Portfolio review request and Are we there yet?

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doughmeetsoil
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Portfolio review request and Are we there yet?

Post by doughmeetsoil »

Dear bogleheads

Been mulling this over for some time but can't make up my mind on retiring in the next year or so. Grateful if you can review this and provide insights.

Emergency funds: 6 months

Debt: Mortgages 1.7m at 3% 7 yr arm, 300k at 4.75% 30 yr fixed (on rentals so fully deductible)

Tax Filing Status: Married Filing Jointly
Tax Rate: Effective 26% Federal, 7% State

State of Residence: CA

Age:55/50. DS college - expenses fully covered by 529

Desired Asset allocation: 60% stocks / 40% bonds
Desired International allocation: 15% of stocks

Please provide an approximate size of your total portfolio - almost 8 figures

Current retirement assets (NW = net worth)
Real estate investments – 60% of NW – Net returns about 100k per year
Owned home – 20% of NW
Retirement accounts 15% of NW
His 401k 10% of NW at TROW
65% VANGUARD INST INDEX , PLUS VIIIX (0.02%)
35% BLACKROCK US DEBT INDX NON-LEN DEBTM (0.04%)
Company match? 50% - 3% max

His Roth IRA 1.5% of NW at Schwab
90% Stocks various
10% treasuries

His SEP IRA 0.6% of NW at Schwab
93% Stocks various
7% treasuries
Her Traditional IRA 0.75% of NW at Schwab
99% Stocks various
1% treasuries

Her ROTH 1.2% of NW at Schwab
100% Stocks various

Her Rollover IRA 0.3% of NW at Fidelity
70% stocks various
30% bonds FNMIX

Her SEP IRA 1.4% of NW at Fidelity
100% stocks various

Taxable 5% of NW
40% cash in Treasuries (for investing – do not include emergency funds)
20% VTI
40% Wealthfront 70% stock, 30% bond various

Contributions
New annual Contributions
$20k his 401k (+ 6k employer)
$30k her SEP
$7.5k his Roth IRA
$7.5k her Roth IRA
$50k taxable (for retirement, not short term goals)

Questions:
1. Simplify investments

2. Work is relatively easy, but it does require time and attention. We feel we have enough to enjoy 20 to 30 healthy years. If we decide to retire in a year or so, how would we fund the expenses of about 150k considering that 80% of NW is in RE that returns about 70% of the expected expenses

3. When to claim SS

4. If we retire next year (56/51) – what should be estimated for ACA expenses? Are healthy adults who plan to be in the country for only half the year choosing different options?

Thanks
doughmeetsoil
Last edited by doughmeetsoil on Mon Apr 01, 2024 10:09 pm, edited 1 time in total.
chassis
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Re: Portfolio review request and Are we there yet?

Post by chassis »

doughmeetsoil wrote: Mon Apr 01, 2024 7:21 pm Please provide an approximate size of your total portfolio - almost 8 figures
You are there. Congratulations.

doughmeetsoil wrote: Mon Apr 01, 2024 7:21 pm 1. Simplify investments
Yes, a universal good.
doughmeetsoil wrote: Mon Apr 01, 2024 7:21 pm 2. ...how would we fund the expenses of about 150k..
From $6m in emergency funds.

doughmeetsoil wrote: Mon Apr 01, 2024 7:21 pm 3. When to claim SS
At the first opportunity, or as late as you want. You "are there", so SS has no appreciable influence on your financial outcome.
doughmeetsoil wrote: Mon Apr 01, 2024 7:21 pm 4. If we retire next year (56/51) – what should be estimated for ACA expenses? Are healthy adults who plan to be in the country for only half the year choosing different options?
Healthcare.gov will give you that information.
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doughmeetsoil
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Re: Portfolio review request and Are we there yet?

Post by doughmeetsoil »

chassis wrote: Mon Apr 01, 2024 8:54 pm
doughmeetsoil wrote: Mon Apr 01, 2024 7:21 pm 2. ...how would we fund the expenses of about 150k..
Clarification From $6m in emergency funds.

6m was 6 months not 6 million
lakpr
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Re: Portfolio review request and Are we there yet?

Post by lakpr »

Your real estate investments are 60% of a 8 figure portfolio, or $6 million, generating $100k per year. That is 1.6% return on your investment. You can do so much better by just being in money market funds yielding 5% or $300k per year.

Sell your rentals.
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MikeWillRetire
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Re: Portfolio review request and Are we there yet?

Post by MikeWillRetire »

lakpr wrote: Tue Apr 02, 2024 4:14 am Your real estate investments are 60% of a 8 figure portfolio, or $6 million, generating $100k per year. That is 1.6% return on your investment. You can do so much better by just being in money market funds yielding 5% or $300k per year.

Sell your rentals.
But isn't it possible that his real estate value is increasing more than 5% per year in addition to the rental profit?
lakpr
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Re: Portfolio review request and Are we there yet?

Post by lakpr »

MikeWillRetire wrote: Tue Apr 02, 2024 8:28 am
lakpr wrote: Tue Apr 02, 2024 4:14 am Your real estate investments are 60% of a 8 figure portfolio, or $6 million, generating $100k per year. That is 1.6% return on your investment. You can do so much better by just being in money market funds yielding 5% or $300k per year.

Sell your rentals.
But isn't it possible that his real estate value is increasing more than 5% per year in addition to the rental profit?
It is also possible that if he invests the realized money in stocks they will increase more than the 5% per year that money markets yield. It's basically what asset allocation he chooses with the proceeds after selling the rentals. I took the money-market funds yields as the lowest baseline.

Tangentially ... are real estate prices REALLY going up 5% year on year? Does/did any of the rentals appreciated by $200k compared to an year ago?
sailaway
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Re: Portfolio review request and Are we there yet?

Post by sailaway »

lakpr wrote: Tue Apr 02, 2024 8:32 am
MikeWillRetire wrote: Tue Apr 02, 2024 8:28 am
lakpr wrote: Tue Apr 02, 2024 4:14 am Your real estate investments are 60% of a 8 figure portfolio, or $6 million, generating $100k per year. That is 1.6% return on your investment. You can do so much better by just being in money market funds yielding 5% or $300k per year.

Sell your rentals.
But isn't it possible that his real estate value is increasing more than 5% per year in addition to the rental profit?
It is also possible that if he invests the realized money in stocks they will increase more than the 5% per year that money markets yield. It's basically what asset allocation he chooses with the proceeds after selling the rentals. I took the money-market funds yields as the lowest baseline.

Tangentially ... are real estate prices REALLY going up 5% year on year? Does/did any of the rentals appreciated by $200k compared to an year ago?
We have a friend who got into real estate a few years ago and then the market became the fastest growing in the US. Ain't no one going to talk him out of real estate and his properties are barely revenue neutral.

OP, 20% of $10M is plenty to generate the $50k a year you estimate you need. However, it doesn't sound like $150k spending is very accurate, as you ask about healthcare after giving that number. Does $150k include taxes? Do you have separate funding to cover issues at the rentals, such as a prolonged vacancy?
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doughmeetsoil
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Re: Portfolio review request and Are we there yet?

Post by doughmeetsoil »

lakpr wrote: Tue Apr 02, 2024 4:14 am Your real estate investments are 60% of a 8 figure portfolio, or $6 million, generating $100k per year. That is 1.6% return on your investment. You can do so much better by just being in money market funds yielding 5% or $300k per year.

Sell your rentals.
We have considered selling them as well. However a very large part of the current value of rentals is capital gain. Selling them will cost a lot in taxes on cap gain and depreciation recapture. Our plan is to tell the kids to sell the rentals when they inherit those with step up basis.
runningshoes
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Re: Portfolio review request and Are we there yet?

Post by runningshoes »

Can you add some details on the rentals as it's not really possible to help on this w/o seeing the growth in equity from principal payments each month/year for each rental? One thought on minimizing the tax bite is to sell your primary residence and move into one of the rentals for 2 years and then sell it as well. Obviously, you would need to figure out if the remaining rental is a fit for a permanent residence or would you go buy a smaller home at that point to help your cash flow in retirement.
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doughmeetsoil
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Re: Portfolio review request and Are we there yet?

Post by doughmeetsoil »

sailaway wrote: Tue Apr 02, 2024 9:06 am
OP, 20% of $10M is plenty to generate the $50k a year you estimate you need. However, it doesn't sound like $150k spending is very accurate, as you ask about healthcare after giving that number. Does $150k include taxes? Do you have separate funding to cover issues at the rentals, such as a prolonged vacancy?
For issues in the rentals like vacancy, turnover, roof, AC etc., I have allocated money out of the rent every month and the net return from the rentals is calculated after including this number as an expense. Healthcare and taxes are more difficult to estimate because I cannot easily estimate MAGI. Covered CA website says that for 2 persons 56/51 earning 150k, expected expense for a silver plan is 1068 per month and if the MAGI is 75000, silver plan costs 500 per month. I have estimated10k healthcare and 15k taxes in the 150k expenses.
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doughmeetsoil
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Re: Portfolio review request and Are we there yet?

Post by doughmeetsoil »

runningshoes wrote: Tue Apr 02, 2024 10:51 am Can you add some details on the rentals as it's not really possible to help on this w/o seeing the growth in equity from principal payments each month/year for each rental? One thought on minimizing the tax bite is to sell your primary residence and move into one of the rentals for 2 years and then sell it as well. Obviously, you would need to figure out if the remaining rental is a fit for a permanent residence or would you go buy a smaller home at that point to help your cash flow in retirement.
Thanks this is a good idea as there is a rental we can move into. The primary has 1.5m in capital gain built in and after taking basis updates and 500k exemption, tax bite may be palatable. Maybe that is something we tackle when we stop working...
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doughmeetsoil
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Re: Portfolio review request and Are we there yet?

Post by doughmeetsoil »

Re deferring taxes on selling the rentals, couple options are 1031 exchange into another real estate property or 1031 into a Delaware Savings Trust. I am researching the costs and management (do you have to do it again and again) involved in these options at this time. If someone has worked on this in the past and can give a general primer on what they found, that would be awesome.

Looking at the situation as it is now, how comfortable does it look if we retire from our regular work?
lakpr
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Re: Portfolio review request and Are we there yet?

Post by lakpr »

doughmeetsoil wrote: Wed Apr 03, 2024 10:26 am Looking at the situation as it is now, how comfortable does it look if we retire from our regular work?
Your rentals are 60% of your net worth, and your primary home is 15% of your net worth, and selling either of them is being ruled out for various reasons. So you have only 25% of your net worth, or about $2.5 million that is liquid enough and should cover your expenses.

A 3% withdrawal rate from this (remember, the 4% figure from Trinity Study covered only 30 years; and more sophisticated / recent calculators that use Monte Carlo simulations put the safe withdrawal rate somewhere between 3% and 3.5%) is $75k. You are also expecting a $100k income from the rentals.

If $175k annual income is enough to cover your expenses -- INCLUDING taxes and health insurance, and upcoming/ongoing college expenses -- THEN you can retire from your regular work. Your original post claimed $150k in expenses, but I suspect that does not include health insurance premiums, and quite possibly it is an after-tax figure.

I'd say it is a LEAN FIRE. Now if you can sell those rentals, have those assets being liquid, you can definitely retire tomorrow.
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Re: Portfolio review request and Are we there yet?

Post by HMSVictory »

Obviously with a 8 figure net worth you are GOOD with money! Bravo.

You are also very comfortable with debt and owe $2M.

Nothing is on fire, but I'd come up with a plan to do one of two things:
  • zero out this debt or
  • sell the properties / 1.6% yield on your investment (best case scenario is miserable long term)
When you are retired you want to minimize the variables and maximize your stability. Don't fall for the "my mortgages are cheap" trap.
Stay the course!
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doughmeetsoil
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Re: Portfolio review request and Are we there yet?

Post by doughmeetsoil »

lakpr wrote: Wed Apr 03, 2024 10:33 am
doughmeetsoil wrote: Wed Apr 03, 2024 10:26 am Looking at the situation as it is now, how comfortable does it look if we retire from our regular work?
Your rentals are 60% of your net worth, and your primary home is 15% of your net worth, and selling either of them is being ruled out for various reasons. So you have only 25% of your net worth, or about $2.5 million that is liquid enough and should cover your expenses.

A 3% withdrawal rate from this (remember, the 4% figure from Trinity Study covered only 30 years; and more sophisticated / recent calculators that use Monte Carlo simulations put the safe withdrawal rate somewhere between 3% and 3.5%) is $75k. You are also expecting a $100k income from the rentals.

If $175k annual income is enough to cover your expenses -- INCLUDING taxes and health insurance, and upcoming/ongoing college expenses -- THEN you can retire from your regular work. Your original post claimed $150k in expenses, but I suspect that does not include health insurance premiums, and quite possibly it is an after-tax figure.

I'd say it is a LEAN FIRE. Now if you can sell those rentals, have those assets being liquid, you can definitely retire tomorrow.
Thank you. Right now, we are planning this out so nothing is sacred or off the table. Maybe reducing the rental exposure slowly over the years will release the equity for spending big (can't imagine what)
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doughmeetsoil
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Re: Portfolio review request and Are we there yet?

Post by doughmeetsoil »

HMSVictory wrote: Wed Apr 03, 2024 10:42 am Obviously with a 8 figure net worth you are GOOD with money! Bravo.

You are also very comfortable with debt and owe $2M.

Nothing is on fire, but I'd come up with a plan to do one of two things:
  • zero out this debt or
  • sell the properties / 1.6% yield on your investment (best case scenario is miserable long term)
When you are retired you want to minimize the variables and maximize your stability. Don't fall for the "my mortgages are cheap" trap.
I think taxes on exits make the selling decision a little less palatable
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Re: Portfolio review request and Are we there yet?

Post by HMSVictory »

doughmeetsoil wrote: Wed Apr 03, 2024 11:30 am
HMSVictory wrote: Wed Apr 03, 2024 10:42 am Obviously with a 8 figure net worth you are GOOD with money! Bravo.

You are also very comfortable with debt and owe $2M.

Nothing is on fire, but I'd come up with a plan to do one of two things:
  • zero out this debt or
  • sell the properties / 1.6% yield on your investment (best case scenario is miserable long term)
When you are retired you want to minimize the variables and maximize your stability. Don't fall for the "my mortgages are cheap" trap.
I think taxes on exits make the selling decision a little less palatable
I understand that but I wouldn't let 15% capital gains taxes tail wag the dog.

I'd gladly pay the capital gains taxes and move the money from yielding 1.6% to 8-9% which should be achievable long term in equities.

If you think in terms of decades, it may be more palatable than you think. You can model this exact scenario in newretirement(dot)com.
Stay the course!
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Re: Portfolio review request and Are we there yet?

Post by CoAndy »

lakpr wrote: Tue Apr 02, 2024 4:14 am Your real estate investments are 60% of a 8 figure portfolio, or $6 million, generating $100k per year. That is 1.6% return on your investment. You can do so much better by just being in money market funds yielding 5% or $300k per year.

Sell your rentals.
I agree with this, though there are no doubt complications.
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doughmeetsoil
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Re: Portfolio review request and Are we there yet?

Post by doughmeetsoil »

CoAndy wrote: Thu Apr 04, 2024 8:19 am
lakpr wrote: Tue Apr 02, 2024 4:14 am Your real estate investments are 60% of a 8 figure portfolio, or $6 million, generating $100k per year. That is 1.6% return on your investment. You can do so much better by just being in money market funds yielding 5% or $300k per year.

Sell your rentals.
I agree with this, though there are no doubt complications.
Appreciate the input. However I think we are in a wealth preservation mode. We are not trying to increase our networth. This is also partially the reason we are trying to reduce our work. If we sell all the rental for example, we would introduce couple million in capital gains which would probably be taxed at 20% Federal and 12.3% California. Add depreciation recapture

Selling the rental would be an option if our expenses cannot be met by our income.
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doughmeetsoil
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Re: Portfolio review request and Are we there yet?

Post by doughmeetsoil »

HMSVictory wrote: Thu Apr 04, 2024 7:15 am
doughmeetsoil wrote: Wed Apr 03, 2024 11:30 am
HMSVictory wrote: Wed Apr 03, 2024 10:42 am Obviously with a 8 figure net worth you are GOOD with money! Bravo.

You are also very comfortable with debt and owe $2M.

Nothing is on fire, but I'd come up with a plan to do one of two things:
  • zero out this debt or
  • sell the properties / 1.6% yield on your investment (best case scenario is miserable long term)
When you are retired you want to minimize the variables and maximize your stability. Don't fall for the "my mortgages are cheap" trap.
I think taxes on exits make the selling decision a little less palatable
I understand that but I wouldn't let 15% capital gains taxes tail wag the dog.

I'd gladly pay the capital gains taxes and move the money from yielding 1.6% to 8-9% which should be achievable long term in equities.

If you think in terms of decades, it may be more palatable than you think. You can model this exact scenario in newretirement(dot)com.
Thanks for the link. I will try to model it out. I also checked the tax rates. I wish net taxes were 15%. For capital gains over 560k, fed taxes would be 20% and CA taxes would be 12.3%. We also have significant depreciation that would involve recapture. It will take some work to make it palatable 😊
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doughmeetsoil
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Re: Portfolio review request and Are we there yet?

Post by doughmeetsoil »

HMSVictory wrote: Thu Apr 04, 2024 7:15 am
If you think in terms of decades, it may be more palatable than you think. You can model this exact scenario in newretirement(dot)com.
Really like the website. Going to plus level (free for 14 days) to see how they model RE taxes. Wonder if anyone here keeps their $120 a year plan.. What value do they get out of the plus plan every year
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HMSVictory
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Re: Portfolio review request and Are we there yet?

Post by HMSVictory »

doughmeetsoil wrote: Fri Apr 05, 2024 11:58 am
HMSVictory wrote: Thu Apr 04, 2024 7:15 am
If you think in terms of decades, it may be more palatable than you think. You can model this exact scenario in newretirement(dot)com.
Really like the website. Going to plus level (free for 14 days) to see how they model RE taxes. Wonder if anyone here keeps their $120 a year plan.. What value do they get out of the plus plan every year
The value is as I get closer and closer to retirement you update the plan with your ACTUAL numbers - then you can model all sorts of fun stuff like one time expenses, social security strategies and roth conversions. The tool is very powerful!
Stay the course!
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