Portfolio for FIRE

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Topic Author
firenerd
Posts: 4
Joined: Sun May 02, 2021 5:40 pm

Portfolio for FIRE

Post by firenerd »

Emergency funds: Yes

Debt: 600K @ 2.375 Primary mortgage, 400K @ 3% rental mortgages

Tax Filing Status: Married Filing Jointly

Tax Rate: 37% Federal, 11.3% State

State of Residence: CA

Age: 44

Desired Asset allocation: 65 stocks 35 bonds
Desired International allocation:Don't know need help

Current retirement assets

Taxable
cash 650K (sold lot of stocks)
fund name - no funds
stock 1.2M (various plus company stocks)
Crypto - 120K

His 401k
350K - (target retirement fund)

His Traditional IRA
240K (multiple stocks)

Her 401K
250K (target retirement fund)

Her Roth IRA
22K (multiple stocks)

Her Traditional IRA
55K (multiple stocks)

Real Estate Rentals
Total Debt : 400K
Total Cashflow : $1200/mo

Questions:
1. Need portfolio strategy, assuming a 65-35 stock bond mix, fund recommendations

2. How does pre-tax and post tax $ affect above portfolio strategy ? What funds should go in pre-tax and what post tax assuming full flexibility ?

3. For FIRE what's the income that can be generated with this mix

4. Do folks here recommend selling all stocks even the big winners over years and swap with VTI kind of investments ?
Bear906
Posts: 39
Joined: Fri Mar 12, 2021 1:07 am

Re: Portfolio for FIRE

Post by Bear906 »

1. We'd have to know what target date funds you're using to determine what asset allocation you're presently holding.

2. Ideally, you would fill up Roth IRA accounts with the assets you expect to grow the most over time: individual stocks and stock mutual funds/ETFs. Generally speaking, bond funds and other fixed-income investments intended for retirement savings belong in your 401k and Traditional IRAs.

3. Not knowing which target date funds and individual stocks you're holding makes it impossible to determine where you stand at this point and time.

4. The recommended approach here is to use low-cost, broadly diversified index funds for your portfolio's equities position(s). But, you already have a substantial portfolio of individual stocks. Liquidating them first thing tomorrow morning and using the proceeds to acquire shares of VTI may be the WRONG thing to do. As we gather more information about your particular situation, a sensible action plan for you will become apparent.
Retirement: 48% WFSPX/SWPPX 12% BDOKX 40% PRRIX -- Other Needs: 25% SCHG 75% SCHR
chipperd
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Joined: Sat Sep 24, 2011 5:58 am
Location: here and now

Re: Portfolio for FIRE

Post by chipperd »

First, welcome. You will find you will answers to questions you didn't ask here on Bogleheads. Let me be the first to take that tact :happy

First thing that stands out to me:
Real Estate Rentals
Total Debt : 400K
Total Cashflow : $1200/mo

Huh?

Rental debt: $400,000 @3%
Income from that rental: $14,400/yr.
$14,400/$400,000 in debt=3.6% gross profit. 3.6%-3% to service the debt means you make .6% gross on that debt, which is about what you could get at most online banks, but you have the added hassle factor you aren't getting paid for and you need to pay to maintain those properties.
I Bonds are at 3.6% for doing nothing.
The reality is, since you didn't list the value of that rental, we can't know what you are actually netting out on that property, but I would bet it's a negative number since maintenance isn't even in this discussion.
Meaning you are paying for and maintaining properties rather than those properties paying you.
That's a real drag on your attempts to reach F.I. and not the way being a landlord is supposed to work.
Dump the rentals.

I couldn't see past that to get to the rest.
"A portfolio is like a bar of soap, the more it's handled, the less there is." Dr. William Bernstein
Huskies26
Posts: 15
Joined: Fri Jan 20, 2017 9:43 am

Re: Portfolio for FIRE

Post by Huskies26 »

What is the purpose of holding 650k cash when you have a mortgage?

I assume you will have to withhold some of that for taxes, however paying off 400k @ 3% is a guaranteed $12k annual return compared to $0 leaving as cash.

I believe most here would not support taking the risk of retiring early with a mortgage.
chipperd
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Location: here and now

Post by chipperd »

I think retiring early with a mortgage is a very individual situation as to whether it makes sense financially and psychologically.
We (wife and I) are FI with a mortgage and work very part time by choice. We keep the mortgage b/c, we can earn the same on our cash relative to the mortgage rate, and like the sequence of returns risk reduction along with the flexibility of having cash on hand (ie: Gonna buy some I Bonds today).
Given the OP's income on those rentals, I wouldn't pay those off as they are terrible investments as I noted above.
OP: Sell the rentals
At any rate, OP needs to provide much more info for anyone to come close to making a solid rec for the questions posed.
"A portfolio is like a bar of soap, the more it's handled, the less there is." Dr. William Bernstein
Topic Author
firenerd
Posts: 4
Joined: Sun May 02, 2021 5:40 pm

Re: Portfolio for FIRE

Post by firenerd »

Sorry if this caused confusion, but when I said Rentals 1200/mo that is cashflow as in net cash in hand after mortgage/insurance etc. all expenses.
I had paid the downpayment (around 150K) earlier and now am netting this amount along with the fact that tenant is paying my mortgage.
For the 401K question its all target retirement fund from fidelity 2040 retirement as of now, don't know the ticker but essentially as I said I can buy VTI if i want to in all of 401K.

Also I sold lot of stocks lately for the cash and was not holding this for years. I don't want to pay off mortgages since both are at such a low rate heck even i bonds today beat them, there has to be better investments.
Bear906
Posts: 39
Joined: Fri Mar 12, 2021 1:07 am

Re: Portfolio for FIRE

Post by Bear906 »

chipperd wrote: Mon May 03, 2021 4:31 am First, welcome. You will find you will answers to questions you didn't ask here on Bogleheads. Let me be the first to take that tact :happy

First thing that stands out to me:
Real Estate Rentals
Total Debt : 400K
Total Cashflow : $1200/mo

Huh?

Rental debt: $400,000 @3%
Income from that rental: $14,400/yr.
$14,400/$400,000 in debt=3.6% gross profit. 3.6%-3% to service the debt means you make .6% gross on that debt, which is about what you could get at most online banks, but you have the added hassle factor you aren't getting paid for and you need to pay to maintain those properties.
I Bonds are at 3.6% for doing nothing.
The reality is, since you didn't list the value of that rental, we can't know what you are actually netting out on that property, but I would bet it's a negative number since maintenance isn't even in this discussion.
Meaning you are paying for and maintaining properties rather than those properties paying you.
That's a real drag on your attempts to reach F.I. and not the way being a landlord is supposed to work.
Dump the rentals.

I couldn't see past that to get to the rest.
That waved a red flag to me as well. But, we don't know the whole story here. Perhaps the OP owes $400K on properties with a value of $2M in an area where values are appreciating at a good clip, and stands to make a tidy profit when the properties are liquidated. They're in California, after all. It's very possible.
Retirement: 48% WFSPX/SWPPX 12% BDOKX 40% PRRIX -- Other Needs: 25% SCHG 75% SCHR
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willthrill81
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Location: USA

Re: Portfolio for FIRE

Post by willthrill81 »

65/35 is a little light on stocks for a FIRE portfolio since it will need to potentially last 50+ years, but it's within the realm of plausibility.

For the stock/bond portion of your portfolio, you should plan on a withdrawal rate around 3-3.5% of the starting balance. If your portfolio performs well, you can slowly increase that as time goes on.

Don't let the 'tax tail wag the investment dog'. Figure out what you want your AA to be and then figure out where you should put each piece of the portfolio.

I agree with others that it seems that your rentals are not good investments. You're only netting 3.6% of the market value each year. That's so low that I would strongly urge you to consider selling them immediately. If the market turns at all, you could be facing big losses.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
LeftCoastIV
Posts: 324
Joined: Wed May 01, 2019 7:19 pm

Re: Portfolio for FIRE

Post by LeftCoastIV »

You may want to try firecalc.com to answer your question on the viability of your portfolio to support FIRE. Cfiresim.com is another solid option. Play around with scenarios to see the impacts (retirement age, expenses, asset allocation, etc).
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JonL
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Location: San Diego, CA
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Re: Portfolio for FIRE

Post by JonL »

firenerd wrote: Mon May 03, 2021 1:07 am
Debt: 600K @ 2.375 Primary mortgage, 400K @ 3% rental mortgages

Desired Asset allocation: 65 stocks 35 bonds
Kitces wrote a good piece about holding bonds in your portfolio while also holding debt.

https://www.kitces.com/blog/why-is-it-r ... -mortgage/

Enjoy!

EDIT: TL;DR Micahel argues that holding bonds may not make sense if you're holding debt. Instead, it makes more sense to prepay that debt, he says.
Jon Luskin, MBA, CFP® | Advice-Only is the New Fee-Only
Grt2bOutdoors
Posts: 23595
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Portfolio for FIRE

Post by Grt2bOutdoors »

chipperd wrote: Mon May 03, 2021 4:31 am First, welcome. You will find you will answers to questions you didn't ask here on Bogleheads. Let me be the first to take that tact :happy

First thing that stands out to me:
Real Estate Rentals
Total Debt : 400K
Total Cashflow : $1200/mo

Huh?

Rental debt: $400,000 @3%
Income from that rental: $14,400/yr.
$14,400/$400,000 in debt=3.6% gross profit. 3.6%-3% to service the debt means you make .6% gross on that debt, which is about what you could get at most online banks, but you have the added hassle factor you aren't getting paid for and you need to pay to maintain those properties.
I Bonds are at 3.6% for doing nothing.
The reality is, since you didn't list the value of that rental, we can't know what you are actually netting out on that property, but I would bet it's a negative number since maintenance isn't even in this discussion.
Meaning you are paying for and maintaining properties rather than those properties paying you.
That's a real drag on your attempts to reach F.I. and not the way being a landlord is supposed to work.
Dump the rentals.

I couldn't see past that to get to the rest.
You should not compare fixed rate debt financing a real property to that of a floating rate instrument where you have obvious restrictions- inability to purchase as much as you like and inability to gauge future rates of return. The I bond rate is set on the six month change in CPI-U. The OP controls the rate of return to some extent on his rental by the rate charged for the property. If inflation heats up the fixed rate debt cost will be inflated away, possibly. The implicit return is both cash earned and the cash used to pay the mortgage. OP, how much is your monthly mortgage payment? What is the underlying equity in the property?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Topic Author
firenerd
Posts: 4
Joined: Sun May 02, 2021 5:40 pm

Re: Portfolio for FIRE

Post by firenerd »

There are multiple properties in it bought different times, total mortgage payment is 1800/month and total rents is 4000/month, I mentioned 1200/mo net cashflow since out of 4K/month i need to pay mortgage 1800/mo, property taxes/insurance/property management/expenses etc. netting around 1000/month leaving 1200 as free cashflow. The return if way better if you look at how much down, my total downpayment is ~150K and netting 1200/mo = 14K plus the fact tenant pays my mortgage so its like 10% rate of return.

Do people here recommend selling all stocks and putting in VTI ? I did not get any fund recommendations yet ? What about stocks that have been multi-bagger (tsla) with lot less cost basis, is it recommended to sell these too and put in funds ? If not whats an individual stock/mutual or index fund or etf allocation mix that folks have in their portfolio.
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willthrill81
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Re: Portfolio for FIRE

Post by willthrill81 »

firenerd wrote: Mon May 03, 2021 4:40 pm There are multiple properties in it bought different times, total mortgage payment is 1800/month and total rents is 4000/month, I mentioned 1200/mo net cashflow since out of 4K/month i need to pay mortgage 1800/mo, property taxes/insurance/property management/expenses etc. netting around 1000/month leaving 1200 as free cashflow. The return if way better if you look at how much down, my total downpayment is ~150K and netting 1200/mo = 14K plus the fact tenant pays my mortgage so its like 10% rate of return.
The only 'guaranteed' sources of return on these properties are your free cash flow and the principal portion of the P&I being paid for by the gross rents. If you took out 30 year mortgages any time within the last five years or so, the amount going toward principal is very low. 15 years into a 30 year mortgage, the principal is only reduced by about 25%. So your gross return on the market value of the property isn't close to 10%. Your cash on cash return might be that high or even higher, but that's highly leveraged and could easily turn the other way if the property fell in value at all.

Regarding funds, U.S. TSM and ex-U.S. TSM are widely espoused. Active funds, even those with good track records, are widely eschewed because that has not been a good predictor at all of future performance. If you want to get 'fancier' with your stocks, consider factor investing with funds (e.g., SCV).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
chipperd
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Joined: Sat Sep 24, 2011 5:58 am
Location: here and now

Re: Portfolio for FIRE

Post by chipperd »

Bear906 wrote: Mon May 03, 2021 1:34 pm
chipperd wrote: Mon May 03, 2021 4:31 am First, welcome. You will find you will answers to questions you didn't ask here on Bogleheads. Let me be the first to take that tact :happy

First thing that stands out to me:
Real Estate Rentals
Total Debt : 400K
Total Cashflow : $1200/mo

Huh?

Rental debt: $400,000 @3%
Income from that rental: $14,400/yr.
$14,400/$400,000 in debt=3.6% gross profit. 3.6%-3% to service the debt means you make .6% gross on that debt, which is about what you could get at most online banks, but you have the added hassle factor you aren't getting paid for and you need to pay to maintain those properties.
I Bonds are at 3.6% for doing nothing.
The reality is, since you didn't list the value of that rental, we can't know what you are actually netting out on that property, but I would bet it's a negative number since maintenance isn't even in this discussion.
Meaning you are paying for and maintaining properties rather than those properties paying you.
That's a real drag on your attempts to reach F.I. and not the way being a landlord is supposed to work.
Dump the rentals.

I couldn't see past that to get to the rest.
That waved a red flag to me as well. But, we don't know the whole story here. Perhaps the OP owes $400K on properties with a value of $2M in an area where values are appreciating at a good clip, and stands to make a tidy profit when the properties are liquidated. They're in California, after all. It's very possible.
Absolutely possible and if so, all the more reason to sell, sell, sell.
"A portfolio is like a bar of soap, the more it's handled, the less there is." Dr. William Bernstein
Topic Author
firenerd
Posts: 4
Joined: Sun May 02, 2021 5:40 pm

Re: Portfolio for FIRE

Post by firenerd »

Please read my subsequent replies, the 3.6% gross profit calculation is totally flawed
chipperd
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Re: Portfolio for FIRE

Post by chipperd »

firenerd wrote: Mon May 03, 2021 7:22 pm Please read my subsequent replies, the 3.6% gross profit calculation is totally flawed
Yup, just did. Garbage in garbage out I guess. Thanks for the corrected info.
"A portfolio is like a bar of soap, the more it's handled, the less there is." Dr. William Bernstein
Sasquatch1
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Joined: Tue Feb 18, 2020 9:19 am

Re: Portfolio for FIRE

Post by Sasquatch1 »

chipperd wrote: Tue May 04, 2021 5:59 am
firenerd wrote: Mon May 03, 2021 7:22 pm Please read my subsequent replies, the 3.6% gross profit calculation is totally flawed
Yup, just did. Garbage in garbage out I guess. Thanks for the corrected info.
He only had 150k to put down. Which is what he’d have had to put in the bond at 3.6%

He’d only get 3.6% on 150

By your math he’s getting 3.6% on 400k while only spending 150k

I don’t think his properties are the best deals myself but idk his market, however I don’t think they as bad as you imply. However bad tenants can Wipe away any profit.

We also not accounting for some appreciation which hed get on the fully value while only out of pocket 150.

He also gets the depreciation tax write off of around 16k yr
Exchme
Posts: 363
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Re: Portfolio for FIRE

Post by Exchme »

What an odd mix in your portfolio - tons of cash, mixed with mortgaged real estate, individual stocks and even crypto. Definitely not a Boglehead portfolio. This site recommends you set your bond/stock allocation per your risk tolerance, and buy a total bond fund for the bonds and a total stock fund for the stocks. Many people advise holding some International too, though that subject is much debated and never resolved.

Holding individual stocks is not a great idea as even great companies can have bad stock performance if the stock price got bid up too high. In your IRAs and Roths where there would be no tax consequences to shift, so I would certainly get out of individual stocks, load the tax deferred accounts with a bond fund, and the Roths with a stock fund.

Like others, I don't see the value of your real estate investment. Being a landlord is a lot of risk and means a lot of headaches. A roof, air conditioner, foundation issue, etc. could wipe out a year's profit, or you might have a tenant problem or the neighborhood could devalue. Unless you are in a hot market where you are getting price appreciation, I would just get rid of the risk and headache.

I would not sell the stocks in your taxable account while you are working, that is just asking to pay extra taxes, but deploy the cash into stock and bond funds and quit buying individual stocks. Then as you need cash in retirement, sell the individual stocks first.

As for crypto, it's purely speculative and very risky, you might get rich, do OK, or get wiped out, but there's no way to quantify the risk/reward, so certainly limit this to a small part of your portfolio as your "play" money and take profits off the table if you get them. You could be right that it will change the world, but too early or wrong on which ones to buy.

With every technology revolution, there are far more losers than winners and it's never apparent ahead of time which is which. At the risk of sounding like the out of touch boomer that I am, starting in the early 80's, VHS tapes took off and Blockbuster was king, then everyone could see that PCs would change the world and the Commodore 64 was huge. Later word processors like WordPerfect held the early lead in their field, while Lotus123 dominated spreadsheets. The early internet investors bid up AOL to the moon as it was the popular site, CompUSA was the hot retailer, Netscape the big browser, Yahoo! was big on search. The Palm Pilot became the hot personal data assistant and Palm also had the best early smartphone with their Treo. So you can be right on the macro story and still eventually be very wrong with your money. That's why holding the total market works, it holds things in proportion to the value known at the time, with winners increasing their share and losers fading away.
googly_moogly
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Re: Portfolio for FIRE

Post by googly_moogly »

firenerd wrote: Mon May 03, 2021 4:40 pm I did not get any fund recommendations yet ?
You likely won't until you follow the rest of the recommended format for reporting Current Retirement Assets and Available Funds: viewtopic.php?f=1&t=6212

Folks like to see what funds and expense ratios are available in your 401ks, the actual stocks you're currently invested in, etc.

For brokerage accounts, you'll get general advice of "Quality total market funds with lowest expense ratios" and "View all your investments as one large account which should match your asset allocation" and "No bonds in taxable because they're not tax efficient". Everything else (e.g., mutual fund vs ETF) is second or third order.
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