings.

Add it all together and I’d say laziness makes a lot of sense. Especially when we’re talking about 4% of annual savings. If that’s not the definition of “measly”, what is?

[smitcat]

• We got lazy and stopped doing backdoor roths a few years ago. Both partners can do mega-backdoors if desired.

• Cash balance is due to recent sale of RSUs and fear of market.

These are the two most concerning things I see in your post.

I don't understand the "lazy" bit. How much effort is it, really.

As someone who makes almost as much as OP does, it makes sense to me.

When you’re saving $300k/yr, why bother shifting a measly $12k into tax-advantaged?

I'm struggling to understand why paying additional taxes on an investment "makes sense" to you?

I also don't think of $12k as "measly" but that's me.


Regards,

For very HNW individuals the calculation can be different.

1. The OP’s marginal income tax rate is probably over 50%. Saving the $12k in taxable and then donating to a DAF could deliver significant tax savings now vs doing Backdoor Roth and donating that money as cash in retirement.

2. If the $12k were invested in taxable, investing in growth funds make sense to minimize taxable distributions. Annual tax cost would be minimal (~0.2%).

3. With a large taxable account, tax loss harvesting becomes ever more important. The $12k would be much more useful in taxable to offset capital gains if the OP ever wanted to cash out some taxable investments for spending.

4. With such a large taxable account, it’s likely the money will never be spent, ending up passed down to heirs with a stepped up basis. Inherited Roth IRA distributions are taxed on the earnings.

Add it all together and I’d say laziness makes a lot of sense. Especially when we’re talking about 4% of annual savings. If that’s not the definition of “measly”, what is?

"1. The OP’s marginal income tax rate is probably over 50%."
How do you reach a marginal tax rate above 50%?

[RocketShipTech]

These are the two most concerning things I see in your post.

I don't understand the "lazy" bit. How much effort is it, really.

As someone who makes almost as much as OP does, it makes sense to me.

When you’re saving $300k/yr, why bother shifting a measly $12k into tax-advantaged?

I'm struggling to understand why paying additional taxes on an investment "makes sense" to you?

I also don't think of $12k as "measly" but that's me.


Regards,

For very HNW individuals the calculation can be different.

1. The OP’s marginal income tax rate is probably over 50%. Saving the $12k in taxable and then donating to a DAF could deliver significant tax savings now vs doing Backdoor Roth and donating that money as cash in retirement.

2. If the $12k were invested in taxable, investing in growth funds make sense to minimize taxable distributions. Annual tax cost would be minimal (~0.2%).

3. With a large taxable account, tax loss harvesting becomes ever more important. The $12k would be much more useful in taxable to offset capital gains if the OP ever wanted to cash out some taxable investments for spending.

4. With such a large taxable account, it’s likely the money will never be spent, ending up passed down to heirs with a stepped up basis. Inherited Roth IRA distributions are taxed on the earnings.

Add it all together and I’d say laziness makes a lot of sense. Especially when we’re talking about 4% of annual savings. If that’s not the definition of “measly”, what is?

"1. The OP’s marginal income tax rate is probably over 50%."
How do you reach a marginal tax rate above 50%?

The OP has $780k in W2 income.

37% Fed + 11.3% CA + 2.35% Medicare surtax = 50.65%

[retired@50]

4. With such a large taxable account, it’s likely the money will never be spent, ending up passed down to heirs with a stepped up basis. Inherited Roth IRA distributions are taxed on the earnings.

It appears to me that inherited Roth IRA distributions are rarely taxed.

See link: https://fairmark.com/retirement/roth-ac ... -roth-ira/

Regards,

[smitcat]

As someone who makes almost as much as OP does, it makes sense to me.

When you’re saving $300k/yr, why bother shifting a measly $12k into tax-advantaged?

I'm struggling to understand why paying additional taxes on an investment "makes sense" to you?

I also don't think of $12k as "measly" but that's me.


Regards,

For very HNW individuals the calculation can be different.

1. The OP’s marginal income tax rate is probably over 50%. Saving the $12k in taxable and then donating to a DAF could deliver significant tax savings now vs doing Backdoor Roth and donating that money as cash in retirement.

2. If the $12k were invested in taxable, investing in growth funds make sense to minimize taxable distributions. Annual tax cost would be minimal (~0.2%).

3. With a large taxable account, tax loss harvesting becomes ever more important. The $12k would be much more useful in taxable to offset capital gains if the OP ever wanted to cash out some taxable investments for spending.

4. With such a large taxable account, it’s likely the money will never be spent, ending up passed down to heirs with a stepped up basis. Inherited Roth IRA distributions are taxed on the earnings.

Add it all together and I’d say laziness makes a lot of sense. Especially when we’re talking about 4% of annual savings. If that’s not the definition of “measly”, what is?

"1. The OP’s marginal income tax rate is probably over 50%."
How do you reach a marginal tax rate above 50%?

The OP has $780k in W2 income.

37% Fed + 11.3% CA + 2.35% Medicare surtax = 50.65%

There are 4 deductions , 401K deductions and 529 as well.
RSU's are taxable when?

[vfinx]

RSU's are taxable when?

I don't actually follow the logic of this sub-thread anymore, but to try to answer your question, in my case 53% of the RSUs that vest is withheld by my company for taxes, under a "sell to cover" approach.

[RocketShipTech]

RSU's are taxable when?

I don't actually follow the logic of this sub-thread anymore, but to try to answer your question, in my case 53% of the RSUs that vest is withheld by my company for taxes, under a "sell to cover" approach.

Regardless of how much is withheld at first, your RSUs are eventually taxed as regular income using their market value at vesting.

[smitcat]

RSU's are taxable when?

I don't actually follow the logic of this sub-thread anymore, but to try to answer your question, in my case 53% of the RSUs that vest is withheld by my company for taxes, under a "sell to cover" approach.

It did not appear that these were vested or executed stocks based upon your initial statement.
"Partner A Job: $150k
Partner B Job: $230k cash + $400k RSU at current (highly volatile) stock price"
I believed that the current taxes would be based on the income(s) of $380K and be well under the 50% marginal rate.

If total realized income in this year was $380K (no RSU income realized) then the income taxes would be based on the $380K less the 401k's and other deductions. That would leave tax planning for the RSU's for a future date when there could be any number of changes &/or plans.
I am most familiar with planning for RSU and other uniquely timed income by attempting to time other possible deferred income or deductions.

On the other hand if the total of all potential incomes $780K (income plus RSU) were to be taxable in this year but the stocks were unable to be converted to cash there would be $380K cash and a tax liability of say 0.5 of the $780K = $390K
The results would be a negative $10K in cash flow before any 401K deductions and the $150K of living expenses.

[smitcat]

RSU's are taxable when?

I don't actually follow the logic of this sub-thread anymore, but to try to answer your question, in my case 53% of the RSUs that vest is withheld by my company for taxes, under a "sell to cover" approach.

Regardless of how much is withheld at first, your RSUs are eventually taxed as regular income using their market value at vesting.

They did not appear to be vested or sold - please see above post.

[vfinx]

I hold zero vested stock in my company. I've been selling it as it vests.

[smitcat]

I hold zero vested stock in my company. I've been selling it as it vests.

Thank you ....