31 Years Old, Sold Company for 3MM. Want to retire. How to allocate in taxable?

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fortunateFIRE
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Joined: Tue May 14, 2019 8:35 am

31 Years Old, Sold Company for 3MM. Want to retire. How to allocate in taxable?

Post by fortunateFIRE » Tue May 14, 2019 8:42 am

I have no money invested yet nor do I have any retirement accounts yet. I live in a no tax state. I plan to max out a SEP IRA this year, but apart from that, the rest will go in a taxable account. Let's say I want to retire from paid work and do something else. Couple questions:

+After much research, 80/20 (stock/bond) seems like the right mix for me to withdraw 3.5% for life. From what I understand I need to keep this relatively high stock allocation to maintain for a long period.
+How can I keep my portfolio balanced as my gains increase over time and drift away from 80/20. Surely this is tax disadvantageous?
+I'm thinking VTSAX/VBTLX for my Mutual Funds. Any thoughts?

megabad
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Re: 31 Years Old, Sold Company for 3MM. Want to retire. How to allocate in taxable?

Post by megabad » Tue May 14, 2019 11:52 am

I think you are definitely on the right track. What is tax advantageous will depend on your income and you indicate that you are currently still working (with earned income). If you can max out an SEP IRA or Solo 401k than this can provide a vehicle toward tax efficiency. A Roth IRA or HSA can provide another. However you will certainly continue to have significant amounts outside of tax advantaged plans for quite some time. If your tax bracket is very high you might consider allocating the bond portion to a tax exempt municipal bond fund or help reduce tax costs. You might also want to consider breaking your equity holdings up a little (into multiple low cost index funds instead of just one) to better facilitate tax loss harvesting to help reduce costs or eliminate tax costs of rebalancing. There are additional strategies depending on your situation but i think considering these is a good start.

rkhusky
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Re: 31 Years Old, Sold Company for 3MM. Want to retire. How to allocate in taxable?

Post by rkhusky » Tue May 14, 2019 11:56 am

At 3.5%, anything from 30/70 - 100/0 would probably work (50/50 - 60/40 might be the sweet spot). If all you are doing is withdrawing about $100K/yr ($3M after tax?), you are likely in a low tax bracket. A combination of VTSAX, VTIAX and VBTLX is the classic 3-fund portfolio. Rebalance by withdrawing from the fund(s) that are overweight.
Last edited by rkhusky on Tue May 14, 2019 12:02 pm, edited 2 times in total.

anil686
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Re: 31 Years Old, Sold Company for 3MM. Want to retire. How to allocate in taxable?

Post by anil686 » Tue May 14, 2019 11:57 am

It starts with how much money do you need to live the lifestyle you want. Also, what you want to do with your time and does that entail additional costs that you do not have now (i.e. golf every day, take art/yoga/spin classes). Your expenses, rather than your asset allocation should really be your guide. If you are 31, you may have 70 years of life left and potentially not as much social security if you are not working from 31 onwards. If you require $70,000 a year, there are calculators that can help you figure how much you need for 70 years. the less you need, the better. Also, kids are costly and may have unexpected expenses (personal experience)

As far as the funds go for a really long time (i.e. 70 years), I would use Vanguard total world stock and vanguard int med term tax exempt for the bond component. The total world stock is relatively tax efficient, has exposure to international stocks since we cannot predict the future especially for more than half a century and the tax exempt bond fund is of such duration that it should be relatively safe next to the volatility of stocks.

Rebalancing can be done by having dividends taken in a sweep account (cash) and manually rebalancing to your desired targets. The bond fund will deposit in cash monthly, the stock fund every quarter.

Hope that helps...

sjt
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Re: 31 Years Old, Sold Company for 3MM. Want to retire. How to allocate in taxable?

Post by sjt » Tue May 14, 2019 11:58 am

fortunateFIRE wrote:
Tue May 14, 2019 8:42 am
+How can I keep my portfolio balanced as my gains increase over time and drift away from 80/20. Surely this is tax disadvantageous?
Probably not. Remember you are only taxed on the gains, Let's say a withdrawl of 3.5% ($105k) is $80k principal and $25k long term capital gains, your tax burden is $0 (assuming no other income). If your money really starts growing and you end up taking out more money, be happy to have good fortune and pay whatever tax is due. :idea:

If you really hate the idea of paying taxes, withdraw until you max the 0% rate and donate the rest
"The one who covets is the poorer man, | For he would have that which he never can; | But he who doesn't have and doesn't crave | Is rich, though you may hold him but a knave." - Wife of Bath tale

MotoTrojan
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Re: 31 Years Old, Sold Company for 3MM. Want to retire. How to allocate in taxable?

Post by MotoTrojan » Tue May 14, 2019 12:02 pm

rkhusky wrote:
Tue May 14, 2019 11:56 am
At 3.5%, anything from 30/70 - 100/0 would probably work. If all you are doing is withdrawing about $100K/yr ($3M after tax?), you are likely in a low tax bracket. A combination of VTSAX, VTIAX and VBTLX is the classic 3-fund portfolio. Rebalance by withdrawing from the fund(s) that are overweight.
Agreed. I would probably feel safer at 3% though with such a long time ahead. How well have you estimated your expenses to meet the 3.5%? Does it include health insurance? Longterm care? Life changing decisions (children, marriage, etc...)?

If you truly want 80/20 and don't want/need tax-exempt bonds you could use the LifeStrategy Growth Fund which will take care of rebalancing for you and you can simply spend dividends plus some additional sales. This fund is 80/20 but holds International stocks and bonds too, which are contentious but I would suggest you have at-least some (I use 25% of equity). Feels funny but you truly can hold nothing but this fund. Tax-exempt bonds could be worth a look but I bet you'd be fine without them and without substantial tax-advantaged accounts there is less to gain from holding separate funds.

One reason to hold separately though would be to allow you to more easily change your AA as you age by selling more/only equities, if you desire a lower risk portfolio.

ssquared87
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Re: 31 Years Old, Sold Company for 3MM. Want to retire. How to allocate in taxable?

Post by ssquared87 » Tue May 14, 2019 12:16 pm

sjt wrote:
Tue May 14, 2019 11:58 am
fortunateFIRE wrote:
Tue May 14, 2019 8:42 am
+How can I keep my portfolio balanced as my gains increase over time and drift away from 80/20. Surely this is tax disadvantageous?
Probably not. Remember you are only taxed on the gains, Let's say a withdrawl of 3.5% ($105k) is $80k principal and $25k long term capital gains, your tax burden is $0 (assuming no other income). If your money really starts growing and you end up taking out more money, be happy to have good fortune and pay whatever tax is due. :idea:

If you really hate the idea of paying taxes, withdraw until you max the 0% rate and donate the rest
If OP is not working, and has no income, then wouldn’t the long term capital gains be 0%? You only pay long term capital gains if you are single and your taxable income is more than $39k a year.

fujiters
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Re: 31 Years Old, Sold Company for 3MM. Want to retire. How to allocate in taxable?

Post by fujiters » Tue May 14, 2019 12:42 pm

fortunateFIRE wrote:
Tue May 14, 2019 8:42 am
I have no money invested yet nor do I have any retirement accounts yet. I live in a no tax state. I plan to max out a SEP IRA this year, but apart from that, the rest will go in a taxable account. Let's say I want to retire from paid work and do something else. Couple questions:

+After much research, 80/20 (stock/bond) seems like the right mix for me to withdraw 3.5% for life. From what I understand I need to keep this relatively high stock allocation to maintain for a long period.
+How can I keep my portfolio balanced as my gains increase over time and drift away from 80/20. Surely this is tax disadvantageous?
+I'm thinking VTSAX/VBTLX for my Mutual Funds. Any thoughts?
If you're retiring from paid work, you're pulling money from your portfolio to meet expenses. To maintain an 80/20 allocation, don't automatically reinvest dividends and use your withdrawals to rebalance (pull from stocks when you have a higher percentage in stocks, and similarly for bonds).

Your fund choices look fine to me. Personally, I invest in international as well, but the question of how much, if any, international belongs in one's portfolio is contentious.

At 3.5% withdrawals on $3M, you'll withdraw a little over $100k every year, much of which will be qualified dividends and return of basis, so you will not be in a high tax bracket. As such, VBTLX is a good bond holding.
“The purpose of the margin of safety is to render the forecast unnecessary.” -Benjamin Graham

skjoldur
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Re: 31 Years Old, Sold Company for 3MM. Want to retire. How to allocate in taxable?

Post by skjoldur » Tue May 14, 2019 1:25 pm

You might want to check out this blog post:
If all you do is keep up with inflation then over the course of 5 or 6 decades you will go from middle-class to poor.
https://medium.com/@justusjp/inflation- ... 78bd0b7283

It looks at the possibility that for very long retirements, you might want to be more concerned about keeping up with a metric like real wage growth rather than inflation.

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goodenyou
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Re: 31 Years Old, Sold Company for 3MM. Want to retire. How to allocate in taxable?

Post by goodenyou » Tue May 14, 2019 1:31 pm

You will potentially have a long life time without "paid work". That long time will require a conservative withdrawal rate. Your plans may change and you may desire to live a lifestyle that requires more that $100k over 60 years. In the meantime, put it into an 80/20 and withdraw 3% a year. If there are turbulent times, it may motivate you to go back to earned income or start another company.

Just did a quick calculation on an inflation app. $100,000 in 1960 → $889,237.97 in 2020, Assuming 3% inflation 2019-2020. That's 60 years.
"Ignorance more frequently begets confidence than does knowledge" | "The best years you have left are the ones you have right now"

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BL
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Re: 31 Years Old, Sold Company for 3MM. Want to retire. How to allocate in taxable?

Post by BL » Tue May 14, 2019 1:50 pm

If you want at least some Social Security and Medicare, you will need to work at least 10 years, or earn 40 credits. The dollar amount is small, but I think it is important to at least have Medicare available at age 65. You may have made it, or are close, but these are important; any low income also gives you a huge pay-back in SS. Every year you earn nothing is a zero averaged into your 35 highest earning years.

Ependytis
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Re: 31 Years Old, Sold Company for 3MM. Want to retire. How to allocate in taxable?

Post by Ependytis » Tue May 14, 2019 2:35 pm

I am surprised that nobody brought up just because he sold the company for $3 million doesn’t mean that he has $3 million. What about taxes on the sale?

Tamalak
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Re: 31 Years Old, Sold Company for 3MM. Want to retire. How to allocate in taxable?

Post by Tamalak » Tue May 14, 2019 2:59 pm

Congrats my dude, here's to hopefully 60+ years of total freedom :sharebeer

renue74
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Re: 31 Years Old, Sold Company for 3MM. Want to retire. How to allocate in taxable?

Post by renue74 » Tue May 14, 2019 3:14 pm

Ependytis wrote:
Tue May 14, 2019 2:35 pm
I am surprised that nobody brought up just because he sold the company for $3 million doesn’t mean that he has $3 million. What about taxes on the sale?
I sold a small business a few years ago, an "asset acquisition." At the time, I had an FA. So, I received a full amount wire transfer to my LLC checking account and then moved the money into a Schwab advisor managed account.

She earmarked the "estimated" tax and put that into a MM account....then invested the rest. Come tax time, I wrote a check for the tax liability.

Just a rough estimate...but if you sold for $3M, you're looking at $800K to $1M tax liability.

Don't tell anybody the $ of your business sale.

ohai
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Re: 31 Years Old, Sold Company for 3MM. Want to retire. How to allocate in taxable?

Post by ohai » Tue May 14, 2019 3:32 pm

What are you going to do exactly for the next 60 years? I know a lot of 30 somethings with $3 million, but everyone is still working. It's not that everyone really needs more money (well, some will spend it I guess); they just have nothing else to do.

I'd also be concerned about deterioration of your human capital asset, which is likely worth more than $3 million. You need to do at least some work to maintain your thinking and communication skills. Time and skills are also assets, and are probably the main assets and recession hedge for young people given the many years you have left to do something productive.

Anyway, advice above is good, especially the ones who say to be more conservative. All those 4% tests assume 30y retirement and are generally untested in scenarios where 10y rates are 2.4%. For longer maturities, your tail risk increases. Also, seems that you come from the type of background where $3 million is considered a lot of money. In this case, don't tell anyone your net worth, because they will be envious at best and try to get money at worst.

bhsince87
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Re: 31 Years Old, Sold Company for 3MM. Want to retire. How to allocate in taxable?

Post by bhsince87 » Tue May 14, 2019 4:22 pm

ssquared87 wrote:
Tue May 14, 2019 12:16 pm
sjt wrote:
Tue May 14, 2019 11:58 am
fortunateFIRE wrote:
Tue May 14, 2019 8:42 am
+How can I keep my portfolio balanced as my gains increase over time and drift away from 80/20. Surely this is tax disadvantageous?
Probably not. Remember you are only taxed on the gains, Let's say a withdrawl of 3.5% ($105k) is $80k principal and $25k long term capital gains, your tax burden is $0 (assuming no other income). If your money really starts growing and you end up taking out more money, be happy to have good fortune and pay whatever tax is due. :idea:

If you really hate the idea of paying taxes, withdraw until you max the 0% rate and donate the rest
If OP is not working, and has no income, then wouldn’t the long term capital gains be 0%? You only pay long term capital gains if you are single and your taxable income is more than $39k a year.

If OP is invested 80/20 in the two funds mentioned, they will have an annual income of around $63k at current yields.


Lets just call that $50k after standard deduction. That will put them into the 22% marginal bracket, so zero capital gains tax will go away at that point.

Still, the tax picture isn't too bad.
Retirement: When you reach a point where you have enough. Or when you've had enough.

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ohboy!
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Re: 31 Years Old, Sold Company for 3MM. Want to retire. How to allocate in taxable?

Post by ohboy! » Tue May 14, 2019 4:39 pm

renue74 wrote:
Tue May 14, 2019 3:14 pm
Ependytis wrote:
Tue May 14, 2019 2:35 pm
I am surprised that nobody brought up just because he sold the company for $3 million doesn’t mean that he has $3 million. What about taxes on the sale?
I sold a small business a few years ago, an "asset acquisition." At the time, I had an FA. So, I received a full amount wire transfer to my LLC checking account and then moved the money into a Schwab advisor managed account.

She earmarked the "estimated" tax and put that into a MM account....then invested the rest. Come tax time, I wrote a check for the tax liability.

Just a rough estimate...but if you sold for $3M, you're looking at $800K to $1M tax liability.

Don't tell anybody the $ of your business sale.
Nice to not pay any state tax. In some states that would be a big hit.

smectym
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Re: 31 Years Old, Sold Company for 3MM. Want to retire. How to allocate in taxable?

Post by smectym » Tue May 14, 2019 5:13 pm

There are different ways of looking at the question, and sure, “long time horizon” arguably suggests “be more aggressive.” But accepting the parameter “this is the $ that’s going to have to last me for the next half-century or longer” counsels a more conservative approach. I would shoot for 60-40 and start with a 3% withdrawal rate. That would mean a relatively modest lifestyle—but still the rentier lifestyle, enviable at any age.

Sam1
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Re: 31 Years Old, Sold Company for 3MM. Want to retire. How to allocate in taxable?

Post by Sam1 » Tue May 14, 2019 6:22 pm

ohai wrote:
Tue May 14, 2019 3:32 pm
What are you going to do exactly for the next 60 years? I know a lot of 30 somethings with $3 million, but everyone is still working. It's not that everyone really needs more money (well, some will spend it I guess); they just have nothing else to do.

I'd also be concerned about deterioration of your human capital asset, which is likely worth more than $3 million. You need to do at least some work to maintain your thinking and communication skills. Time and skills are also assets, and are probably the main assets and recession hedge for young people given the many years you have left to do something productive.

Anyway, advice above is good, especially the ones who say to be more conservative. All those 4% tests assume 30y retirement and are generally untested in scenarios where 10y rates are 2.4%. For longer maturities, your tail risk increases. Also, seems that you come from the type of background where $3 million is considered a lot of money. In this case, don't tell anyone your net worth, because they will be envious at best and try to get money at worst.
I agree. I think it will be hard to not have some sort of job. It makes relationships harder and all sorts of other issues. I’d try and find something with health insurance in something that you love. Even if it’s a ski instructor. At least something.

I’d try and work at least 10 more years. It’s 10 more years you don’t have to tap into your money and it’s 10 more years you can save a little more into tax advantaged accounts, get social security credits and hopefully health insurance too.

Hector
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Re: 31 Years Old, Sold Company for 3MM. Want to retire. How to allocate in taxable?

Post by Hector » Tue May 14, 2019 6:38 pm

fortunateFIRE wrote:
Tue May 14, 2019 8:42 am
+How can I keep my portfolio balanced as my gains increase over time and drift away from 80/20. Surely this is tax disadvantageous?
Most people here rebalance for reducing risk and for the sake of doing something as there isn't much to do for indexers.
If you are thinking about maintaining 80/20 for maximum return, rebalance is not necessary. Let it drift and you want sacrifice return.
Don't auto-reinvest your dividend. Instead, invest it to be closer to 80/20.
Also withdraw $$ for expenses to be closer to 80/20.

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