Portfolio Reset with $1M

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Topic Author
socialforums2019
Posts: 237
Joined: Sun Aug 25, 2019 10:12 am

Portfolio Reset with $1M

Post by socialforums2019 »

I've had a similar thread, but it went off topic.

Looking to get different opinions on best approach on how to reset my portfolio with new allocation of $1M of cash (e.g. $X set aside for EF, $X invested, $X pay down mortgage). I was thinking a 90/10 AA to maximize gains, however with a large mortgage, may want to change that strategy into perhaps 80/20.

Goal is to FIRE in 20 years if possible. Happy to change current accounts as seen fit (e.g. consolidate 401Ks into single, exchange all equity in 401K#1 to bonds, etc.)

If any questions, please let me know. Thank you for your input.

Stats
Age: Mid 30s
Income: ~$220K base + commissions
Federal: 24% - 35% depending on the year
State: 9.3%
Debt: $1M mortgage @ 2.375% (~$1.70M house value)

Portfolio Contributions
401K Max of $19,500 + $7,800 company match

Current Portfolio:
401K #1
$75K - FXAIX - Fidelity 500 Index
$3K - FXNAX - Fidelity US Bond Index

401K #2
$24K - VTBMK - Vanguard Total Bonds
$238K - VLCSP - Vanguard 500 Index

HSA
$5K - FXAIX - Fidelity 500 Index

Roth IRA
$25K - VTSAX - Vanguard Total Stock Market

Taxable
$10K - VTI - Vanguard Total Stock Market
$50K - VASIX - Vanguard LifeStrategy Income Fund

Cash/Emergency Fund
$1M
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David Jay
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Re: Portfolio Reset with $1M

Post by David Jay »

Do you have any idea how good your “balance sheet” looks at your age? You are killing it!

With a 2.375 mortgage, you have options. You don’t need to pay it down because you will get a better return in the market (not if you leave it in cash :( ). On the other hand, paying down a bit will change the amortization schedule and get you to your desired “no mortgage” for FIRE by your mid-50s.

At your income level, I would keep $100,000 in your emergency fund. Put $100,000 on the mortgage, that should take perhaps 7-8 years off the mortgage schedule.

I would put the rest in a taxable account in VTI, it is very tax-efficient. Move as much 401K into bonds as necessary to get to your desired AA.

(LifeStrategy Income is not tax efficient, I would take the one-time capital gains tax and sell that smallish position in VASIX).
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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Wiggums
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Re: Portfolio Reset with $1M

Post by Wiggums »

David Jay wrote: Tue Jun 08, 2021 9:22 am Do you have any idea how good your “balance sheet” looks at your age? You are killing it!

With a 2.375 mortgage, you have options. You don’t need to pay it down because you will get a better return in the market (not if you leave it in cash :( ). On the other hand, paying down a bit will change the amortization schedule and get you to your desired “no mortgage” for FIRE by your mid-50s.

At your income level, I would keep $100,000 in your emergency fund. Put $100,000 on the mortgage, that should take perhaps 7-8 years off the mortgage schedule.

I would put the rest in a taxable account in VTI, it is very tax-efficient. Move as much 401K into bonds as necessary to get to your desired AA.

(LifeStrategy Income is not tax efficient, I would take the one-time capital gains tax and sell that smallish position in VASIX).
+1

Congratulations on your success
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climber2020
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Re: Portfolio Reset with $1M

Post by climber2020 »

socialforums2019 wrote: Tue Jun 08, 2021 7:46 am Looking to get different opinions on best approach on how to reset my portfolio with new allocation of $1M of cash
How did it come about that you have 1 million in cash?

The answer to that will affect what kind of advice you get.
mikejuss
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Re: Portfolio Reset with $1M

Post by mikejuss »

Invest that cash at your preferred asset allocation, OP!
chassis
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Re: Portfolio Reset with $1M

Post by chassis »

@socialforums2019

Set a target number, in dollars, for your FIRE number. Using the "4% rule" is one way to do this, there are others.

Calculate your required total net worth annual return based on the FIRE number and today's net worth.

Live below your means.

Invest aggressively. I like your AA.

You will hit your number and retire early. Go for it.
Topic Author
socialforums2019
Posts: 237
Joined: Sun Aug 25, 2019 10:12 am

Re: Portfolio Reset with $1M

Post by socialforums2019 »

climber2020 wrote: Tue Jun 08, 2021 9:29 am
socialforums2019 wrote: Tue Jun 08, 2021 7:46 am Looking to get different opinions on best approach on how to reset my portfolio with new allocation of $1M of cash
How did it come about that you have 1 million in cash?

The answer to that will affect what kind of advice you get.
The $1M in cash is coming from savings + remaining proceeds after sale of current house
123
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Joined: Fri Oct 12, 2012 3:55 pm

Re: Portfolio Reset with $1M

Post by 123 »

socialforums2019 wrote: Tue Jun 08, 2021 9:45 am The $1M in cash is coming from savings + remaining proceeds after sale of current house
Set aside any amount needed for capital gains taxes on the house after considering any applicable capital gains exclusions. Some states, like California, tax remaining capital gains the same as ordinary income.
The closest helping hand is at the end of your own arm.
Aged Maduro
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Re: Portfolio Reset with $1M

Post by Aged Maduro »

I would take that $1,000,000 and go 100% VTSAX...No guts, no glory.

Seriously, you are doing so well that there is no reason not to swing for the fences. Don't pay off your low rate mortgage and keep maxing out your retirement accounts. Otherwise, stay out of debt. In 20 years you will have more money in your taxable account than you will know what to do with. Enjoy your success.
shess
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Re: Portfolio Reset with $1M

Post by shess »

socialforums2019 wrote: Tue Jun 08, 2021 9:45 am
climber2020 wrote: Tue Jun 08, 2021 9:29 am
socialforums2019 wrote: Tue Jun 08, 2021 7:46 am Looking to get different opinions on best approach on how to reset my portfolio with new allocation of $1M of cash
How did it come about that you have 1 million in cash?

The answer to that will affect what kind of advice you get.
The $1M in cash is coming from savings + remaining proceeds after sale of current house
It's still a little confusing, to me. Let's say it was $500k from savings and $500k remainder from your house sale. In that case, are you comfortable going from a portfolio around 40/60 to 90/10 or even 80/20? That's a huge leap! IMHO, you should make no huge sudden changes like that. Your existing layup might have been too conservative, but nobody gets to where they are without having made many choices in the past. Maybe you can be more aggressive, but you don't want to swing way towards aggressive and then find out that you can't bear it.

Personally, my first step would be to talk to a mortgage broker and see if you'll have any value to getting the mortgage under the conforming cap. They can probably ballpark it in five or ten minutes. Given your tax rate and house value, my guess is you're in an area where the conforming cap is in the $750k or $800k range. I would think twice before getting into an interest-only or short ARM, since that's a LOT of mortgage on your base salary, so I assume you're carrying a lot of it on commissions. If you have a period of lower commissions, you'll be stuck with whatever loan you have at the time.

If the gain from the prior home was, indeed, $500k, then you're taxed on $250k if single, so make sure you've accomodated that tax bill. MFJ raises that limit to $500k, so account for any excess.

Personally, I'm not sure where your 90/10 vs 80/20 argument is coming from WRT the mortgage. Neither option is really going to do much to back you up on the mortgage. If you're going to have that much mortgage, you really need to be looking at your job security. When we carried large mortgages, we had basically %0 into fixed-income, other than our emergency fund, because it seemed silly to borrow money AND lend money (there are various arguments on this in the forums). You probably should have a long period of coverage for mortgage payments tucked into that emergency fund, but that's more of a fixed amount based on months*payment, not a percentage amount based on portfolio size (I suppose it's indirectly a percentage of mortgage size).

Check your 401k to see if they allow "mega backdoor Roth" technique. https://www.bogleheads.org/wiki/After-tax_401(k)
If so, then you should consider laying aside some to replace the $30k or so per year of income that would use. IMHO, "mega backdoor Roth" is almost always a better idea than investing in a taxable account.

As others mentioned, I'd dump the VASIX for VTI. After setting aside a handsome emergency fund, I'd dump most of what's left into VTI. Of course it might fall, if that concerns you split it across four months or something. At your age, I'd probably consolidate the 401k accounts, unless you have specific concerns about your current 401k.
LeslieSmiley
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Re: Portfolio Reset with $1M

Post by LeslieSmiley »

Continue to max out your 401k and IRA

With such low-ish mortgage interest rate, i personally would not pay it off or pay it down.

With a rather long time horizon and if your risk tolerance aligns with a growth centric portfolio, i personally would invest most if not all of them to a low cost index funds like VTSAX, FXAIX or FSKAX assuming that you also maintain an emergency fund that works for your personal situation.
renue74
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Re: Portfolio Reset with $1M

Post by renue74 »

What's your number? I ask this a lot now to my friends. Your number to walk away and do something else....your number to reduce the hours you work. Everybody has a number.

Whatever your number is, don't let it control you. My number controls me. When I was 39, I had what you have...then I bought rental property, private mortgages, etc. in addition to my regular fund investing in vanguard. My number was $3M....I thought that was the number that I would "be happy and retire." But I thought I would hit that in my 50s.....like you...because retiring early meant in your 50s.

We'll I'm 47 and we're at $3.7M. Yet, everyday I look at my net worth and try to do deals to make more money. It's like an addiction.

Don't let it control you. Have a plan for your target number. I never made an IPS and I don't even know if there would be info in an IPS about hitting your number and what you would do.
mikejuss
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Re: Portfolio Reset with $1M

Post by mikejuss »

renue74 wrote: Tue Jun 08, 2021 6:46 pm What's your number? I ask this a lot now to my friends. Your number to walk away and do something else....your number to reduce the hours you work. Everybody has a number.

Whatever your number is, don't let it control you. My number controls me. When I was 39, I had what you have...then I bought rental property, private mortgages, etc. in addition to my regular fund investing in vanguard. My number was $3M....I thought that was the number that I would "be happy and retire." But I thought I would hit that in my 50s.....like you...because retiring early meant in your 50s.

We'll I'm 47 and we're at $3.7M. Yet, everyday I look at my net worth and try to do deals to make more money. It's like an addiction.

Don't let it control you. Have a plan for your target number. I never made an IPS and I don't even know if there would be info in an IPS about hitting your number and what you would do.
No offense meant, but it sounds like you actually need to figure out your own number. Is it $5 million? As you say, wisely, "Don't let it control you."
renue74
Posts: 1886
Joined: Tue Apr 07, 2015 7:24 pm

Re: Portfolio Reset with $1M

Post by renue74 »

mikejuss wrote: Tue Jun 08, 2021 6:49 pm
renue74 wrote: Tue Jun 08, 2021 6:46 pm What's your number? I ask this a lot now to my friends. Your number to walk away and do something else....your number to reduce the hours you work. Everybody has a number.

Whatever your number is, don't let it control you. My number controls me. When I was 39, I had what you have...then I bought rental property, private mortgages, etc. in addition to my regular fund investing in vanguard. My number was $3M....I thought that was the number that I would "be happy and retire." But I thought I would hit that in my 50s.....like you...because retiring early meant in your 50s.

We'll I'm 47 and we're at $3.7M. Yet, everyday I look at my net worth and try to do deals to make more money. It's like an addiction.

Don't let it control you. Have a plan for your target number. I never made an IPS and I don't even know if there would be info in an IPS about hitting your number and what you would do.
No offense meant, but it sounds like you actually need to figure out your own number. Is it $5 million? As you say, wisely, "Don't let it control you."
No worries. I've come to peace that I have "passed" my number and could live comfortably on 3% of $3M for a long time, plus we have rental income. It doesn't mean I fully stopped working. I'm still look for deals...but I don't work as hard.

I think the OP should definitely think about what happens if he/she hits their number before 20 years. Do they stop? Do they adjust their number? Of course life changes...and maybe they have to take care of a relative or child unexpectedly.
mikejuss
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Re: Portfolio Reset with $1M

Post by mikejuss »

renue74 wrote: Tue Jun 08, 2021 7:11 pm
mikejuss wrote: Tue Jun 08, 2021 6:49 pm
renue74 wrote: Tue Jun 08, 2021 6:46 pm What's your number? I ask this a lot now to my friends. Your number to walk away and do something else....your number to reduce the hours you work. Everybody has a number.

Whatever your number is, don't let it control you. My number controls me. When I was 39, I had what you have...then I bought rental property, private mortgages, etc. in addition to my regular fund investing in vanguard. My number was $3M....I thought that was the number that I would "be happy and retire." But I thought I would hit that in my 50s.....like you...because retiring early meant in your 50s.

We'll I'm 47 and we're at $3.7M. Yet, everyday I look at my net worth and try to do deals to make more money. It's like an addiction.

Don't let it control you. Have a plan for your target number. I never made an IPS and I don't even know if there would be info in an IPS about hitting your number and what you would do.
No offense meant, but it sounds like you actually need to figure out your own number. Is it $5 million? As you say, wisely, "Don't let it control you."
No worries. I've come to peace that I have "passed" my number and could live comfortably on 3% of $3M for a long time, plus we have rental income. It doesn't mean I fully stopped working. I'm still look for deals...but I don't work as hard.

I think the OP should definitely think about what happens if he/she hits their number before 20 years. Do they stop? Do they adjust their number? Of course life changes...and maybe they have to take care of a relative or child unexpectedly.
Understood. Most of the people of this board take a dim view of alternative investments, like hedge funds, private equity, and real estate, but it seems like you've done well for yourself with them. Good luck as you close in your number!
Topic Author
socialforums2019
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Re: Portfolio Reset with $1M

Post by socialforums2019 »

Thank you all for your replies. Here is what a proposed plan looks like:

1. Consolidate 401K accounts
2. Exchange $50K of VASIX in Taxable to $50K VTI
3. Of the $1M cash
3a. Keep $100K in cash to act as buffer and EF (Estimated ~10 months EF)
3b. Invest remaining $900K into taxable VTI
4. After completion of above, exchange equities for bonds in 401K account to establish overall portfolio allocation of 80 equities/20 cash&bond balance

Proposed Portfolio:
401K
$163K - FXAIX - Fidelity 500 Index
$177K - FXNAX - Fidelity US Bond Index

HSA
$5K - FXAIX - Fidelity 500 Index

Roth IRA
$25K - VTSAX - Vanguard Total Stock Market

Taxable
$960K - VTI - Vanguard Total Stock Market

Cash/Emergency Fund
$100K

Proposed Contributions:
Max 401K + $8,700 company match
Target minimum $500 monthly contribution into taxable VTI from "excess" income after expenses
Distributions from taxable VTI (estimated $1,000/mo) will be used to fund any additional cash flow requirements for the month. Anything not used that month will be reinvested into taxable VTI.
Contribute excess commissions not used for monthly cash flow into taxable VTI

Based upon the above estimated contributions, my hope is to contribute a minimum of $50K/year into the portfolio.
mikejuss
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Re: Portfolio Reset with $1M

Post by mikejuss »

socialforums2019 wrote: Wed Jun 09, 2021 7:53 am Thank you all for your replies. Here is what a proposed plan looks like:

1. Consolidate 401K accounts
2. Exchange $50K of VASIX in Taxable to $50K VTI
3. Of the $1M cash
3a. Keep $100K in cash to act as buffer and EF (Estimated ~10 months EF)
3b. Invest remaining $900K into taxable VTI
4. After completion of above, exchange equities for bonds in 401K account to establish overall portfolio allocation of 80 equities/20 cash&bond balance

Proposed Portfolio:
401K
$163K - FXAIX - Fidelity 500 Index
$177K - FXNAX - Fidelity US Bond Index

HSA
$5K - FXAIX - Fidelity 500 Index

Roth IRA
$25K - VTSAX - Vanguard Total Stock Market

Taxable
$960K - VTI - Vanguard Total Stock Market

Cash/Emergency Fund
$100K

Proposed Contributions:
Max 401K + $8,700 company match
Target minimum $500 monthly contribution into taxable VTI from "excess" income after expenses
Distributions from taxable VTI (estimated $1,000/mo) will be used to fund any additional cash flow requirements for the month. Anything not used that month will be reinvested into taxable VTI.
Contribute excess commissions not used for monthly cash flow into taxable VTI

Based upon the above estimated contributions, my hope is to contribute a minimum of $50K/year into the portfolio.
Good plan! A few small thoughts: in order to keep your asset allocation on point, you may need to add some bonds to your brokerage account in order to even out your monthly VTI buy. I wouldn't sweat that. I'm also realizing just now that you own a lot of house relative to your base salary.

It looks like you'll reach just about $50,000 per year in contributions ($19,500 + $8,700 + [$500 x 12] + [$1,000 x 12] = $46,200).
dogagility
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Re: Portfolio Reset with $1M

Post by dogagility »

socialforums2019 wrote: Wed Jun 09, 2021 7:53 am Thank you all for your replies. Here is what a proposed plan looks like:
+1
max out HSA and pay for health care expenses out of pocket.
The more flexibility you have the less you need to know what happens next. -- Morgan Housel
marcopolo
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Re: Portfolio Reset with $1M

Post by marcopolo »

socialforums2019 wrote: Tue Jun 08, 2021 9:45 am
climber2020 wrote: Tue Jun 08, 2021 9:29 am
socialforums2019 wrote: Tue Jun 08, 2021 7:46 am Looking to get different opinions on best approach on how to reset my portfolio with new allocation of $1M of cash
How did it come about that you have 1 million in cash?

The answer to that will affect what kind of advice you get.
The $1M in cash is coming from savings + remaining proceeds after sale of current house
Can you be a little more specific?

The reason I ask is that if the bulk of it came from a recent house sale, then your plan seems reasonable.

But, if the bulk of it is from savings, and has been sitting around in cash for a while, then I would question why you suddenly want to go to a 90/10 allocation? Why did you have that much in cash before. I would be concerned you would go back to a lot of cash in a severe market crash. doing more harm than good by going equity heavy now.
Once in a while you get shown the light, in the strangest of places if you look at it right.
ivgrivchuck
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Re: Portfolio Reset with $1M

Post by ivgrivchuck »

My two cents.

I'm in the camp which thinks that having a mortgage and at the same time investing in bonds is crazy, negative arbitrage.

So what I'd do in your shoes is:
- First determine your extended emergency funds to meet any immediate liquidity needs: 100k(?), 150k(?). This you keep in savings account, CDs, I-bonds, treasuries, BND, whatever you prefer.
- Then you divide your money into two piles: First pile goes 100% into stocks. The second pile goes into paying back some of your mortgage.
- Going forward you determine your preferred you stocks/"house equity" ratio, like 50/50. Some of your income goes into stocks and some goes against your house.

Investing into your "mortgage" gives you a guaranteed (zero volatility) 2.4% return. That is pretty hard to beat.
37% VTI | 37% VXUS | 13% I-bonds | 13% EE-bonds
etfan
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Re: Portfolio Reset with $1M

Post by etfan »

dogagility wrote: Wed Jun 09, 2021 4:38 pm max out HSA and pay for health care expenses out of pocket.
Why?

(I'm not the OP but I'm curious).
shess
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Re: Portfolio Reset with $1M

Post by shess »

etfan wrote: Wed Jun 09, 2021 7:31 pm
dogagility wrote: Wed Jun 09, 2021 4:38 pm max out HSA and pay for health care expenses out of pocket.
Why?

(I'm not the OP but I'm curious).
https://www.bogleheads.org/wiki/Health_ ... _of_pocket

Basically, people use it as an additional tax-sheltered plan by paying expenses out of pocket now, and requesting reimbursement in the future. I personally avoided it, since it involves keeping detailed records for potentially decades.
etfan
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Re: Portfolio Reset with $1M

Post by etfan »

shess wrote: Wed Jun 09, 2021 7:33 pm https://www.bogleheads.org/wiki/Health_ ... _of_pocket

Basically, people use it as an additional tax-sheltered plan by paying expenses out of pocket now, and requesting reimbursement in the future. I personally avoided it, since it involves keeping detailed records for potentially decades.
Wow. It never occurred to me that there is no time limit for reimbursements. Thanks for sharing.
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retired@50
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Re: Portfolio Reset with $1M

Post by retired@50 »

etfan wrote: Wed Jun 09, 2021 7:58 pm
shess wrote: Wed Jun 09, 2021 7:33 pm https://www.bogleheads.org/wiki/Health_ ... _of_pocket

Basically, people use it as an additional tax-sheltered plan by paying expenses out of pocket now, and requesting reimbursement in the future. I personally avoided it, since it involves keeping detailed records for potentially decades.
Wow. It never occurred to me that there is no time limit for reimbursements. Thanks for sharing.
You can also use the money in the account to pay for Medicare premiums, etc. once you reach 65 and are on Medicare.
See the Medicare section of the wiki page.

Regards,
This is one person's opinion. Nothing more.
EfficientInvestor
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Location: Alabama

Re: Portfolio Reset with $1M

Post by EfficientInvestor »

Have you read any of the threads on NTSX and the other 90/60 balanced funds? Might be worth consideration for the taxable account.
etfan
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Re: Portfolio Reset with $1M

Post by etfan »

retired@50 wrote: Wed Jun 09, 2021 8:06 pm You can also use the money in the account to pay for Medicare premiums, etc. once you reach 65 and are on Medicare.
See the Medicare section of the wiki page.
The reason it seemed counter-intuitive is because the money you save by using the untaxed HSA money today could be invested. But obviously the flip-side of that is that the HSA money you spend is no longer there, and therefore it can't be invested!

So it's a matter of math: which move gets you more capital gain over the long term.
marcopolo
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Re: Portfolio Reset with $1M

Post by marcopolo »

etfan wrote: Wed Jun 09, 2021 10:08 pm
retired@50 wrote: Wed Jun 09, 2021 8:06 pm You can also use the money in the account to pay for Medicare premiums, etc. once you reach 65 and are on Medicare.
See the Medicare section of the wiki page.
The reason it seemed counter-intuitive is because the money you save by using the untaxed HSA money today could be invested. But obviously the flip-side of that is that the HSA money you spend is no longer there, and therefore it can't be invested!

So it's a matter of math: which move gets you more capital gain over the long term.
You can get the same return (capital gain as you call it) over the long term either way by investing the same way. The benefit of the HSA is that all that growth can be extracted tax-free as long as it is used for qualified medical expenses.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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anon_investor
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Re: Portfolio Reset with $1M

Post by anon_investor »

marcopolo wrote: Thu Jun 10, 2021 4:19 am
etfan wrote: Wed Jun 09, 2021 10:08 pm
retired@50 wrote: Wed Jun 09, 2021 8:06 pm You can also use the money in the account to pay for Medicare premiums, etc. once you reach 65 and are on Medicare.
See the Medicare section of the wiki page.
The reason it seemed counter-intuitive is because the money you save by using the untaxed HSA money today could be invested. But obviously the flip-side of that is that the HSA money you spend is no longer there, and therefore it can't be invested!

So it's a matter of math: which move gets you more capital gain over the long term.
You can get the same return (capital gain as you call it) over the long term either way by investing the same way. The benefit of the HSA is that all that growth can be extracted tax-free as long as it is used for qualified medical expenses.
Plus investing in your HSA instead of taxable reduces dividend tax drag. So over 30 years that can end up being a lot.
Topic Author
socialforums2019
Posts: 237
Joined: Sun Aug 25, 2019 10:12 am

Re: Portfolio Reset with $1M

Post by socialforums2019 »

ivgrivchuck wrote: Wed Jun 09, 2021 6:52 pm My two cents.

I'm in the camp which thinks that having a mortgage and at the same time investing in bonds is crazy, negative arbitrage.

So what I'd do in your shoes is:
- First determine your extended emergency funds to meet any immediate liquidity needs: 100k(?), 150k(?). This you keep in savings account, CDs, I-bonds, treasuries, BND, whatever you prefer.
- Then you divide your money into two piles: First pile goes 100% into stocks. The second pile goes into paying back some of your mortgage.
- Going forward you determine your preferred you stocks/"house equity" ratio, like 50/50. Some of your income goes into stocks and some goes against your house.

Investing into your "mortgage" gives you a guaranteed (zero volatility) 2.4% return. That is pretty hard to beat.
Slightly confused by this advice. Let's say $150K of the $1M is kept in savings account for dual purpose which is monthly cash flow + EF. Of the remaining $850K, you're saying to now split that up into being invested and the other portion to go into making a direct payment into the mortgage? You then want to convert all current bonds into equities so that the only "bonds" I'm holding is the mortgage amount?
dogagility
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Re: Portfolio Reset with $1M

Post by dogagility »

etfan wrote: Wed Jun 09, 2021 10:08 pm
retired@50 wrote: Wed Jun 09, 2021 8:06 pm You can also use the money in the account to pay for Medicare premiums, etc. once you reach 65 and are on Medicare.
See the Medicare section of the wiki page.
The reason it seemed counter-intuitive is because the money you save by using the untaxed HSA money today could be invested. But obviously the flip-side of that is that the HSA money you spend is no longer there, and therefore it can't be invested!

So it's a matter of math: which move gets you more capital gain over the long term.
If you're going to invest the money no matter what and you're already maxing out other tax-advantaged accounts (as the OP is doing), it's a matter of investing in a taxable account or investing in a triple tax-advantaged HSA.

Another aspect of the HSA is this. At age 65, the money can be used for any expense (not just medical) in a manner similar to a tax deferred traditional IRA.

For the wealthy, an HSA is simply a tax advantaged retirement account.
The more flexibility you have the less you need to know what happens next. -- Morgan Housel
ivgrivchuck
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Re: Portfolio Reset with $1M

Post by ivgrivchuck »

socialforums2019 wrote: Thu Jun 10, 2021 6:53 am Slightly confused by this advice.
Firstly, I'm not giving advice (I'm not a licensed financial advisor), I can only tell what I would do in your shoes. Everybody here is responsible for their own decisions and so forth...
Let's say $150K of the $1M is kept in savings account for dual purpose which is monthly cash flow + EF. Of the remaining $850K, you're saying to now split that up into being invested and the other portion to go into making a direct payment into the mortgage? You then want to convert all current bonds into equities so that the only "bonds" I'm holding is the mortgage amount?
The concept is perhaps easiest to explain by an example. Let's forget the emergency fund for a moment. Let's say a person has 1M total net worth, consisting of:
- $500k stocks
- House worth of $700k, but they have $200k mortgage.

This person has $500k stocks, and $500k house equity. So they are maintaining 50/50 stocks/"house equity" portfolio.

Because house equity is more volatile than bonds, a person who without a house would maintain 80/20 stocks/bonds AA, might choose 50/50 stocks/"house equity" AA.

Now if a person has a large extended emergency fund, it makes sense to pool that together with the house equite. Example:
- $500k stocks
- House worth of $700k, but they have $200k mortgage.
- $100k bonds for liquidity

This person has $500k stocks, and ($500k house equity + 100k liquididity fund), so it's $500k/$600k, so they are maintaining roughly 45/55 stocks/"house equity" AA.
37% VTI | 37% VXUS | 13% I-bonds | 13% EE-bonds
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firebirdparts
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Re: Portfolio Reset with $1M

Post by firebirdparts »

I think it's kind of hard to give any reasonable argument against 100% stocks with no safety net whatsoever. If you earn 220k a year, you won't need an emergency fund. Just don't spend all your money on chewing gum and your biggest concern will be where to pile the money.
A fool and your money are soon partners
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socialforums2019
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Re: Portfolio Reset with $1M

Post by socialforums2019 »

ivgrivchuck wrote: Thu Jun 10, 2021 11:13 am The concept is perhaps easiest to explain by an example. Let's forget the emergency fund for a moment. Let's say a person has 1M total net worth, consisting of:
- $500k stocks
- House worth of $700k, but they have $200k mortgage.

This person has $500k stocks, and $500k house equity. So they are maintaining 50/50 stocks/"house equity" portfolio.

Because house equity is more volatile than bonds, a person who without a house would maintain 80/20 stocks/bonds AA, might choose 50/50 stocks/"house equity" AA.

Now if a person has a large extended emergency fund, it makes sense to pool that together with the house equite. Example:
- $500k stocks
- House worth of $700k, but they have $200k mortgage.
- $100k bonds for liquidity

This person has $500k stocks, and ($500k house equity + 100k liquididity fund), so it's $500k/$600k, so they are maintaining roughly 45/55 stocks/"house equity" AA.
Doesn't stock need to reduce by the mortgage amount to get the correct allocation?

For example, if we take my proposed portfolio below, you're looking at

Stocks: $1.15M (sum of stocks)
House: $877K (House equity of $700K + selling bonds in portfolio to pay down mortgage, increasing equity by another $177K)

So with the above, I'm at 57% stocks / 43% house allocation but I still have a $1M loan. If s*** hits the fan and I need to pay off that $1M mortgage, well now everything shift drastically to all house basically.

Proposed Portfolio:
401K
$163K - FXAIX - Fidelity 500 Index
$177K - FXNAX - Fidelity US Bond Index

HSA
$5K - FXAIX - Fidelity 500 Index

Roth IRA
$25K - VTSAX - Vanguard Total Stock Market

Taxable
$960K - VTI - Vanguard Total Stock Market

Cash/Emergency Fund
$100K
ivgrivchuck
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Re: Portfolio Reset with $1M

Post by ivgrivchuck »

socialforums2019 wrote: Fri Jun 11, 2021 8:03 am
ivgrivchuck wrote: Thu Jun 10, 2021 11:13 am The concept is perhaps easiest to explain by an example. Let's forget the emergency fund for a moment. Let's say a person has 1M total net worth, consisting of:
- $500k stocks
- House worth of $700k, but they have $200k mortgage.

This person has $500k stocks, and $500k house equity. So they are maintaining 50/50 stocks/"house equity" portfolio.

Because house equity is more volatile than bonds, a person who without a house would maintain 80/20 stocks/bonds AA, might choose 50/50 stocks/"house equity" AA.

Now if a person has a large extended emergency fund, it makes sense to pool that together with the house equite. Example:
- $500k stocks
- House worth of $700k, but they have $200k mortgage.
- $100k bonds for liquidity

This person has $500k stocks, and ($500k house equity + 100k liquididity fund), so it's $500k/$600k, so they are maintaining roughly 45/55 stocks/"house equity" AA.
Doesn't stock need to reduce by the mortgage amount to get the correct allocation?
Not in the model I'm using.
So with the above, I'm at 57% stocks / 43% house allocation but I still have a $1M loan. If s*** hits the fan and I need to pay off that $1M mortgage, well now everything shift drastically to all house basically.
That's true. Anyone who takes out a big mortgage is entering a highly leveraged position (that is more volatile than 100% stock AA without a mortgage).

- That's why some propose that one should pay back the mortgage as quickly as possible (and not invest in stocks at all while doing that) to reduce the leverage. The problem is that then one is forced to stay out from the stock market for 10-20 years which drastically increases one's sequence of return risk.

- Some propose that one should simply ignore one's mortgage and invest their portfolio like the mortgage wasn't there. That is of course a possibility, but these people may not realize that they are effectively investing with a heavy leverage and may not realize the risks until they materialize (s*** hits the fan as you said).

- The model I'm proposing is a simple compromise where one tries to balance the need to get exposure to stock market and at the same time try to deleverage at a reasonable schedule. It's a practical model, I'm not arguing for mathematical optimality or anything along those lines.
37% VTI | 37% VXUS | 13% I-bonds | 13% EE-bonds
EfficientInvestor
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Location: Alabama

Re: Portfolio Reset with $1M

Post by EfficientInvestor »

firebirdparts wrote: Thu Jun 10, 2021 12:34 pm I think it's kind of hard to give any reasonable argument against 100% stocks with no safety net whatsoever.
I think a risk parity portfolio with a similar volatility target as 100% stocks would be a reasonable argument.
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