Newbie advice: Investing 1million in real estate earnings

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Topic Author
reesecup21
Posts: 5
Joined: Wed Aug 04, 2021 2:09 pm

Newbie advice: Investing 1million in real estate earnings

Post by reesecup21 »

I am new to bogleheads and fairly new to investing. My husband and I recently sold our home in Coastal San Diego and made a little over 1m on the sale. While great news, we would love some advice as to how some of you would go about investing.

Ages: 44 and 37.
Emergency fund: 6 months regular savings/checking account.
Debt: 7k truck payment, 1.99%
Married filing jointly
Tax bracet: Fed 24% State CA 9.3%
CA resident
Desired AA: We think an 80/20 allocation would be acceptable risk/reward for us.
Desired International AA: 25-30% (husband likes 25%, I like 30%)
Total portfolio amt: 1.3m
We know that we will owe capital gains on about 200k of profit next tax season.

Husband income: 148k
I am currently stay at home mom
1 child, 7yrs old (no 529 currently. I understand that they are not state tax deductable in CA so unsure if it would be a huge benefit vs just having an account we contribute to monthly that is his.)

Husband: Previous 401k Fidelity Total Market fund (150k),
60% taxable (no 401K/HSA offered through current employer)
40% roth contributions
Wife: trad IRA Target date 2055 ($25,775) (0.15%)
roth IRA Target date 2065 (21k) (0.15%)

Joint taxable brokerage with Vanguard index funds equaling 85k
-Target date 2065 (VLXVX) (15k) (0.15%)
-Wellesley Income (VWIAX) (50k) (0.16%)
-Total international (VTIAX) (10k) (0.11%)
-Dividend appreciation (VDADX) (10k) (0.08%)

Contributions: DCA money from house sale approx 10-20k monthly

Comments:
We have signed an 18m lease for rental so will be renting for that time frame. Will use this renting experience to determine if we can be renters again happily or want to get back into a purchase. Purchase also depends on market at the time. Would not buy under conditions similar to current feeding frenzy that is here in Encinitas, CA.

Taxable account: I am looking into investing heavily in the Target date vs three fund portfolio for simplicity, and buying a sm cap value index fund for spice. Would like opinions on this idea.

His/her Roths: I like REITS for next year in our Roths alongside Target date 2065
Would like opinions on this idea


Questions:
I am wondering if taxable event now from selling undesired index funds is preferable in the long run to having too many funds that are generating unnecessary longterm fees?
Or do we just keep all current funds in taxable since there isn't much in them at this time anyway and push new money into either current Target date or newly purchased Total US market and current Total Internatl?
Does this plan sound diversified enough?

We appreciate the feedback and insights.
-Reese
Last edited by reesecup21 on Thu Aug 05, 2021 11:10 am, edited 2 times in total.
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langelgjm
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Location: India

Re: Newbie advice: Investing 1million in real estate earnings

Post by langelgjm »

Why Target Date 2065, is it just because you want the 90/10 allocation it comes with? Do you also want the glide path? Does that glide path make sense given your other holdings?

Personally I'd probably just go with a combination of VTSAX/VTIAX (or VTWAX, but have the domestic/international component separate may be better in taxable, as it allows you more flexibility to adjust). Keep it 100% equity, this will bring you up to your desired AA of 80/20 quicker. Once you reach your desired AA, you can decide if/where/how to add bonds (I'd probably do it via I bonds and EE bonds, though you could also rebalance in your retirement accounts).

Be sure you are prepared for the tax payment and make any estimated tax payments that are required on time.

Nothing wrong with DCA if that's what you need to do to be comfortable.
"Simplicity is the master key to financial success." - John Bogle | "If I am what I have and if what I have is lost, who then am I?" - Erich Fromm
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Watty
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Re: Newbie advice: Investing 1million in real estate earnings

Post by Watty »

What is your current housing situation and do you have plans to buy another house with the money someday?

If you are not going to use the money to eventually buy a house then what do you expect to use it for?

The reason this is important is that money that will be needed to buy a house in five years would be invested a lot differently than retirement money that will not be needed for decades.
reesecup21 wrote: Wed Aug 04, 2021 6:27 pm ....am looking into investing heavily in the Target date
I am a big fan of target date funds in the right situation but two reasons not to use them are;
1) You do not have good low cost ones in your 401k plan.
2) You have a lot of retirement money in a taxable account so you need to be concerned about the tax efficiency.

https://www.bogleheads.org/wiki/Three-fund_portfolio

https://www.bogleheads.org/wiki/Tax-eff ... _placement

Before I retired my 401k had target date funds with an expense ratio of about 0.75% but it also had some index funds with expense ratios of 0.10%. I just used a three fund portfolio and saved 0.65% a year which make a big difference over the years because of compounding.

You will likely get getter responses if you post your information using this suggested format as a guideline but you do not need to follow it exactly.

viewtopic.php?f=1&t=6212
Topic Author
reesecup21
Posts: 5
Joined: Wed Aug 04, 2021 2:09 pm

Re: Newbie advice: Investing 1million in real estate earnings

Post by reesecup21 »

Thank you both for your responses! I will update the post in a better format. I did see the etiqutte post after I had posted and already tweaked post with forgetten info many times.

I looked into the tax-efficiency of target date and I see what you mean about the three fund approach for better control and tax effiency. I suppose my concern now is selling at a high point to reinvest elsewhere. While I am more on the side of just getting our ducks in a row and not worrying about it again, husband is more concerned about taxable event this year.
Thoughts?

I do all index fund investing so Target date expense is 0.15%, whereas separating VTSAX and VTIAX would equal the same 0.15%. However that does not include bond fund.
I will update post with other requested information for future responses. I very much appreciate your time.
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langelgjm
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Location: India

Re: Newbie advice: Investing 1million in real estate earnings

Post by langelgjm »

I do all index fund investing so Target date expense is 0.15%, whereas separating VTSAX and VTIAX would equal the same 0.15%.
Not really, because the target date fund holds a smaller proportion international vs domestic, but the 0.15% ER applies to the entire fund. Whereas if you hold VTSAX and VTIAX separately, you pay VTIAX's higher ER (which is still only 0.11% for Admiral shares) only on the VTIAX balance.

But these differences are still minimal. The main reason I see to separate into individual funds in a taxable account is the opportunities it offers for rebalancing and tax loss harvesting. Instead of being locked into purchasing whatever ratio comes with a target date fund, I can vary the domestic/international ratio over time to ensure my total portfolio's ratio remains where I want it.

I don't think your current balances in taxable are high enough to bother selling to reinvest in other funds, but that's a personal decision. Certainly consider the tax hit and maybe do it in a future year when the tax hit will be less.

And yes, what is your plan for housing given that you sold but didn't mentioned buying something else or renting?
"Simplicity is the master key to financial success." - John Bogle | "If I am what I have and if what I have is lost, who then am I?" - Erich Fromm
pkcrafter
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Location: CA
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Re: Newbie advice: Investing 1million in real estate earnings

Post by pkcrafter »

Welcome to the forum,

reesecup21 wrote: Wed Aug 04, 2021 6:27 pm I am new to bogleheads and fairly new to investing. My husband and I recently sold our home in Coastal San Diego and made a little over 1m on the sale. While great news, we would love some advice as to how some of you would go about investing.

As mentioned above, we need to know if you are using some/most of the sale money to buy another home.

Current ages 44 and 37.
Husband income 148k, I am currently stay at home mom
1 child 7yrs old
(no 529 currently. I understand that they are not state tax deductable in CA so unsure if it would be a huge benefit vs just having an account we contribute to monthly that is his.)

Information on CA 529 plan


https://finance.zacks.com/california-al ... -3277.html

Married filing jointly
We know that we will owe capital gains on about 200k of profit next tax season.
Emergency fund: 6 months regular savings/checking account.
Debt: 7k truck payment

what is the interest rate on the truck loan?

Tax bracet: Fed 24% State CA 9.3%

Husband: 401k Fidelity Total Market fund (150k), 40% Roth/60% taxable (no 401K/HSA offered through current employer)

Wife: trad IRA Target date 2055 (24K)
roth IRA Target date 2065 (26k)

Joint taxable brokerage with Vanguard equaling 85k.
-Target date 2065 (VLXVX) (15k)
-Wellesley Income (VWIAX) (50k)
-Total international (VTIAX) (10k)
-Dividend appreciation (VDADX) (10k)

The above funds, highlighted in red, and not tax-efficient and should not be used in a taxable account. The TR 2065 fund also has some tax-inefficient bonds, but not much at this time. Watty has already provided a link to tax-efficient fund placement.

I wonder if VTIAX is redundant with the Target date fund and may sell after we both retire. I chose these funds with the best knowledge that I had at the time but have mostly left them alone so I don't trigger a taxable event.

You have to make sure you add up all stock funds to get your correct asset allocation. Another option that might be useful is Vanguard's tax-managed balanced fund (50/50),

https://investor.vanguard.com/mutual-fu ... file/VTMFX


Currently our Wellesley is our largest holding which is 2/3 bonds and so our overall brokerage is conservative 60/40 at this point.
We think an 80/20 allocation would be acceptable risk/reward for us.

I have since been learning from Paul Merriman and am looking into investing heavily in the Target date and buying a sm cap value fund for simplicity.

Over long time periods, the small cap fund may pay off, but in shorter time periods you can have sub-performance with small caps. The returns can be very inconsistent.

I like REITS for next year in our Roths alongside another Target date 2065, not sure if I should also include sm cap value in here as well.

Again, I'm trying for simplicity. While I find all of the information out there interesting and will continue to educate myself, I feel that I know just enough to get myself into trouble and would like a more invest it and forget it strategy. I also am wondering if taxable event is preferable in the long run to having too many funds that are generating unnecessary longterm fees.

I'm not sure what you mean by the above comment.

We were planning to DCA monthy with sizable sums (10-20k) into brokerage account for remainder of the year. We understand the arguement for lump sum investing despite the current valuations, but emotionally we are on the fence with it and I am sure that will get us skewered on this forum :)

From some of your comments, I wonder if you can really be comfortable with an 80/20 portfolio.

Paul

When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
Topic Author
reesecup21
Posts: 5
Joined: Wed Aug 04, 2021 2:09 pm

Re: Investing 1m: Keep current undesired index funds or sell for new desired funds?

Post by reesecup21 »

Thank you langelgjm and pkcrafter for responses. I updated requested information in orignial post.

Pkcrafter: you are not wrong on picking up on 80/20 hesitancy :) It was the middleground for husband and myself. Intellectually I understand being more aggressive for long term growth, but I also want to preserve what we have. This is why I am looking to get all funds set where we are comfortable and only rebalance annually.
I appreciate comment on sm cap value being unpredictable. It's a valid arguement. I liked the thought of greater diversification.
I've read that many internatl large cap stocks are now redundant to US large cap stocks and you are no longer getting the diversification you once were with internatl's.
Perhaps this is worrying above and beyond where I really want to be in finances since simplicity is the goal?
harikaried
Posts: 2613
Joined: Fri Mar 09, 2012 2:47 pm

Re: Newbie advice: Investing 1million in real estate earnings

Post by harikaried »

reesecup21 wrote: Wed Aug 04, 2021 6:27 pmMy husband and I recently sold our home in Coastal San Diego and made a little over 1m on the sale. We know that we will owe capital gains on about 200k of profit next tax season.

Desired AA: We think an 80/20 allocation would be acceptable risk/reward for us.
Desired International AA: 25-30% (husband likes 25%, I like 30%)
Total portfolio amt: 1.3m

401k Fidelity Total Market fund (150k)
trad IRA Target date 2055 (26k)
roth IRA Target date 2065 (21k)

Joint taxable brokerage with Vanguard index funds equaling 85k
-Target date 2065 (VLXVX) (15k)
-Wellesley Income (VWIAX) (50k)
-Total international (VTIAX) (10k)
-Dividend appreciation (VDADX) (10k)
Your current asset allocation overall seems to be…

US stocks: 150k + 26k * .54 + 21k * .54 + 15k * .54 + 50k * .38 + 10k = 213k
Intl stocks: 26k * .36 + 21k * .36 + 15k * .36 + 10k = 32k
Bonds: 26k * .1 + 21k * .1 + 15k * .1 + 50k * .62 = 37k
Cash: 1100k

15% US stocks / 2% Intl stocks / 3% Bonds / 80% Cash
or at a higher level: 17/83 AA

If you want to reach your desired 80/20 AA and 30% international, the dollars allocated should be closer to:
US stocks: $774k
Intl stocks: $332k
Bonds: $276k

One way to get closer to there:
401k: 150k FXNAX (100% bonds = 150k)
trad IRA: 26k VBTLX (100% bonds = 26k)
roth IRA: 21k VTSAX (100% US = 21k)
taxable: 1000k VLXVX (54% US = 540k, 36% Intl = 360k, 10% bonds = 100k) + 185k VTSAX (100% US = 185k)

Here Intl is a little bit more than desired at 32.5%, but as you add money to roth and taxable as VTSAX, the Intl ratio moves towards your desired 30%.
Topic Author
reesecup21
Posts: 5
Joined: Wed Aug 04, 2021 2:09 pm

Re: Newbie advice: Investing 1million in real estate earnings

Post by reesecup21 »

If you want to reach your desired 80/20 AA and 30% international, the dollars allocated should be closer to:
US stocks: $774k
Intl stocks: $332k
Bonds: $276k

One way to get closer to there:
401k: 150k FXNAX (100% bonds = 150k)
trad IRA: 26k VBTLX (100% bonds = 26k)
roth IRA: 21k VTSAX (100% US = 21k)
taxable: 1000k VLXVX (54% US = 540k, 36% Intl = 360k, 10% bonds = 100k) + 185k VTSAX (100% US = 185k)
I love the way you broke this down into some concrete information for me. Incredibly helpful with which funds I could/should put where. I only had a vague understanding that bonds should go into trad IRA, and less tax efficient funds into roth, and that we really to tweak our amounts to reach our AA goal. Thank you! It looks like a great start that would be easy to implement.
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