Recently Paid Off School Loan - Millennial Couple Seeking Advice & Guidance

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cj2018
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Recently Paid Off School Loan - Millennial Couple Seeking Advice & Guidance

Post by cj2018 » Wed Jun 13, 2018 2:15 pm

Hi BHs,

Discovered the site earlier this year and have been lurking on the forum for the past few months. it's been tremendously helpful to read and absorb all the valuable investment knowledge/information here. It's amazing folks who's been through boom/bust cycles are willing to share their wisdom about the market and shed light on the pitfalls/missteps of conventional investment traps etc, all for free!. For those are who are willing to listen and execute, these are essentially advice/guidance that would help younger generations like myself better manage/plan our finances and stay years ahead of the curve. So I'm thankful a community like this exists and appreciate all your generosity and contribution. I certainly look forward to being engaged with the community going forward and actively contributing to its on-going success!

Now, let's talk about personal investments and before i get to my questions, below is a quick scan of our financial picture per forum guidance:

Emergency funds: Three months of expenses in checking acct.
Debt:
  • Student Loan: We paid off the $100K bschool loan i had since 2014 earlier this year. DW went through her phd debt free.
  • Mortgage: $720k, 7/1 ARM at 3%. We have 29 yrs and 8 months left on the mortgage. Monthly payment (PITI) around $4k.
  • CC/Car Debt: paid off car and CC balance paid off full every month
Tax Filing Status: Married Filing Jointly
Tax Rate: 32% Federal, 0% State
State of Residence: WA
Age: both 28
Desired Asset allocation: 100% stocks / 0% bonds
Desired International allocation: 0% of stocks


Current Investable Assets (combined):

Tax-Advantaged:
  • 401K: $25k in VFFSX (Vanguard 500 Index Fund Institutional). Both our 401k plan have the same fund.
  • IRAs: $0
Taxable:
  • Vanguard Joint: $55k in VFIAX (Vanguard 500 Index Fund Admiral)
  • Company RSUs: $180k granted and vesting at 4-yr schedule
  • Private Equity: $120k at the latest valuation..i will get back to this one shortly
Contributions

Tax-Advantaged:
  • 401K: We are currently maxing out both of ours starting in 2018 and planning to do so for as long as we have our W-2 jobs. Previously we didn't contribute due to student loan and saving for house downpayment
  • IRAs: $0 due to phase-out limit
Taxable:
  • Vanguard Joint: $6k/month in VFIAX (Vanguard 500 Index Fund Admiral)
Expenses

Our total expenses, excluding mortgage, have averaged $2k-$2.5k/month since beginning of 2018. I only started tracking this after paying off my student loans. I expect expenses go up once we have our first kid in 1-2 years time frame but DW and I are both frugal in nature so we intend not to let our random expenses creep into our savings during the wealth accumulation stage of our life.

Questions:
1. Any criticisms/comments/suggestions on our current investment strategy and overall financial health? My main objective is to ensure i'm having the right mindset and blueprint towards managing our finances that will set my family up for long-term success.

2. The long-term vision we have is to FI as soon as we reasonably could so we both could focus on family, health and entrepreneurial endeavors. We are working hard to try to achieve investable assets of 25x - 30x living expenses in 7-10yr timeline so we could get out of the corporate grind ASAP and embark on entrepreneurship while relying on our portfolio to cover basic needs. My personal career objective is to either take over a small-cap business ($10M-$100M in EBIDA) or start my own VC-backed tech business so having a safety net so my family don't end up living on the street and starve while i take that risk is essential to me. Having this context in mind, do you think if we are on the right track or whatever would you do differently to optimize our finances?

3. I invested $25k back in 2015 in a private deal and the business has been doing well and recently raised a healthy amount of institutional capital and prominent angels (household names) that valued my stake at $120k, ish. I plan to liquid some if not all of them and the objective is to use the proceeds to purchase income-generating RE or index funds. However, the caveat is that the nature of PE/VC stake is highly illiquid and it's not like i can push a button and sell it on the open market! So, i was hoping if any BHs have experience selling private shares before a public exit, and any suggestion on how to think about it overall. Should i talk to a broker that specialize in secondary transaction or possibly reach out to other existing investors and see if they are interested in picking up the shares? Any guidance would be immensely appreciated. Thanks.

Again, thanks in advance for any guidance. I look forward to any comments and also engaging with the community going forward! Thanks.
Last edited by cj2018 on Wed Jun 13, 2018 2:50 pm, edited 1 time in total.

delamer
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Re: Recently Paid Off School Loan - Millennial Couple Seeking Advice & Guidance

Post by delamer » Wed Jun 13, 2018 2:36 pm

Let’s say you could meet basic needs with $100K year, in today’s dollars and including income taxes, in 10 years.

Have you actually figured out how much you need to save, assuming a couple different returns on your portfolio, to meet that goal?

At your age, I’d use a multiple of at least 33X expenses and probably higher — like 40X. The 25X or 30X is appropriate for a 30 year retirement, not FIRE at 35.

So I’d argue that you need about $4 million — in today’s dollars — to meet your goal in 10 years. If you went with 33X, then it is $3 million in today’s dollars.

It is fine to be all stocks at your ages, but why exclusively in the S&P 500? Why not add small cap and international stocks into the mix?
Last edited by delamer on Wed Jun 13, 2018 2:43 pm, edited 1 time in total.

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Pajamas
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Re: Recently Paid Off School Loan - Millennial Couple Seeking Advice & Guidance

Post by Pajamas » Wed Jun 13, 2018 2:39 pm

Looks like you are doing well. I agree that you might go with a total stock market fund rather than the S&P500 if you have good choices.

Congratulations on paying off the $100k student loan in four years. That means that you now can direct that $25k+ a year into investments and not even miss it. If you're working towards early financial independence, the last thing you want is lifestyle inflation.

cj2018
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Joined: Tue Jun 12, 2018 3:49 pm

Re: Recently Paid Off School Loan - Millennial Couple Seeking Advice & Guidance

Post by cj2018 » Wed Jun 13, 2018 3:10 pm

delamer wrote:
Wed Jun 13, 2018 2:36 pm
Let’s say you could meet basic needs with $100K year, in today’s dollars and including income taxes, in 10 years.

Have you actually figured out how much you need to save, assuming a couple different returns on your portfolio, to meet that goal?

At your age, I’d use a multiple of at least 33X expenses and probably higher — like 40X. The 25X or 30X is appropriate for a 30 year retirement, not FIRE at 35.

So I’d argue that you need about $4 million — in today’s dollars — to meet your goal in 10 years. If you went with 33X, then it is $3 million in today’s dollars.

It is fine to be all stocks at your ages, but why exclusively in the S&P 500? Why not add small cap and international stocks into the mix?
Thanks delamer. Perhaps using the term 'FIRE' wasn't the best choice. I've edited my origin post to use the term "FI" to more accurately reflect the objective since we don't plan to not generate income after FI. We simply desire to transition from earned-income to passive-income to eventually a combo of passive-income and business-profit.

I've actually crunched the number and at a current contribution rate of $3.5k/month in 401k and $6k/month in Vanguard, and assuming a nominal return of 8%, we can most likely cross $1M in investable amount by 35, which assuming a 2% inflation rate and 2% dividend yield, get us a nominal yield of 4% without touching principle. I can't really predict what our future expenses will look like given all the unknowns, but the benefit i'd like to obtain from the portfolio after age 35 or 37 is to ensure i can quit my corporate job and not worry about living on the street while pursuing my real productive interests. In this case, would 25x - 30x still be an appropriate metric to look at assuming the household plans to continue earn income but perhaps not as much as 2 W-2 incomes?

Regarding the AA to 100% S&P500, my rationale was s&p500 gives me enough diversification at low ER and its dead-simple enough for me just to track a 1-portflio performance on a more frequent basis. I believe i understand the value of small cap and international into the mix, but i'm not 100% sold on how efficient they are from a practical manner considering the longevity of my investment horizon and if the net return does make a statistically significance over a long period of time. I guess the idea of having partial equity ownership of the largest 500 companies in the U.S. is good and simply enough for me mentally, but i haven't really looked much into the data for a more complex mix. And i actually worked at DFA as an investment professional for sometime and i still don't fully understand the value/small cap tilt!

cj2018
Posts: 109
Joined: Tue Jun 12, 2018 3:49 pm

Re: Recently Paid Off School Loan - Millennial Couple Seeking Advice & Guidance

Post by cj2018 » Wed Jun 13, 2018 3:20 pm

Pajamas wrote:
Wed Jun 13, 2018 2:39 pm
Looks like you are doing well. I agree that you might go with a total stock market fund rather than the S&P500 if you have good choices.

Congratulations on paying off the $100k student loan in four years. That means that you now can direct that $25k+ a year into investments and not even miss it. If you're working towards early financial independence, the last thing you want is lifestyle inflation.
Thank you Pajamas. I've read a lot of posts debating the merits between TSM and S&P500. I've thought about it as well but for 401k, we don't have TSM as an option so S&P500 is the best alternative. For taxable, my rationale is that i could TLH/TGH between TSM and S&P500 (i could be wrong on this since that's just an story i read somewhere in my memory). What are the reasons for your preference for TSM besides a broader selection exposure from 500 to 3000+ stocks and exposure to small/value cap? If i remember correctly, the net return between these 2 are practically the same?

Yes, definitely a huge relief to get the student loan chain off and start building the nest egg. Now i just have to 'fight' DW against a mortgage payment inflation in the foreseeable future!

delamer
Posts: 5487
Joined: Tue Feb 08, 2011 6:13 pm

Re: Recently Paid Off School Loan - Millennial Couple Seeking Advice & Guidance

Post by delamer » Wed Jun 13, 2018 3:46 pm

cj2018 wrote:
Wed Jun 13, 2018 3:10 pm
delamer wrote:
Wed Jun 13, 2018 2:36 pm
Let’s say you could meet basic needs with $100K year, in today’s dollars and including income taxes, in 10 years.

Have you actually figured out how much you need to save, assuming a couple different returns on your portfolio, to meet that goal?

At your age, I’d use a multiple of at least 33X expenses and probably higher — like 40X. The 25X or 30X is appropriate for a 30 year retirement, not FIRE at 35.

So I’d argue that you need about $4 million — in today’s dollars — to meet your goal in 10 years. If you went with 33X, then it is $3 million in today’s dollars.

It is fine to be all stocks at your ages, but why exclusively in the S&P 500? Why not add small cap and international stocks into the mix?
Thanks delamer. Perhaps using the term 'FIRE' wasn't the best choice. I've edited my origin post to use the term "FI" to more accurately reflect the objective since we don't plan to not generate income after FI. We simply desire to transition from earned-income to passive-income to eventually a combo of passive-income and business-profit.

I've actually crunched the number and at a current contribution rate of $3.5k/month in 401k and $6k/month in Vanguard, and assuming a nominal return of 8%, we can most likely cross $1M in investable amount by 35, which assuming a 2% inflation rate and 2% dividend yield, get us a nominal yield of 4% without touching principle. I can't really predict what our future expenses will look like given all the unknowns, but the benefit i'd like to obtain from the portfolio after age 35 or 37 is to ensure i can quit my corporate job and not worry about living on the street while pursuing my real productive interests. In this case, would 25x - 30x still be an appropriate metric to look at assuming the household plans to continue earn income but perhaps not as much as 2 W-2 incomes?

Regarding the AA to 100% S&P500, my rationale was s&p500 gives me enough diversification at low ER and its dead-simple enough for me just to track a 1-portflio performance on a more frequent basis. I believe i understand the value of small cap and international into the mix, but i'm not 100% sold on how efficient they are from a practical manner considering the longevity of my investment horizon and if the net return does make a statistically significance over a long period of time. I guess the idea of having partial equity ownership of the largest 500 companies in the U.S. is good and simply enough for me mentally, but i haven't really looked much into the data for a more complex mix. And i actually worked at DFA as an investment professional for sometime and i still don't fully understand the value/small cap tilt!

I understand your point about expecting to have income in addition to your savings at your FI date.

But it seems that you could be spending down your savings by some unknown amount before you actually receive any income from passive income/profits, correct?

Maybe then you should be thinking in terms of how many years of expenses you want to have banked before leaving the W-2 world? You mentioned that you can’t predict your expenses, but then how can you plan for not being out on the street?

If you were planning in a regular career until retirement, you could just keep saving at a high level and worry about expenses later. But you aren’t; you want to live off your investments in as soon as 7 years for some unknown period.

Another option is to make it a goal to pay off your mortgage within 10 years. The elimination of what is probably your biggest expense now would go a long way toward reducing the savings you need in the future.

Regarding the investments, I wasn’t recommending tilting but that you expand your investments to a broader view. There are global stock funds that include US and international equities. There are stock funds that include all cap sizes in the US, in proportion to their capitalization. Or you can add an international fund (minus the US) or a small/midcap fund to your portfolio without over complicating it.

I don’t understand your comment about these other sectors efficiency over the long run.

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Pajamas
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Re: Recently Paid Off School Loan - Millennial Couple Seeking Advice & Guidance

Post by Pajamas » Wed Jun 13, 2018 3:55 pm

cj2018 wrote:
Wed Jun 13, 2018 3:20 pm
Thank you Pajamas. I've read a lot of posts debating the merits between TSM and S&P500. I've thought about it as well but for 401k, we don't have TSM as an option so S&P500 is the best alternative. For taxable, my rationale is that i could TLH/TGH between TSM and S&P500 (i could be wrong on this since that's just an story i read somewhere in my memory). What are the reasons for your preference for TSM besides a broader selection exposure from 500 to 3000+ stocks and exposure to small/value cap? If i remember correctly, the net return between these 2 are practically the same?

Yes, definitely a huge relief to get the student loan chain off and start building the nest egg. Now i just have to 'fight' DW against a mortgage payment inflation in the foreseeable future!
Yes, that's the primary reason but you definitely have to go with what is available and the S&P 500 is roughly 80% of the total U.S. market capitalization, anyway.

Those two are certainly suitable for tax loss harvesting.

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Duckie
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Re: Recently Paid Off School Loan - Millennial Couple Seeking Advice & Guidance

Post by Duckie » Wed Jun 13, 2018 4:19 pm

cj2018 wrote:Contributions

Tax-Advantaged:
  • 401K: We are currently maxing out both of ours starting in 2018 and planning to do so for as long as we have our W-2 jobs. Previously we didn't contribute due to student loan and saving for house downpayment
  • IRAs: $0 due to phase-out limit
Taxable:
  • Vanguard Joint: $6k/month in VFIAX (Vanguard 500 Index Fund Admiral)
You should contribute to IRAs. Read about the Backdoor Roth IRA method.

cj2018
Posts: 109
Joined: Tue Jun 12, 2018 3:49 pm

Re: Recently Paid Off School Loan - Millennial Couple Seeking Advice & Guidance

Post by cj2018 » Wed Jun 13, 2018 4:55 pm

Duckie wrote:
Wed Jun 13, 2018 4:19 pm
cj2018 wrote:Contributions

Tax-Advantaged:
  • 401K: We are currently maxing out both of ours starting in 2018 and planning to do so for as long as we have our W-2 jobs. Previously we didn't contribute due to student loan and saving for house downpayment
  • IRAs: $0 due to phase-out limit
Taxable:
  • Vanguard Joint: $6k/month in VFIAX (Vanguard 500 Index Fund Admiral)
You should contribute to IRAs. Read about the Backdoor Roth IRA method.
Thanks Duckie. The backdoor roth IRA read is very helpful. So in my situation, i would contribute, after-tax, up to $5500 annually (2018 limit) to a traditional IRA and then do a backdoor conversion to roth IRA. The benefit from this practice would be the tax-free growth for the amount, versus if i were to put that money to taxable account where growth is taxed, correct?

I have to confess that i initially omitted IRA due to the contribution limit of just $5500/yr, but sounds like your recommendation would still take the tax-free growth benefit and keep a separate IRA account for this purpose, presumably due to the power of long-term compound return, correct? Thanks.

cj2018
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Re: Recently Paid Off School Loan - Millennial Couple Seeking Advice & Guidance

Post by cj2018 » Wed Jun 13, 2018 5:06 pm

delamer wrote:
Wed Jun 13, 2018 3:46 pm
cj2018 wrote:
Wed Jun 13, 2018 3:10 pm
delamer wrote:
Wed Jun 13, 2018 2:36 pm
Let’s say you could meet basic needs with $100K year, in today’s dollars and including income taxes, in 10 years.

Have you actually figured out how much you need to save, assuming a couple different returns on your portfolio, to meet that goal?

At your age, I’d use a multiple of at least 33X expenses and probably higher — like 40X. The 25X or 30X is appropriate for a 30 year retirement, not FIRE at 35.

So I’d argue that you need about $4 million — in today’s dollars — to meet your goal in 10 years. If you went with 33X, then it is $3 million in today’s dollars.

It is fine to be all stocks at your ages, but why exclusively in the S&P 500? Why not add small cap and international stocks into the mix?
Thanks delamer. Perhaps using the term 'FIRE' wasn't the best choice. I've edited my origin post to use the term "FI" to more accurately reflect the objective since we don't plan to not generate income after FI. We simply desire to transition from earned-income to passive-income to eventually a combo of passive-income and business-profit.

I've actually crunched the number and at a current contribution rate of $3.5k/month in 401k and $6k/month in Vanguard, and assuming a nominal return of 8%, we can most likely cross $1M in investable amount by 35, which assuming a 2% inflation rate and 2% dividend yield, get us a nominal yield of 4% without touching principle. I can't really predict what our future expenses will look like given all the unknowns, but the benefit i'd like to obtain from the portfolio after age 35 or 37 is to ensure i can quit my corporate job and not worry about living on the street while pursuing my real productive interests. In this case, would 25x - 30x still be an appropriate metric to look at assuming the household plans to continue earn income but perhaps not as much as 2 W-2 incomes?

Regarding the AA to 100% S&P500, my rationale was s&p500 gives me enough diversification at low ER and its dead-simple enough for me just to track a 1-portflio performance on a more frequent basis. I believe i understand the value of small cap and international into the mix, but i'm not 100% sold on how efficient they are from a practical manner considering the longevity of my investment horizon and if the net return does make a statistically significance over a long period of time. I guess the idea of having partial equity ownership of the largest 500 companies in the U.S. is good and simply enough for me mentally, but i haven't really looked much into the data for a more complex mix. And i actually worked at DFA as an investment professional for sometime and i still don't fully understand the value/small cap tilt!

I understand your point about expecting to have income in addition to your savings at your FI date.

But it seems that you could be spending down your savings by some unknown amount before you actually receive any income from passive income/profits, correct?

Maybe then you should be thinking in terms of how many years of expenses you want to have banked before leaving the W-2 world? You mentioned that you can’t predict your expenses, but then how can you plan for not being out on the street?

If you were planning in a regular career until retirement, you could just keep saving at a high level and worry about expenses later. But you aren’t; you want to live off your investments in as soon as 7 years for some unknown period.

Another option is to make it a goal to pay off your mortgage within 10 years. The elimination of what is probably your biggest expense now would go a long way toward reducing the savings you need in the future.

Regarding the investments, I wasn’t recommending tilting but that you expand your investments to a broader view. There are global stock funds that include US and international equities. There are stock funds that include all cap sizes in the US, in proportion to their capitalization. Or you can add an international fund (minus the US) or a small/midcap fund to your portfolio without over complicating it.

I don’t understand your comment about these other sectors efficiency over the long run.
Thanks again, this definitely gives me a lot food for thought. It's interesting you bought up the point of paying off mortgage earlier, say within 10 years. That was part of the reason why we chose 7/1 ARM with a 3% rate contemplating paying it off early. Since then, the only push back in my head would be the desire of not concentrating too much NW in a home and the personal preference of having a liquid passive portfolio as a higher priority. But yes, agreed that the high mortgage payment is definitely a sword hanging over our neck till we pay that sucker off or downsize or move to a LCOL area - i view it as our number 1 enemy towards FI in our 30s. I've entertained the idea of being renter for life and following the path of Jeremy at https://www.gocurrycracker.com/, but i don't think i can ever sell that to DW... :sharebeer

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Duckie
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Re: Recently Paid Off School Loan - Millennial Couple Seeking Advice & Guidance

Post by Duckie » Wed Jun 13, 2018 5:10 pm

cj2018 wrote:The benefit from this practice would be the tax-free growth for the amount, versus if i were to put that money to taxable account where growth is taxed, correct?
Correct.
I have to confess that i initially omitted IRA due to the contribution limit of just $5500/yr
You're planning on jointly contributing $72K annually to taxable. This would switch $11K of that $72K to tax-sheltered instead. Every little bit going tax-sheltered helps, especially at your income.

BVRFC
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Re: Recently Paid Off School Loan - Millennial Couple Seeking Advice & Guidance

Post by BVRFC » Wed Jun 13, 2018 5:25 pm

At 36 years old, I'm also 100% equities and 0% international equities, so I like your style.

Like you, I do not have access to a total stock market index fund in my 401k, so I use an S&P 500 index fund. Personally, I use Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) in my taxable account.
Pajamas wrote:
Wed Jun 13, 2018 3:55 pm
cj2018 wrote:
Wed Jun 13, 2018 3:20 pm
Thank you Pajamas. I've read a lot of posts debating the merits between TSM and S&P500. I've thought about it as well but for 401k, we don't have TSM as an option so S&P500 is the best alternative. For taxable, my rationale is that i could TLH/TGH between TSM and S&P500 (i could be wrong on this since that's just an story i read somewhere in my memory). What are the reasons for your preference for TSM besides a broader selection exposure from 500 to 3000+ stocks and exposure to small/value cap? If i remember correctly, the net return between these 2 are practically the same?

Yes, definitely a huge relief to get the student loan chain off and start building the nest egg. Now i just have to 'fight' DW against a mortgage payment inflation in the foreseeable future!
Yes, that's the primary reason but you definitely have to go with what is available and the S&P 500 is roughly 80% of the total U.S. market capitalization, anyway.

Those two are certainly suitable for tax loss harvesting.
I was under the impression that tax loss harvesting an S&P 500 index fund would be difficult if one also owned the S&P 500 index fund in a 401k, because any subsequent purchases of the S&P 500 index fund in the 401k within 30 days would create a wash sale. Is my understanding incorrect?

Would this be an advantage to holding VTSAX in the taxable account and TLH between VTSAX and Vanguard Large-Cap Index Fund Admiral Shares (VLCAX)?

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Pajamas
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Re: Recently Paid Off School Loan - Millennial Couple Seeking Advice & Guidance

Post by Pajamas » Wed Jun 13, 2018 5:28 pm

BVRFC wrote:
Wed Jun 13, 2018 5:25 pm
I was under the impression that tax loss harvesting an S&P 500 index fund would be difficult if one also owned the S&P 500 index fund in a 401k, because any subsequent purchases of the S&P 500 index fund in the 401k within 30 days would create a wash sale. Is my understanding incorrect?

Would this be an advantage to holding VTSAX in the taxable account and TLH between VTSAX and Vanguard Large-Cap Index Fund Admiral Shares (VLCAX)?
Yes, but you can switch between a total stock market fund and an S&P 500 fund. It gets a little tricky sometimes. For instance, I tend to forget that it's not just subsequent purchases and sales but also prior purchases and sales that count. The 30 days goes in both directions. Gill seems to be an expert on wash sales if you have a specific question.

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cj2018
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Re: Recently Paid Off School Loan - Millennial Couple Seeking Advice & Guidance

Post by cj2018 » Wed Jun 13, 2018 5:39 pm

Duckie wrote:
Wed Jun 13, 2018 5:10 pm
cj2018 wrote:The benefit from this practice would be the tax-free growth for the amount, versus if i were to put that money to taxable account where growth is taxed, correct?
Correct.
I have to confess that i initially omitted IRA due to the contribution limit of just $5500/yr
You're planning on jointly contributing $72K annually to taxable. This would switch $11K of that $72K to tax-sheltered instead. Every little bit going tax-sheltered helps, especially at your income.
Awesome, this advice is greatly appreciated! We will start to implement this practice beginning for FY2018.

One more thought i'd like to confirm with you - since we don't currently have any existing IRA, when we do roth conversion, would it be best that all our tax-advantaged dollars are in 401k, as opposed to IRA, to ensure no taxable event is triggered? For instance, let's say i change job, i would either roll my 401k to my new employer, or just keep the old 401k as is, and never roll it into IRA assuming the 401k fund selections are desirable. Thanks.

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Duckie
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Re: Recently Paid Off School Loan - Millennial Couple Seeking Advice & Guidance

Post by Duckie » Wed Jun 13, 2018 5:58 pm

cj2018 wrote:One more thought i'd like to confirm with you - since we don't currently have any existing IRA, when we do roth conversion, would it be best that all our tax-advantaged dollars are in 401k, as opposed to IRA, to ensure no taxable event is triggered? For instance, let's say i change job, i would either roll my 401k to my new employer, or just keep the old 401k as is, and never roll it into IRA assuming the 401k fund selections are desirable.
Right. Because of the pro-rata rule you don't want any pre-tax IRA assets when you use the backdoor Roth method.

cj2018
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Re: Recently Paid Off School Loan - Millennial Couple Seeking Advice & Guidance

Post by cj2018 » Wed Jun 13, 2018 6:30 pm

BVRFC wrote:
Wed Jun 13, 2018 5:25 pm
At 36 years old, I'm also 100% equities and 0% international equities, so I like your style.

Like you, I do not have access to a total stock market index fund in my 401k, so I use an S&P 500 index fund. Personally, I use Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) in my taxable account.
Pajamas wrote:
Wed Jun 13, 2018 3:55 pm
cj2018 wrote:
Wed Jun 13, 2018 3:20 pm
Thank you Pajamas. I've read a lot of posts debating the merits between TSM and S&P500. I've thought about it as well but for 401k, we don't have TSM as an option so S&P500 is the best alternative. For taxable, my rationale is that i could TLH/TGH between TSM and S&P500 (i could be wrong on this since that's just an story i read somewhere in my memory). What are the reasons for your preference for TSM besides a broader selection exposure from 500 to 3000+ stocks and exposure to small/value cap? If i remember correctly, the net return between these 2 are practically the same?

Yes, definitely a huge relief to get the student loan chain off and start building the nest egg. Now i just have to 'fight' DW against a mortgage payment inflation in the foreseeable future!
Yes, that's the primary reason but you definitely have to go with what is available and the S&P 500 is roughly 80% of the total U.S. market capitalization, anyway.

Those two are certainly suitable for tax loss harvesting.
I was under the impression that tax loss harvesting an S&P 500 index fund would be difficult if one also owned the S&P 500 index fund in a 401k, because any subsequent purchases of the S&P 500 index fund in the 401k within 30 days would create a wash sale. Is my understanding incorrect?

Would this be an advantage to holding VTSAX in the taxable account and TLH between VTSAX and Vanguard Large-Cap Index Fund Admiral Shares (VLCAX)?

Thanks for the vote of confidence on "all in on equity", BVRFC! I guess my long-term bets are on the productivity of corporate america vs. IOUs from the govs. Curious to hear your reasons behind 100% equities and 0% international? Would you change it though as your assets grow bigger and as you age more? I guess it all depends on ones expenses and what their needs are from the portfolio. Personally, I don't have the credibility to claim that i will be able to stay the course during a 50%-80% correction since i've never experienced it first hand. But my naive view and understanding of economic activities and monetary policy provide me with a pretty solid grasp on what the market is all about, so we shall see :sharebeer . For now, the only thing under my control is to save/invest and march towards the goal of building a large enough nest egg to only need the 2% dividend yield.

To be frank, I'm a big fan of VTSAX also, especially after reading the stock series from http://jlcollinsnh.com/stock-series/. I believe VTSAX has lower portfolio turn-over %, therefore reducing transaction cost. However, since the ER for both funds are the same at 0.04% so it doesn't matter.

From a tax perspective, VTSAX has a lower SEC-yield compared VFIAX (which make sense presumably because small-cap pays little/no dividend compared to large cap?), therefore VTSAX is more tax-efficient when it comes to dividend reinvestment. Since our portfolio is rather small and we are just in our first year of investing, personally i haven't felt the tax implication and only understand it in theory so we will see how this changes during tax season. Would you agree with my thinking here? If VTSAX is indeed more tax-efficient from a dividend reinvestment perspective, and assuming the principle appreciation is the same and ER is the same, why wouldn't i pick VTSAX over VFIAX if that's an option? hmmmmm you got me thinking now....

cj2018
Posts: 109
Joined: Tue Jun 12, 2018 3:49 pm

Re: Recently Paid Off School Loan - Millennial Couple Seeking Advice & Guidance

Post by cj2018 » Wed Jun 13, 2018 6:32 pm

Duckie wrote:
Wed Jun 13, 2018 5:58 pm
cj2018 wrote:One more thought i'd like to confirm with you - since we don't currently have any existing IRA, when we do roth conversion, would it be best that all our tax-advantaged dollars are in 401k, as opposed to IRA, to ensure no taxable event is triggered? For instance, let's say i change job, i would either roll my 401k to my new employer, or just keep the old 401k as is, and never roll it into IRA assuming the 401k fund selections are desirable.
Right. Because of the pro-rata rule you don't want any pre-tax IRA assets when you use the backdoor Roth method.
Beautiful. gracias.

BVRFC
Posts: 27
Joined: Tue Jul 18, 2017 9:26 pm

Re: Recently Paid Off School Loan - Millennial Couple Seeking Advice & Guidance

Post by BVRFC » Thu Jun 14, 2018 9:38 am

cj2018 wrote:
Wed Jun 13, 2018 6:30 pm
Curious to hear your reasons behind 100% equities and 0% international?
Portfolio success rates for 30 and 60 year retirement periods increase as one approaches 100% equities. Total return increases as one approaches 100% equities.

https://www.gocurrycracker.com/path-100-equities/

I have a strong desire to leave a bequest, so my investment timeline is longer than my lifetime, which also pushes me towards a 100% equities allocation.

I like my job (commercial airline pilot), so I probably won't retire soon, but once I hit my FI number, I can focus on the type of flying that I like instead of the type of flying that is most profitable. I can also drop trips, and fly only one or two 3 to 5 day trips a month. I'm not planning early retirement, but I am planning a prolonged period of semi retirement.

As far as international allocation, I agree with JL Collins, and I can't say it any better than he has already said it.

http://jlcollinsnh.com/2012/09/26/stock ... l-funds-2/
cj2018 wrote:
Wed Jun 13, 2018 6:30 pm
Would you change it though as your assets grow bigger and as you age more?
I might add 20% bonds to smooth the ride a little when I reach FI.
cj2018 wrote:
Wed Jun 13, 2018 6:30 pm
I guess it all depends on ones expenses and what their needs are from the portfolio. Personally, I don't have the credibility to claim that i will be able to stay the course during a 50%-80% correction since i've never experienced it first hand.
As you know, 50%-80% corrections are highly unlikely. Hopefully, we'll never have to experience one.

http://jlcollinsnh.com/2012/04/29/stock ... gly-event/
cj2018 wrote:
Wed Jun 13, 2018 6:30 pm
From a tax perspective, VTSAX has a lower SEC-yield compared VFIAX (which make sense presumably because small-cap pays little/no dividend compared to large cap?), therefore VTSAX is more tax-efficient when it comes to dividend reinvestment. Since our portfolio is rather small and we are just in our first year of investing, personally i haven't felt the tax implication and only understand it in theory so we will see how this changes during tax season. Would you agree with my thinking here? If VTSAX is indeed more tax-efficient from a dividend reinvestment perspective, and assuming the principle appreciation is the same and ER is the same, why wouldn't i pick VTSAX over VFIAX if that's an option? hmmmmm you got me thinking now....
I think you have mentioned multiple good reasons to hold VTSAX over VFIAX. It wouldn't be worth the tax cost of shifting the allocation in my taxable account to me, but I would consider putting new investments into VTSAX, reinvesting the dividends from VFIAX into VTSAX, and drawing down VFIAX first whenever you decide that you need to sell it to support consumption.

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