Getting our house in order

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r64
Posts: 1
Joined: Thu Apr 29, 2021 3:18 pm

Getting our house in order

Post by r64 »

Looking for some perspectives and advice on what a sensible portfolio would be for my wife and me based on our circumstances.

We're lucky to have a high income and have recently had some windfalls and career success that has left us with a lot of cash and high annual incomes. Most of our assets were gained by us over the past couple of years.

We haven't had a real investment strategy up until now and have ended up with a mishmash of investments. We're looking to get our house in order.

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Debt: None
State: California
Age: Early 30s
Desired allocation: Looking for advice
Combined annual gross income: His: High 6-figures (until H2 due to employment change), Hers: Low 7-figures. ~75% of compensation is in stock grants so our income is highly vulnerable to market swings.
Combined annual net expenses: ~$100k
Combined approx. net worth: $12M
Tax rate: 37% (fed) 13.3% (CA)
Assets:
Taxable
Cash: 22%
SCHO: 19%
House: 18%
Betterment: 11% at 80/20 allocation
VFFVX: 9%
VTI: 6%
Tech Stock B: 6%
Tech Stock A: 4%
401ks
His: VFFVX: 2%
Hers: VFFVX: 3%

Employer match (both): 50% up to 7% pre-tax, Roth up to 3.5% of yearly eligible wages

Contributions:
Her 401K: $30K + $21K employer match / His 401K: $24K + $17K employer match
Available Funds: All Vanguard target date funds

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More background
- I am planning to take a break from work and then start a new business in H2 this year. I don't expect to need to contribute a meaningful amount of my assets to start this business, and expect to be able to quickly draw a modest salary ($75K/yr) by end of year to cover basic expenses.
- While our income is high right now there's no guarantee that this will continue, especially during a downturn. I think a safe lower bound for our combined income would be ~$200k/yr if we were quite unlucky career-wise and stayed in California, ~$100k/yr elsewhere.
- We currently live in California but are considering an eventual relocation to Europe to an area where there would be a lower cost of living but also substantially lower compensation (no fixed time horizon, could be in a few years—could be in a decade or longer). We would still be working after this transition but our main goal would be quality of life rather than maximizing wealth.

Questions:
1. What would a sensible asset allocation be? We're leaning towards something like 50% VTI / 35% VXUS / 15% BND but perhaps we should be more conservative considering our unknown future income? Should we consider international bond exposure via BNDW?
2. When we know what allocation we want, how should we think about transitioning our current holdings to meet our desired allocation (e.g. all in one go? gradually?)
3. Our retirement investments are a very small % of our overall portfolio currently (~5%). Is this healthy, and what (if any) adjustments should we be thinking about?
4. Thoughts on high yield bond funds (potentially in a Roth to avoid taxes on dividends?). Is there value in adding some stock/bond diversity to our "higher risk" assets holdings?

Advice or recommendations very welcome!
orklc
Posts: 22
Joined: Sun Mar 24, 2013 10:35 am

Re: Getting our house in order

Post by orklc »

1. What would a sensible asset allocation be? We're leaning towards something like 50% VTI / 35% VXUS / 15% BND but perhaps we should be more conservative considering our unknown future income? Should we consider international bond exposure via BNDW?
2. When we know what allocation we want, how should we think about transitioning our current holdings to meet our desired allocation (e.g. all in one go? gradually?)
3. Our retirement investments are a very small % of our overall portfolio currently (~5%). Is this healthy, and what (if any) adjustments should we be thinking about?
4. Thoughts on high yield bond funds (potentially in a Roth to avoid taxes on dividends?). Is there value in adding some stock/bond diversity to our "higher risk" assets holdings?
1) 50% VTI / 35% VXUS / 15% BND is sensible. However, if your estimated expenses are accurate, then your current assets are already large enough that any asset allocation you choose is sensible (100% stocks to 100% bonds and anything in between). The asset allocation you choose will be based on your desire to take risk, not a need to take risk. I do question your expense estimate -- in much of the country just property tax and ongoing maintenance would consume much of your 100k expenses for a $2m house.

2) All in one go for the portions where there are no or little consequences to fixing, slowly or not at all otherwise. The main problem with your current portfolio is that the taxable investments contain items that are inefficient from a tax point of view, and there are concentrated risks in the two tech stocks. Whether to hold or sell these items depends largely on what capital gains you would incur from selling. One approach would be to wait until your combined earned income drops, but there are many other unknowable considerations in that path as well. See the wiki pages on managing a windfall and on tax efficient fund placement.

3) If most of your earnings are concentrated in just a few years, then the tax-advantaged portion of your portfolio will be small, and there is little you can do about this. I would stop thinking about your retirement portfolio as just the 401k/ira portions -- your taxable investments are part of your retirement portfolio as well.

4) I don't see a need for high yield anything. In your position I'd put the entirety of the 401ks in BND, taxable in VTI/VXUS. Shift however much of the taxable portion from VTI to bonds (boring index fund types, either munis or treasuries) it takes for you to sleep soundly and ignore market swings.
User avatar
Watty
Posts: 22348
Joined: Wed Oct 10, 2007 3:55 pm

Re: Getting our house in order

Post by Watty »

You may get better responses if you edit your post to add the mutual fund names instead of using the ticker symbols since most people don't have all those memorized. Also what is H2?
r64 wrote: Thu Apr 29, 2021 5:37 pm We currently live in California but are considering an eventual relocation to Europe to an area where there would be a lower cost of living but also substantially lower compensation (no fixed time horizon, could be in a few years—could be in a decade or longer). We would still be working after this transition but our main goal would be quality of life rather than maximizing wealth.
People have posted that California can be aggressive about trying to collect state income tax if you still have connections to California while you are living overseas. Be sure to research what it will take to not be considered a tax resident of California. Even if you move to a different state you still need to be careful about breaking all your ties to California.

Many financial institutions will not allow expatriates who are living overseas to have accounts because of the reporting requirements so also research that. It may make sense to start using a financial institution that is friendly to expatriates now.

Something to add to your checklist is that if you are living overseas then be sure to have wills that will be valid in the country you are living in. Some countries, like France, have very different inheritance laws that may override your will. Even though you are relatively young something could happen like you could be in a fatal car accident. Also have their version of important documents like power of attorney and medical directive paperwork.
chassis
Posts: 376
Joined: Tue Mar 24, 2020 4:28 pm

Re: Getting our house in order

Post by chassis »

Congratulations!

1. Regarding allocation, an idea to consider is to liquidate employer stock options relatively aggressively, when allowed by the plan rules. This reduces concentration risk. I look at taxes paid in this process as the cost for getting to desirable reduction in portfolio concentration. I am a proponent of high percentage in US equities in my allocation, and I also believe in some diversification within them. I like the risk parity analysis in portfoliovisulizer, and I like the idea of low correlation among equities in my portfolio. Have a look at the efficient frontier tool in portfoliovisualizer, and it calculates correlations for you.
Exchme
Posts: 371
Joined: Sun Sep 06, 2020 3:00 pm

Re: Getting our house in order

Post by Exchme »

I would put that 41% cash + short term treasuries to work. At your high NW and especially at your young age, I think it's fine to have a high allocation to stocks, so your proposed 85/15 allocation seams reasonable. However, don't sell anything in taxable (unless you have some losses), your tax bracket is far too high to take any gains, just invest the cash + SCHO. Municipal bonds are designed to be attractive for people in your tax bracket, so look at those for part of your bond holding.

Not sure what Betterment does for you, but it is tedious to have money with different institutions, so you might think about consolidating. Investigate the fees, features, ETFs you can hold, etc. Generally, you can transfer ETFs between institutions without selling, so no taxable event takes place.

I would think with your NW and income, you should be thinking about hiring some specialists, like an estate attorney or a fee-only certified financial planner. Even if you don't make another dime, you may have 5+ decades to live and your assets may double every decade - you may one day be in the 9 figure club, so get some help now. I saw a quote on the White Coat Investor site that applies here:

"I'll pay every dime I owe, but I'm not leaving a tip!"
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