Porfolio review around financial independence

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Topic Author
chem6022
Posts: 94
Joined: Sat May 11, 2019 9:19 pm

Porfolio review around financial independence

Post by chem6022 »

Emergency funds: 1 year of expenses
Debt: none, renting

Tax Filing Status: single, no kids
Tax Rate: 35% Federal, 9.3% State, 3.8% NIIT
State of Residence: California

Age: 47
Desired asset allocation: 63% stocks / 37% bonds (see Investment Target below for details)
Desired international allocation: 30% of equities
Portfolio size: ~1.5M

HSA
0.8% Vanguard Total World Stock ETF (VT) 0.08%

SEP-IRA
4.0% Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) 0.05%

401k
7.8% Vanguard Long-Term Treasury ETF (VGLT) 0.05%
0.4% Fidelity US Bond Index Fund (FXNAX) 0.025%

Roth
9.2% Fidelity ZERO Total Market Index Fund (FZROX) 0.00%
13.9% Vanguard Total World Stock ETF (VT) 0.08%

Treasury Direct
2.0% I-bonds

Taxable
9.9% Vanguard Total Stock Market ETF (VTI) 0.03%
12.8% Vanguard Total International Stock ETF (VXUS) 0.08%
19.1% Vanguard Small-Cap Value ETF (VBR) 0.07%
14.4% Vanguard Long-Term Treasury ETF (VGLT) 0.05%
6.1% Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) 0.05%

New annual Contributions
19.5k + 8.8k match in 401k
120k taxable

Funds available in 401k
95% can be in Brokeragelink invested in almost anything
5% has to be in these
Fidelity US Bond Index Fund (FXNAX) 0.025%
Dodge & Cox Income Fund (DODIX) 0.42%
Fidelity 500 Index (FXAIX) 0.015%
Fidelity International Index (FSPSX) 0.035%
Fidelity Extended Market Index (FSMAX) 0.035%
Fidelity Emerging Markets Index (FPADX) 0.075%
Fidelity Freedom Index 2030 Fund (FXIFX) 0.12% [Dates every 5 years]
Plus other higher ER equity funds

Retirement Outlook
Looking at 0-2 years away
Conservatively targeting 50k expenses at 30x or more
SS at 70 is ~26k if fully funded
Taxable cost basis is about 70% of value

Investment Target (30x overall)
4x 13.3% Short-term TIPS & I-bonds
7x 23.3% Long-term treasuries
6x 20.0% Small cap value
13x 43.4% Total world stocks

If you squint this looks something like a golden butterfly variant without gold, maybe a tipsy butterfly. The short-term TIPS (VTIP) provide near term spending needs and unexpected inflation protection, while the long-term treasuries complement the equities.

Questions:

1. Am I financially independent now? For example, VPW suggests I could withdraw 70k normally or 50k after a 50% market drop, where even the lower amount already equals my planned expenses. Also those expenses are fairly flexible, as I am the most frugle person I know in real life even if I do live in San Francisco.

2. How much should I fear non-muni bonds in taxable? With low interest rates now and lower tax brackets when I retire, I hope this will not have a huge dollar impact, but admittedly this is my first year trying this. My reasoning is that I have always preferred treasuries to corporates because of the way corporate credit risk spikes at exactly the same time when I most want my bonds to be protecting me. I previously had California munis but they dropped similarly to corporates during the 2020 downturn. It will likely be a full decade before I can access tax-deferred, so having some bonds for spending in taxable makes things easier.

3. How to factor in private biotech startup incentive stock options (ISO)? As one of the first 10 employees at a venture-backed startup I already early exercised my initial seed round options. But when I do leave my job I will have 90 days to exercise the rest. I plan to pay the mid-5-digits to exercise them, but there is still a chance the stock ends up worthless before I can sell it. I feel like the company is doing well but as a biotech there are still huge risks and slower timeframes. However if it pays out it could be in the 200k to 2M range. I currently value this at zero for planning purposes, but it honest could change where I end up retiring. How do others handle this?

4. I am currently struggling with retirement timing? I feel like I will be fine money wise, so this really should be about choosing to work longer. At the same time I am still contributing 3x plus portfolio growth every year I continue to work. Plus I have a wonderful job with a great team that I will likely miss after being away for a couple of years. Yet I could really use a breather as soon as possible if I am going to stay long, maybe even 2-3 months leave. Partly because of this timing uncertainty, I have been avoiding conversations about how my compensation has been flat for 4 years - even while both technical leadership and project management job responsibilies have been added. Along with COVID craziness that leaves me just mailing my work in right now, which is unfamiliar and non-ideal to remain longer term. Do I rock the boat about compensation even if I might retire soon? Should I ask about a leave of absense and/or officially reducing hours and responsibilities? It seems like approaching FI made this a lot more muddled when I expected it to make things clearer.

5. Any other portfolio or planning thoughts through this critical transition?
theorist
Posts: 1329
Joined: Sat Sep 28, 2019 11:39 am

Re: Porfolio review around financial independence

Post by theorist »

OP, it seems like the main thing you didn’t clearly articulate here is — why are you retiring? I understand the burnout of covid plus a few years of flat compensation as responsibility ramps up. But it sounds like you enjoy your job, could just use some time off, and are not proactively looking forward to new opportunities retirement brings you. Without the latter, it seems odd to choose to retire as opposed to dialing back for a time and re - evaluating. Your idea of getting a few month leave — and maybe asking for changed work conditions, or whatever, as you decide whether yo come back — seems like what is called for.

(I’m not commenting on financial details, but retirement with a very careful eye on expenses may be possible now — but seems like it would be more of a slam dunk in 5-10 years, still qualifying you as an early retiree!)
sycamore
Posts: 6360
Joined: Tue May 08, 2018 12:06 pm

Re: Porfolio review around financial independence

Post by sycamore »

chem6022,
chem6022 wrote: Mon Oct 25, 2021 2:45 pm 1. Am I financially independent now? For example, VPW suggests I could withdraw 70k normally or 50k after a 50% market drop, where even the lower amount already equals my planned expenses. Also those expenses are fairly flexible, as I am the most frugle person I know in real life even if I do live in San Francisco.
Based on just current assets & expected expenses, I think you're in a gray area where financial independence could come & go in a matter of months if the stock market were to drop say 30% or more and your withdrawal rate goes up quite a bit.

But given your flexibility, and Social Security benefits (even if you discount it by 25% as many people do), I think that puts you in the FI camp. Congrats :)
chem6022 wrote: Mon Oct 25, 2021 2:45 pm 2. How much should I fear non-muni bonds in taxable? With low interest rates now and lower tax brackets when I retire, I hope this will not have a huge dollar impact, but admittedly this is my first year trying this. My reasoning is that I have always preferred treasuries to corporates because of the way corporate credit risk spikes at exactly the same time when I most want my bonds to be protecting me. I previously had California munis but they dropped similarly to corporates during the 2020 downturn. It will likely be a full decade before I can access tax-deferred, so having some bonds for spending in taxable makes things easier.
Not much to fear, IMO. Currently rates are relatively low so income from them will be low too. Big unknown is tax brackets, but for $50k - std deduction (and filing single) likely you'll stay in low brackets.

Do you think you'd ever go back to munis? If rates do go up significantly and the higher income pushes you into a higher bracket (or, makes taxable bonds less competitive with muni bonds), likely your taxable bonds dropped in price and you could either sell for low cap gains or even tax loss harvest, and then switch to munis. So there's an "out" for you in the rising rates scenario.

Regarding the "It will likely be a full decade before I can access tax-deferred", see https://www.madfientist.com/how-to-acce ... nds-early/ for some ideas.

Regarding "so having some bonds for spending in taxable makes things easier", see https://www.bogleheads.org/wiki/Placing ... ed_account. It doesn't solve everything but may be some food for thought.
chem6022 wrote: Mon Oct 25, 2021 2:45 pm 3. How to factor in private biotech startup incentive stock options (ISO)? As one of the first 10 employees at a venture-backed startup I already early exercised my initial seed round options. But when I do leave my job I will have 90 days to exercise the rest. I plan to pay the mid-5-digits to exercise them, but there is still a chance the stock ends up worthless before I can sell it. I feel like the company is doing well but as a biotech there are still huge risks and slower timeframes. However if it pays out it could be in the 200k to 2M range. I currently value this at zero for planning purposes, but it honest could change where I end up retiring. How do others handle this?
"Don't count your chickens until they've hatched" :) which it sounds like you're doing.

My two cents with ISO says don't let the tax tail wag the dog. I did let that happen and it cost me - stock ended up dropping like a rock. Would've been better to sell as son as practical and pay the tax cost.
chem6022 wrote: Mon Oct 25, 2021 2:45 pm 4. I am currently struggling with retirement timing? I feel like I will be fine money wise, so this really should be about choosing to work longer. At the same time I am still contributing 3x plus portfolio growth every year I continue to work. Plus I have a wonderful job with a great team that I will likely miss after being away for a couple of years. Yet I could really use a breather as soon as possible if I am going to stay long, maybe even 2-3 months leave. Partly because of this timing uncertainty, I have been avoiding conversations about how my compensation has been flat for 4 years - even while both technical leadership and project management job responsibilies have been added. Along with COVID craziness that leaves me just mailing my work in right now, which is unfamiliar and non-ideal to remain longer term. Do I rock the boat about compensation even if I might retire soon? Should I ask about a leave of absense and/or officially reducing hours and responsibilities? It seems like approaching FI made this a lot more muddled when I expected it to make things clearer.
Hard to answer not knowing all the specifics. But I'll suggest thinking about things from the "satisficer" point of view: you have a good job & team that you like, but the compensation is less than you think it should be. The key question is: is your compensation good enough, especially knowing that you have a clear path to FI.

I think the answer comes down to what you prioritize in life: getting your just/fair compensation, resolving any resentment/unhappiness knowing that you're not being treated fairly, focusing your time/energy on things that make you happy. Not everyone feels the same about those things so think it through & make your best decision. If you do decide to press the matter, avoid burning bridges is usually good advice :)
chem6022 wrote: Mon Oct 25, 2021 2:45 pm 5. Any other portfolio or planning thoughts through this critical transition?
1. Minor optimization idea: Small Cap Value fund (VBR) is less tax-efficient than either Total US Stock or Total Intl Stock, and probably better off placed in Roth. Not completely clear cut as VBR also offers some more opportunity for tax loss harvesting. You may have built up enough gains already to make switching not worth the cost.

2. Keep an open mind about what retirement means. Retirement doesn't have to be permanent -- if stocks go south and you end up worried about your portfolio, better to go back to work if you knew all along it was a "plan B". Or maybe you find that you miss working with good colleagues and great projects.

3. As part of retirement, look into volunteer opportunities. You've probably gained much knowledge & experience over your career that could be very helpful to schools or non-profits doing good work.

Good luck with all that !
Topic Author
chem6022
Posts: 94
Joined: Sat May 11, 2019 9:19 pm

Re: Porfolio review around financial independence

Post by chem6022 »

theorist wrote: Mon Oct 25, 2021 3:01 pm OP, it seems like the main thing you didn’t clearly articulate here is — why are you retiring? I understand the burnout of covid plus a few years of flat compensation as responsibility ramps up. But it sounds like you enjoy your job, could just use some time off, and are not proactively looking forward to new opportunities retirement brings you. Without the latter, it seems odd to choose to retire as opposed to dialing back for a time and re - evaluating. Your idea of getting a few month leave — and maybe asking for changed work conditions, or whatever, as you decide whether yo come back — seems like what is called for.

(I’m not commenting on financial details, but retirement with a very careful eye on expenses may be possible now — but seems like it would be more of a slam dunk in 5-10 years, still qualifying you as an early retiree!)
It's a great question, and I might end up taking a break and going back to work after 2 months or 2 years off. However I would like the option of making it permanent if I decide. For both innate and health reasons, work is much more all-encompassing for me than most. I don't have lupus but "spoon theory" is the best way to describe the mental and physical effects. I am often able to counter that with a strong passion and deep focus, but it is not getting any easier as I get older. So at some point I would definitely like to devote more of my energy to other parts of my life outside of work. Also my mother retired at 50, so I've long considered this as an option. Meanwhile my father died of cancer at 50, so I am extra aware that my time could be limited.
Topic Author
chem6022
Posts: 94
Joined: Sat May 11, 2019 9:19 pm

Re: Porfolio review around financial independence

Post by chem6022 »

sycamore wrote: Mon Oct 25, 2021 4:09 pm 1. Based on just current assets & expected expenses, I think you're in a gray area where financial independence could come & go in a matter of months if the stock market were to drop say 30% or more and your withdrawal rate goes up quite a bit.

But given your flexibility, and Social Security benefits (even if you discount it by 25% as many people do), I think that puts you in the FI camp. Congrats :)
1. I agree it is definitely social security and flexibility that put it over the top. Being in a rent-controlled apartment pegged to 2005 rental rates also gives me a lot of confidence if I decide to stay here.
sycamore wrote: Mon Oct 25, 2021 4:09 pm 2. Not much to fear, IMO. Currently rates are relatively low so income from them will be low too. Big unknown is tax brackets, but for $50k - std deduction (and filing single) likely you'll stay in low brackets.

Do you think you'd ever go back to munis? If rates do go up significantly and the higher income pushes you into a higher bracket (or, makes taxable bonds less competitive with muni bonds), likely your taxable bonds dropped in price and you could either sell for low cap gains or even tax loss harvest, and then switch to munis. So there's an "out" for you in the rising rates scenario.
2. I doubt I would switch back to munis, but if rates go up considerably and my tax bracket remains high it would definitely test my conviction. My tax-deferred space should grow the longer I continue to work so that would also reduce the need. Right now I am very constrained with only 1/8th of my portfolio being tax deferred.
sycamore wrote: Mon Oct 25, 2021 4:09 pm 3. "Don't count your chickens until they've hatched" :) which it sounds like you're doing.

My two cents with ISO says don't let the tax tail wag the dog. I did let that happen and it cost me - stock ended up dropping like a rock. Would've been better to sell as son as practical and pay the tax cost.
3. So you would even forgo the 1-year long-term capital gains wait? Definitely something to think about, especially if I have stopped working if and when they become liquid.
sycamore wrote: Mon Oct 25, 2021 4:09 pm 4. Hard to answer not knowing all the specifics. But I'll suggest thinking about things from the "satisficer" point of view: you have a good job & team that you like, but the compensation is less than you think it should be. The key question is: is your compensation good enough, especially knowing that you have a clear path to FI.

I think the answer comes down to what you prioritize in life: getting your just/fair compensation, resolving any resentment/unhappiness knowing that you're not being treated fairly, focusing your time/energy on things that make you happy. Not everyone feels the same about those things so think it through & make your best decision. If you do decide to press the matter, avoid burning bridges is usually good advice :)
4. I definitely won't be burning bridges with this team, as it has been a great ride. My compensation is good enough for the time and effort I can muster right now, but I do hope the feeling is mutual. Performance feedback should open up again after a long COVID hiatus, so maybe I will know more soon.
sycamore wrote: Mon Oct 25, 2021 4:09 pm 1. Minor optimization idea: Small Cap Value fund (VBR) is less tax-efficient than either Total US Stock or Total Intl Stock, and probably better off placed in Roth. Not completely clear cut as VBR also offers some more opportunity for tax loss harvesting. You may have built up enough gains already to make switching not worth the cost.
2. Keep an open mind about what retirement means. Retirement doesn't have to be permanent -- if stocks go south and you end up worried about your portfolio, better to go back to work if you knew all along it was a "plan B". Or maybe you find that you miss working with good colleagues and great projects.
3. As part of retirement, look into volunteer opportunities. You've probably gained much knowledge & experience over your career that could be very helpful to schools or non-profits doing good work.

Good luck with all that !
1. This is a good suggestion, but indeed I swapped from VIOV to VBR in a tax-loss harvest and the gains are pretty substantial since. I even rebalanced out of the position due to overweight. In the future I really would not mind going global weight with a single worldwide small-cap value fund, but those do not seem to exist yet.
2. & 3. Yeah I can definitely see the potential to want to go to back to work after say 2 years when I am feeling more refreshed and renewed. Or not.
sycamore
Posts: 6360
Joined: Tue May 08, 2018 12:06 pm

Re: Porfolio review around financial independence

Post by sycamore »

chem6022 wrote: Mon Oct 25, 2021 6:15 pm ...
sycamore wrote: Mon Oct 25, 2021 4:09 pm 3. "Don't count your chickens until they've hatched" :) which it sounds like you're doing.

My two cents with ISO says don't let the tax tail wag the dog. I did let that happen and it cost me - stock ended up dropping like a rock. Would've been better to sell as son as practical and pay the tax cost.
3. So you would even forgo the 1-year long-term capital gains wait? Definitely something to think about, especially if I have stopped working if and when they become liquid.
In the dot com boom era when it seemed like stocks just kept going up, it seemed easy just wait for the 1-year holding period.

But in the dot com crash, many stocks dropped 60, 70, 80% in a matter of months. In retrospect, it would've been better to pay short-term rates of 40%+ (combined fed + state). There was no way to know, and that's still true today. Just the nature of risk.

Knowing what I know now, rather than focusing on the large "loss" of the tax bite, I would've given more consideration to what the ISO proceeds could've been used for like paying off mortgage or debt, or use bonds to ensure financial security of X years spending expenses. Or at least stop taking on diversified risk of a single company stock!
Topic Author
chem6022
Posts: 94
Joined: Sat May 11, 2019 9:19 pm

Re: Porfolio review around financial independence

Post by chem6022 »

sycamore wrote: Tue Oct 26, 2021 4:28 pm In the dot com boom era when it seemed like stocks just kept going up, it seemed easy just wait for the 1-year holding period.

But in the dot com crash, many stocks dropped 60, 70, 80% in a matter of months. In retrospect, it would've been better to pay short-term rates of 40%+ (combined fed + state). There was no way to know, and that's still true today. Just the nature of risk.

Knowing what I know now, rather than focusing on the large "loss" of the tax bite, I would've given more consideration to what the ISO proceeds could've been used for like paying off mortgage or debt, or use bonds to ensure financial security of X years spending expenses. Or at least stop taking on diversified risk of a single company stock!
True and thanks for the perspective! I had just started investing during the dot-com crash, when I was not a boglehead yet but had just bought my first index fund. So I personally experienced a 80% drawdown including one stock that went to zero plus a small inheritance in QQQ that dropped over 80% due to my (and my dads) impeccable timing. Fun times indeed.
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