recently high income, couple of qs

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getttinggoing37
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Joined: Wed Jan 08, 2020 10:43 am

recently high income, couple of qs

Post by getttinggoing37 » Wed Jan 08, 2020 12:16 pm

Long-time lurker, first-time poster.

35 married, 2 kids.

I own my own business that really started taking off over the last few years, income for the past 5 years looked like this:

2015: 125k
2016: 150k
2017: 250k
2018: 600k
2019: 1.3m

The wife has an income of $100k+, no savings, no debt.

Given these numbers, you'd think we'd saved a lot more, but currently, assets (aside from biz) look like this:

Cash 375k: (275k of this is going to close on a home in the next 2 months)
Taxable inv accounts: 500k
Debt: none

1) If I keep up current income, which is not guaranteed, I can save approx 500-600k per year. Should I just dump this into a total market ETF like VTI and not think about it, or should I diversify w/ bonds?

2) Am I crazy to buy this home? It's a second home that will mostly pay its own mortgage/taxes/insurance w/ Airbnb income, and I'll be able to use it personally ~20 weeks a year. I currently rent my primary residence.

Any thoughts appreciated.

elainet7
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Re: recently high income, couple of qs

Post by elainet7 » Mon Jan 13, 2020 10:31 am

use a 60/40 balanced portfolio like vanguard balanced index fund
dollar cost average in over 18-24 months
do you want to go all in at all time highs
buy your primary residence

daheld
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Re: recently high income, couple of qs

Post by daheld » Mon Jan 13, 2020 10:39 am

At that level of income (very high) and savings/investments (not that much relative to income), I would not be buying a second home.

At your income, you can be disciplined for 3 years and go from a "meh" portfolio to a "wow" portfolio. Or you can continue to not save that much and have a real missed opportunity.

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anon_investor
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Re: recently high income, couple of qs

Post by anon_investor » Mon Jan 13, 2020 11:16 am

Are you viewing that "second home" really as an investment property or really as "a second home"? Are you going to move into that "second home" as a primary residence at some point? Personally I would not buy a "second home" (even if it may "pay for itself") and instead invest that money, but I have never had the desire to be a landlord (Warren Buffet has said something similar before), so my opinion is biased.

With that kind of income, you definitely should be doing some tax planning. Are you able to utilize backdoor roth IRAs for you and your spouse? Maxing out 401ks (or whatever equivalent your wife may have at her job)? Have you created an individual 401k (or regular 401k if you have employees) for your business? Have you funded 529 plans for your kids? All these investment vehicles can potentially save you a lot on taxes.

In terms of investments in a taxable account, VTSAX/VTI is a great choice due to its tax efficiency. If you plan to buy any bonds in your taxable account, you should look into Federal income tax exempt muni bonds/funds. One benefit of having investments in taxable accounts, is that you can sell them to get money if there is an emergency without tax penalties with many retirement accounts (obviously you would have to pay any potential capital gains taxes). Your Asset Allocation is a personal choice, some people like 60/40, some people like 100% equities + enough cash to sleep at night, etc. Keep in mined that Vanguard Balance Index Fund is not that tax efficient, so not the best choice for someone to keep in a taxable account, so keep tax efficiency in mind when investing in a taxable account.

Keep in mind you might want to ensure you have sufficient cash flow to cover any expenses for your business/"second home" which you may be partially renting.

chw
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Re: recently high income, couple of qs

Post by chw » Mon Jan 13, 2020 11:46 am

Not sure if you should buy the second home- not enough info provided. It seems you may not track your expenses, and know where your money is going, so I would recommend you do that for at least the next year (as well as try and go back over the past year to categorize where the money went).

Another note of caution- you’ve had 2 years or so of very high income. If your lifestyle has crept up with the income, be careful that you could still sustain it should the income fall back to levels of a few years ago. Any high income earner can experience this, but self-employed individuals are at greater risk of this happening- and likely don’t think it will during times of great success.

niceguy7376
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Re: recently high income, couple of qs

Post by niceguy7376 » Mon Jan 13, 2020 11:47 am

getttinggoing37 wrote:
Wed Jan 08, 2020 12:16 pm
I own my own business that really started taking off over the last few years, income for the past 5 years looked like this:
What type of retirement plan do you have on your business?

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Watty
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Re: recently high income, couple of qs

Post by Watty » Mon Jan 13, 2020 12:00 pm

getttinggoing37 wrote:
Wed Jan 08, 2020 12:16 pm
Given these numbers, you'd think we'd saved a lot more, but.....


The huge question is where the rest of the money went.


Since you cannot count on the high income to continue you are in much the same situation as someone that won a lottery or an athlete that will have high income for just a few years. A lot of these people have a lot more than you do and they end up in financial trouble ten years later.
getttinggoing37 wrote:
Wed Jan 08, 2020 12:16 pm
1) If I keep up current income, which is not guaranteed, I can save approx 500-600k per year. Should I just dump this into a total market ETF like VTI and not think about it, or should I diversify w/ bonds?
The high income may just be for a very limited time. I would try to keep the same lifestyle that I had a few years ago and;
1) Have a paid off house to live in.
2) Have college funds for the kids with enough to pay for them to go to a state university. Google the name of the big state university in your state and "cost of attendance" to see this how much this is. It is a lot more than tuition. You can add to this later if you want to be able to pay for expensive private colleges.
3) Max out your retirement accounts. Ask your accountant about this since you can do a lot since you have your own business.

But that is just me.

If your business is still going strong in a few years you can crank up the spending then.
getttinggoing37 wrote:
Wed Jan 08, 2020 12:16 pm
2) Am I crazy to buy this home? It's a second home that will mostly pay its own mortgage/taxes/insurance w/ Airbnb income, and I'll be able to use it personally ~20 weeks a year. I currently rent my primary residence.
Pretty much. If you had a paid off primary residence and a couple of million in the bank then buying a second home might make more sense.

Running an Airbnb is a second job. Between your business, your wife working, and 2 kids you likely don't have a lot of spare time to do that.

20 weeks a year is a LOT when your wife has a job and you are running a business. If you are talking 20 weekends then you also need to consider the ages of your kids since as they get to be older they will have their own friends and activities and may not want to spend 20 weekends away from home. Most likely you will also want to use it during the best times of years which will cut down on your ability to do Airbnb rentals.

You are also likely in a very high tax bracket so even if you make some money off of it a lot it will just go to taxes.

One other thing to watch out for is that many second homes in resort areas will be hit hard in a recession and a bad housing market. They might not only lose a lot of value but they can be very difficult to sell. In a recession fewer people may be renting Airbnbs. Other people who have properties may also try to start renting them because they need the money.

Topic Author
getttinggoing37
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Re: recently high income, couple of qs

Post by getttinggoing37 » Mon Jan 13, 2020 4:20 pm

Thanks for the responses, everyone. Just a few answers to the pattern of qs.

I have a budget and track my expenses, for 2019 we spent ~350k, and see that going up maybe 15% this year

I'm nearly certain that I'll have a similar income for 2020 if not greater, and while nothing is guaranteed the business is stable and revenues are growing. The business itself has significant value if sold today.

The second home would be for weekend use and is about 1.5 hours from our home, so I do plan on spending the time there. I'm not thinking about it as an investment, rather a place to enjoy and recharge. My intention is essentially to mitigate the costs of ownership, if I can reduce these expenses by 75% it will be well worth it for me, I don't need to make a profit from it. In terms of it being a second job to manage it as an Airbnb, I think that might be true, but if it gets too consuming I believe we can find someone else to manage it, as the previous (current owner) does now.

I'm reluctant to buy my primary home and prefer renting for now, mostly because I don't think that I can afford a home that I would want to live comfortably in for the next ten years. The flexibility to scale up is important to me.

Lastly, our company does offer a 401k for employees, but it becomes complex for me to utilize it since I'm on a draw and not salaried, and the way we deal with business tax planning further complicates any tax-deferred savings for this kind of vehicle.

So here's my current thinking:

1) buy the second home
2) put 50k x2 into 529s for the kids, add a few hundred dollars each month to these (they are both under 2 and have time for this to grow)
3) put the balance in vtsax and direct all additional savings there

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Watty
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Re: recently high income, couple of qs

Post by Watty » Mon Jan 13, 2020 10:30 pm

getttinggoing37 wrote:
Mon Jan 13, 2020 4:20 pm
The second home would be for weekend use and is about 1.5 hours from our home, so I do plan on spending the time there. I'm not thinking about it as an investment, rather a place to enjoy and recharge.
One other option would be to rent a house there for a year.

Not only would your finances be better in a year but that would give you a chance to make sure that you really like spending that many weekends there. 1.5 hours does not sound like a lot but 3 hours a weekend adds up and some young kids travel better than others.

It has been a long time since I had a young kid but in addition to car sickness I can remember trips where our kid would be sound asleep when we were driving and once we got to where we were going they would be awake long past their normal bedtime. That would sometimes also make them cranky the next day.

Renting for a year would also give you a chance to learn the area better and when you are ready to buy you might be able to find an even better house.

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geerhardusvos
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Re: recently high income, couple of qs

Post by geerhardusvos » Mon Jan 13, 2020 10:42 pm

getttinggoing37 wrote:
Mon Jan 13, 2020 4:20 pm
Thanks for the responses, everyone. Just a few answers to the pattern of qs.

I have a budget and track my expenses, for 2019 we spent ~350k, and see that going up maybe 15% this year

I'm nearly certain that I'll have a similar income for 2020 if not greater, and while nothing is guaranteed the business is stable and revenues are growing. The business itself has significant value if sold today.

The second home would be for weekend use and is about 1.5 hours from our home, so I do plan on spending the time there. I'm not thinking about it as an investment, rather a place to enjoy and recharge. My intention is essentially to mitigate the costs of ownership, if I can reduce these expenses by 75% it will be well worth it for me, I don't need to make a profit from it. In terms of it being a second job to manage it as an Airbnb, I think that might be true, but if it gets too consuming I believe we can find someone else to manage it, as the previous (current owner) does now.

I'm reluctant to buy my primary home and prefer renting for now, mostly because I don't think that I can afford a home that I would want to live comfortably in for the next ten years. The flexibility to scale up is important to me.

Lastly, our company does offer a 401k for employees, but it becomes complex for me to utilize it since I'm on a draw and not salaried, and the way we deal with business tax planning further complicates any tax-deferred savings for this kind of vehicle.

So here's my current thinking:

1) buy the second home
2) put 50k x2 into 529s for the kids, add a few hundred dollars each month to these (they are both under 2 and have time for this to grow)
3) put the balance in vtsax and direct all additional savings there
I think this is a relatively solid plan given your current standard of living. I personally would try to spend a lot less, but you make 5X what I make. What are your goals? Do you want to retire in 10 years from now? Do you want to keep this business and pass it down? Do you want to sell it? That should dictate a lot of your next steps. If your long-term spending habits are still going to be above $300K? Then you might have to save for quite a while to be honest. But you won’t go wrong in the long term piling money into VTSAX, so cheers to your success! In the good years, try to stash away as much as you can and try not to ramp up the standard of living. Keeping it simple and not getting in over your head with that high of an income will be difficult
VTSAX and chill

KyleAAA
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Re: recently high income, couple of qs

Post by KyleAAA » Mon Jan 13, 2020 11:20 pm

Your plan is a good one. The only thing to watch out for is your spending. At a $350k run rate you already need to accumulate $10mm to retire. Increase your spending further and that number goes up. That’s quite a target.

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White Coat Investor
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Re: recently high income, couple of qs

Post by White Coat Investor » Tue Jan 14, 2020 12:40 am

getttinggoing37 wrote:
Wed Jan 08, 2020 12:16 pm
Long-time lurker, first-time poster.

35 married, 2 kids.

I own my own business that really started taking off over the last few years, income for the past 5 years looked like this:

2015: 125k
2016: 150k
2017: 250k
2018: 600k
2019: 1.3m

The wife has an income of $100k+, no savings, no debt.

Given these numbers, you'd think we'd saved a lot more, but currently, assets (aside from biz) look like this:

Cash 375k: (275k of this is going to close on a home in the next 2 months)
Taxable inv accounts: 500k
Debt: none

1) If I keep up current income, which is not guaranteed, I can save approx 500-600k per year. Should I just dump this into a total market ETF like VTI and not think about it, or should I diversify w/ bonds?

2) Am I crazy to buy this home? It's a second home that will mostly pay its own mortgage/taxes/insurance w/ Airbnb income, and I'll be able to use it personally ~20 weeks a year. I currently rent my primary residence.

Any thoughts appreciated.
Congrats on your success.

1. I prefer to diversify.
2. What home? if your total mortgages are under $2.8M, then no you're not crazy.

At any rate, you're a HENRY. High earner, not rich yet. I'd get rich before you go crazy on the spending. Luckily at an income of $1.4M, that won't take long.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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AerialWombat
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Re: recently high income, couple of qs

Post by AerialWombat » Tue Jan 14, 2020 12:51 am

getttinggoing37 wrote:
Mon Jan 13, 2020 4:20 pm
I'm on a draw and not salaried
Just replying to give you a word of caution. Our friends at the IRS really don't like it when a business owner takes all their pay as distributions, thus avoiding payment of Social Security and Medicare taxes. Talk to your accountant or tax advisor about your potential exposure to "reasonable compensation" issues. I have represented quite a few clients with this particular problem, and the interactions with the IRS on this matter are no fun (nor are the penalties).

Congrats on the success of your business. I've experienced similar growth in the past 5 years, and it can be overwhelming to adjust to it. You're in the right place for the portfolio advice.
“Life doesn’t come with a warranty.” -Michael LeBoeuf

Financologist
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Re: recently high income, couple of qs

Post by Financologist » Tue Jan 14, 2020 1:16 am

Hi there,

Things are looking up for you. That's awesome. It appears you'll have lots of options..

However. You have the opportunity of a lifetime. You can set up your family for the long term. Meaning.. in the next 2-4 years, if your income continues on this path, you'll have enough to pay cash for the family residence, fund the 529s to the gills, and build a 7 figure investment portfolio.. the potential cornerstone of a comfortable retirement.

The other stuff.. like a 2nd home, is terrific. But if I were in your shoes, I would set the family up first. Rent a lovely vacation home and reward yourself and family for the hard work you're undoubtedly doing to build your business. But first thing's first. Nothing about the future is guaranteed.

Good luck

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