Early 30s-- planning for the long term

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mb189
Posts: 6
Joined: Tue Nov 30, 2021 9:35 am

Early 30s-- planning for the long term

Post by mb189 »

Hi All! I am new to the forum here and relatively new to all the technical details of modern portfolio theory. That said, I have a graduate degree in a quantitative field and an undergrad degree in Econ. We've only had any significant money to invest for the last ~2 years due to spending ~5 years each in graduate school, paying off student loans, and finally buying a house. In retrospect I wish we had set aside a small amount earlier but it was nearly impossible until we achieved those goals. Nevertheless we have a solid foundation to work from and are looking forward to doing long term planning.

Emergency funds: 6 months living expenses. My wife has the most stable healthcare job in the world, we could temporarily live off either income if needed, and we have no shortage of access to credit.

Debt: We owe 40k on one car (purchased a month ago) and other is paid off. We obviously could pay off the existing car loan but I see no reason to do so in current interest rate environment.

We owe ~360k on house @ 2.5% fixed 30 year, purchased in 2020. House was recently appraised at ~550k (part of that is market appreciation, most of that is we renovated a lot of the house ourselves). Our mortgage + interest + insurance + taxes is ~2300 all in. Our house is very "safe" in that we are not in a HCOL area with crazy appreciation right now, solid school district, gated community, etc. So even if the housing market overall got hit very hard, I am *extremely* confident that our home equity is reasonably safe. It is basically perfect for a millennial family of 4.

No CC/revolving debt.

Tax Filing Status: Married filing jointly

Tax Rate: We just barely cross into 32 federal but get back to 24 with 401k witholding.

State of Residence: FL

Age: 31

Desired Asset allocation: 70/30 stocks:bonds (does this make sense?!)
Desired International allocation: ~10%?

Family: We have a 6 month old and are planning to have one more child in next two years.

Income: 325k/year (wife makes ~125k, I make ~200k). I have another 25-100k+/year in options/RSUs but it is very difficult to project the exact value of this (I am in an area of tech where 50-200%+ stock swings are very normal). So I just assume the RSUs are worth whatever our low price was in last 2 years when trying to assess this for planning purposes. On the other hand, my company could end up as a wallstreetbets darling one of these days and I'd suddenly find myself in the market for a private jet.

Retirement accounts:
My 401k(s): 75k (about 10k of this is in Roth 401k)
My HSA: 6k
My IRA: 40k

Her 401k(s): 40k (about 5k of this is in Roth 401k)

Currently all of our 401k allocations are in target date funds for ~2050. My understanding is that these are essentially 80/20 equities/bonds and they automatically re-balance those allocations over time as it gets closer to the target date.

Taxable:
200k total (including 50k cash that I haven't deployed into anything yet but don't know what to do with)

Taxable account non-cash holdings are:
25% cash
20% VTI
10% QQQ
10% VXUS
20% individual "safe" stocks/ETFs (AAPL, PFE, VZ, SPLV, KO, etc.)
5% VNQ
5% commodities (DBC/GLD/SLV)
5% crypto-related (GBTC, ETHE, COIN)

New annual contributions:
~50k direct to 401k's including employer matches
- Anything else (proceeds from selling RSUs, leftover after expenses, etc.) would go to taxable. Assume conservatively that this is 25k.

Goals
(1) I would like us to have 4-5m investable assets by age ~53 (so assume ~20 year time horizon). I am *not* expecting this number to fully sustain retirement at that point. Once our second child goes off to college, we plan to transition to part-time positions that would cover living expenses. I find the alphabet soup of FIRE labels a little confusing, but something resembling barista fat FIRE would be the goal.

In both of our occupations it's feasible to transition to part-time/contract positions and we pretty much know what our lifestyle is. I don't expect a ton of lifestyle creep (except housing location, as below) in the future. We pretty much know what our hobbies, travel, and housing needs are.

https://www.bankrate.com/retirement/cal ... alculator/
In this calculator, I get ~4.8m in 21 years assuming:
15% savings rate
8% CAGR
300k starting balance
3% annual raise on average

Right now we can *definitely* do better than 15% savings rate with 401k matches included. If we move to a higher COL area in a few years we would still continue to max out 401k's for the tax benefit but it would be a little harder to save a bunch beyond that (other than "bonus" money such as RSUs).

Both of us lost a parent in their early 60s and plan to avoid working full time continuously into our 60s. We would both be willing to work part time for as long as necessary to achieve this.

(2) In ~3 years we will likely move to a higher COL area for the long term. Around this time my wife would be expected to have her income double with a few additional years of training (250-300k total salary, I will make about the same). Our combined income would be expected to be ~450k/yr at that time but desirable homes in that area are closer to ~1.5m. The state we plan to move to also has 5% state tax rate. While I will pray for the market to come down to earth a little bit as interest rates rise, we have to be prepared to pay that much for us to live there.

Our current plan is to use equity from current house (~300k in 3 years?) to fund down payment and I think the numbers work ok for that mortgage with our expected income. It's just way more than we've ever considered spending on a house or anyone I know closely has.

Questions
(1) I want to be more purposeful with our investment allocation. Across all accounts right now we are more or less ~70/30 stocks/bonds either directly via the target date funds or indirectly via the IRA/taxable account. Is there a better way to track this with so many accounts?

(2a) How do we fix the huge imbalance between roth/non-roth accounts? I realize that we want this to be diversified but we are not able to do roth IRA contribution directly. Currently we both max out pre-tax 401k contributions and then withhold an additional ~3% for roth 401k.

(2b) Given our current tax rate and expected tax rate in retirement, what is roughly the Roth:non-Roth balance that people are aiming for these days? Or is it slightly more complicated-- there is no best "balance", rather, we should max out pre-tax contributions first and then every other dollar we can save should go to roth accounts?

(2c) Given our current allocations, what is the best way to achieve the targeted Roth:non-Roth balance above? The easiest I can think of would be to try to roll over my non-Roth IRA. Unfortunately I was dumb in my 20s and didn't realize that a regular IRA made no sense when I was in a lower tax bracket. Like I said, I was dumb.

(3a) I have read recently about the logic/benefits of time diversification via leveraging (a la HFEA portfolio or Pimco's PSLDX). I am willing to channel ~20% of our total allocations to this strategy. I am slightly hesitant about buying a bunch of leveraged equities with equities at ATH but I think I just need to get over this and realize that if I am contributing consistently then this doesn't matter (I can just DCA if the market tanks and the point of leveraged bonds is to help manage this).

I am able to purchase PSLDX reasonably cheaply in my IRA account ($20 transaction fee). From a tax perspective if I am planning to dedicate ~20% of our investments to this strategy, what are the best accounts to do this with? Some PSLDX in the IRA account and dedicate a portion of taxable account to HFEA?

In my mind, we should be taking the portion of our portfolio in non-roth to more standard investments and apply the leverage in Roth portion to maximize benefit if the leveraged portion does well. Does this make sense?

(4) Is there any reason we should add a fiduciary advisor if I am more comfortable with self direction? I would certainly be willing to have an independent person auditing my plans. However, I have not been at all impressed by the few advisors we have spoken with briefly. I don't really plan to pay some rando with a BA in finance 1000s of dollars to plug some numbers into a calculator I can do myself. Is this assessment accurate?

(5) I recently changed my insurance to HDHP with my new employer because they have a very good HSA match, I am currently not on any medications (my personal healthcare expenses are <$1000 in last 4 years), and the premiums are completely covered by my employer. So over next few years I plan to grow this account to ~20k and invest it aggressively to take advantage of tax benefits for these accounts.
Wife and baby are on a separate plan through wife's employer (which I am not on in order to allow me to contribute to HSA).

Is there any downside to this strategy given tax benefits of HSA account, my current healthcare needs, and our long term goals?

(6) Do we really need 6 months living expenses in cash? Anything beyond 3 months feels like it's just for psychological benefit but not really doing anything. Our essential living expenses are ~10k/month, so this amounts to ~30k in cash that could also be applied towards investments.

(7) If my company does well over the next few years and my equity-based compensation is worth a lot, is there a rule of thumb for how much of this I should cash out? Leaving 50% as shares and cashing 50% out seems fairly safe but is there any quantitative way of evaluating this?

I appreciate you all taking the time to evaluate our position and any advice you have!
User avatar
Beensabu
Posts: 5618
Joined: Sun Aug 14, 2016 3:22 pm

Re: Early 30s-- planning for the long term

Post by Beensabu »

Bump.

OP mainly has Qs about:

-- order/priority of contributions
-- leveraging long-term bonds
-- HSA
-- emergency fund
-- RSUs
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
DIYtrixie
Posts: 380
Joined: Sun Sep 13, 2020 12:11 pm

Re: Early 30s-- planning for the long term

Post by DIYtrixie »

mb189 wrote: Wed Dec 01, 2021 9:37 am Emergency funds: 6 months living expenses. My wife has the most stable healthcare job in the world, we could temporarily live off either income if needed, and we have no shortage of access to credit.

Debt: We owe 40k on one car (purchased a month ago) and other is paid off. We obviously could pay off the existing car loan but I see no reason to do so in current interest rate environment.
If you feel your job security means only a 3-month EF is necessary (as you indicated in your questions), I suggest using some of the extra 3 months to pay off the car loan. That’s a much better return than you’ll get on a cash account.
mb189 wrote: Wed Dec 01, 2021 9:37 am Tax Rate: We just barely cross into 32 federal but get back to 24 with 401k witholding.
It sounds like you are mostly contributing to tax-deferred 401k but also a bit to Roth. Many will argue that in the 24% bracket, all contributions should be tax-deferred, but if you’ve got strong evidence that your tax rate will only go higher (both due to career progression and the upcoming hike in tax rates), I think your current strategy of squeezing in what Roth contributions you can in the 24% bracket sounds fine.

You don’t mention Roth IRAs: currently, even if your income is over the limit, you and your wife can contribute $6k/year using the “back door” method. There is speculation this may change with upcoming tax legislation, but speculating on this is against forum rules.
mb189 wrote: Wed Dec 01, 2021 9:37 am Taxable:
200k total (including 50k cash that I haven't deployed into anything yet but don't know what to do with)

Taxable account non-cash holdings are:
25% cash
20% VTI
10% QQQ
10% VXUS
20% individual "safe" stocks/ETFs (AAPL, PFE, VZ, SPLV, KO, etc.)
5% VNQ
5% commodities (DBC/GLD/SLV)
5% crypto-related (GBTC, ETHE, COIN)
BHers don’t consider any individual stock to be “safe”, because the record shows that this year’s “safe” stock is next year’s Kodak, IBM, GE, etc.

Once you settle on an asset allocation that you’re comfortable on, deploy the cash according to that AA. Easy peasy.
mb189 wrote: Wed Dec 01, 2021 9:37 am (2a) How do we fix the huge imbalance between roth/non-roth accounts? I realize that we want this to be diversified but we are not able to do roth IRA contribution directly. Currently we both max out pre-tax 401k contributions and then withhold an additional ~3% for roth 401k.

(2b) Given our current tax rate and expected tax rate in retirement, what is roughly the Roth:non-Roth balance that people are aiming for these days? Or is it slightly more complicated-- there is no best "balance", rather, we should max out pre-tax contributions first and then every other dollar we can save should go to roth accounts?

(2c) Given our current allocations, what is the best way to achieve the targeted Roth:non-Roth balance above? The easiest I can think of would be to try to roll over my non-Roth IRA. Unfortunately I was dumb in my 20s and didn't realize that a regular IRA made no sense when I was in a lower tax bracket. Like I said, I was dumb.


Don’t worry about this so much. Yes, tax-deferred 401k will grow faster than Roth, but you will have plenty of years between retirement and RMDs to convert it to Roth at what will most likely be low(er) tax rates than now (due to lower income).

And don’t beat yourself up about past missteps: many of us have made much worse! Focus on the future.
mb189 wrote: Wed Dec 01, 2021 9:37 am (3a) I have read recently about the logic/benefits of time diversification via leveraging (a la HFEA portfolio or Pimco's PSLDX). I am willing to channel ~20% of our total allocations to this strategy. I am slightly hesitant about buying a bunch of leveraged equities with equities at ATH but I think I just need to get over this and realize that if I am contributing consistently then this doesn't matter (I can just DCA if the market tanks and the point of leveraged bonds is to help manage this).

I am able to purchase PSLDX reasonably cheaply in my IRA account ($20 transaction fee). From a tax perspective if I am planning to dedicate ~20% of our investments to this strategy, what are the best accounts to do this with? Some PSLDX in the IRA account and dedicate a portion of taxable account to HFEA?

In my mind, we should be taking the portion of our portfolio in non-roth to more standard investments and apply the leverage in Roth portion to maximize benefit if the leveraged portion does well. Does this make sense?
I know nothing about leverage other than it is a risky complication that runs contrary to my desire to keep my self-managed portfolio as simple as possible. FWIW, I was 100% stocks in my 401k until my late 40s, then moved to a target date fund with a retirement date a decade later than my planned retirement (to account for my ability to take risk, due to having extremely high job security in a job I mostly like), then at 50 moved to 80/20, mostly as a 3-fund portfolio. I do still have a Roth IRA with individual stocks from my pre-BH days, but it’s <10% of my overall portfolio and mostly gives me something to look at.

Edited to fix formatting.
sailaway
Posts: 8184
Joined: Fri May 12, 2017 1:11 pm

Re: Early 30s-- planning for the long term

Post by sailaway »

For planning purposes, we have always assumed RSUs are worthless. DH could get laid off, or just why fed up and quit or stock prices could crash or...When they vest, we sell and reinvest in our favorite index fund. Bird in hand and all that.

We do sometimes cash out (vs sell and reinvest) the ESPP if we have been spending a bit more than usual, but that is set up in a way that it would take a +17% crash in days to have a loss. And we could get the money from someplace else, if needed.

I am not much older than you and I am still astonished that at 35 and just starting a family, you think you have your lifestyle and hobbies carved in stone. It sounds like you are putting a lot of energy into very specific plans. You are a prime candidate for the good enough and simplify so that the finances run on automatic for the next 25 years. Reevaluate as life happens.
tashnewbie
Posts: 4230
Joined: Thu Apr 23, 2020 12:44 pm

Re: Early 30s-- planning for the long term

Post by tashnewbie »

Welcome to the forum!
mb189 wrote: Wed Dec 01, 2021 9:37 am Questions
(1) I want to be more purposeful with our investment allocation. Across all accounts right now we are more or less ~70/30 stocks/bonds either directly via the target date funds or indirectly via the IRA/taxable account. Is there a better way to track this with so many accounts?
I think target date funds (TDF) can be helpful when starting out because all you have to focus on is making regular contributions. But as you add more accounts and your overall portfolio grows, I think TDFs can make portfolio management more challenging. If you have good low cost options in the 401k for each of your desired asset classes (at least the main components of the "3-fund portfolio" (check the wiki for more information about that), then I would use those (e.g., S&P 500 index/Total US Stock Market index, Total International Stock index, Total US Bond index).

Using the separate funds should help you more easily calculate and track your asset allocation. You could set up a simple spreadsheet to keep track of what you hold in each account. Since you're a quantitative person, I'm sure that would be extremely easy. Most people use 5% tolerance bands (or 20% of any desired asset class) to indicate when the portfolio needs to be rebalanced. Generally you shouldn't need to rebalance more than once a year, at the most. A lot of people seem to check their AA to see if rebalancing is needed at the beginning or end of the year or on a memorable date, such as a birthday.
(2a) How do we fix the huge imbalance between roth/non-roth accounts? I realize that we want this to be diversified but we are not able to do roth IRA contribution directly. Currently we both max out pre-tax 401k contributions and then withhold an additional ~3% for roth 401k.

(2b) Given our current tax rate and expected tax rate in retirement, what is roughly the Roth:non-Roth balance that people are aiming for these days? Or is it slightly more complicated-- there is no best "balance", rather, we should max out pre-tax contributions first and then every other dollar we can save should go to roth accounts?

(2c) Given our current allocations, what is the best way to achieve the targeted Roth:non-Roth balance above? The easiest I can think of would be to try to roll over my non-Roth IRA. Unfortunately I was dumb in my 20s and didn't realize that a regular IRA made no sense when I was in a lower tax bracket. Like I said, I was dumb.
Check out this wiki about the traditional vs. Roth question, link. Unless you're going to have pensions in addition to Social Security, tax-deferred/traditional 401ks will probably be better than Roth 401k in your tax bracket (soon to be tax brackets when you move to a state with state income tax), especially since you plan to retire before Social Security age. You'd have a while before you'd need to start collecting Social Security or receiving RMDs to convert the traditional balances to Roth or otherwise withdraw them.

Don't beat yourself up about making TIRA contributions in your 20s. The most important decision you made was to contribute at all, which most people your age probably didn't do! To confirm: your IRA consists completely of contributions that you deducted from your taxes when you were in your 20s, plus associated growth? If so, then I would move your IRA into your 401k. This reduces the number of accounts you have, thereby streamlining your portfolio. Plus, it would make the backdoor Roth method easier for you to do. As another user mentioned above, there is pending legislation that may make the backdoor Roth unavailable after 2021. It's probably too late for you to get your IRA into the 401k before December 31, 2021 (which is when you'd need to transfer it to avoid prorated taxes on the second step of the backdoor Roth, a Roth conversion). But your spouse doesn't appear to have any IRAs. Therefore, they could do the backdoor Roth in 2021. Check out this wiki for more information, link. I think this tutorial from forum member White Coat Investor is very helpful and maybe a bit easier to follow than the wiki, link.

I don't understand what you mean when you say you max both pretax 401ks and also withhold an additional ~3% for Roth 401k. The total amount you can defer into the 401ks (either traditional/tax-deferred and/or Roth) is one limit ($20.5k in 2022; $19.5k in 2021). Do your 401ks allow after-tax contributions (these aren't Roth contributions, but some plans allow in-plan Roth rollovers/conversions, which gets the after-tax money into the Roth 401k, colloquially known as the Mega Backdoor Roth)?
(4) Is there any reason we should add a fiduciary advisor if I am more comfortable with self direction? I would certainly be willing to have an independent person auditing my plans. However, I have not been at all impressed by the few advisors we have spoken with briefly. I don't really plan to pay some rando with a BA in finance 1000s of dollars to plug some numbers into a calculator I can do myself. Is this assessment accurate?
I don't think it makes any sense at this point for you to use an advisor that charges an assets under management fee. You are more than capable of managing your own portfolio. Some people may want to consult a professional about estate planning and other issues, which makes sense. But that doesn't seem to be what you're asking about. If you wanted an advisor to evaluate your investment portfolio, I would look for a low-cost, fee-only advisor. But I don't think you even need that. Reading this forum and getting feedback from members is probably better than most fee-only advisors.
(5) I recently changed my insurance to HDHP with my new employer because they have a very good HSA match, I am currently not on any medications (my personal healthcare expenses are <$1000 in last 4 years), and the premiums are completely covered by my employer. So over next few years I plan to grow this account to ~20k and invest it aggressively to take advantage of tax benefits for these accounts.
Wife and baby are on a separate plan through wife's employer (which I am not on in order to allow me to contribute to HSA).

Is there any downside to this strategy given tax benefits of HSA account, my current healthcare needs, and our long term goals?
If you've run the numbers and it makes more financial sense for you to use the HSA versus your employer's non-HSA eligible plan or your spouse's (which takes into account your medical care usage), then I don't see any reason why you shouldn't use the HSA eligible plan. Just be aware that your wife can't use a general purpose FSA if you want to make HSA contributions (a limited purpose FSA for dental and vision and a dependent care FSA are fine and wouldn't disallow your HSA contributions).
(6) Do we really need 6 months living expenses in cash? Anything beyond 3 months feels like it's just for psychological benefit but not really doing anything. Our essential living expenses are ~10k/month, so this amounts to ~30k in cash that could also be applied towards investments.
General rule of thumb is 3-6 months of expenses for an emergency fund/cash reserves. The exact amount or number of months you hold is a very personal decision. If you and your spouse are comfortable with 3 months, then go for it.
(7) If my company does well over the next few years and my equity-based compensation is worth a lot, is there a rule of thumb for how much of this I should cash out? Leaving 50% as shares and cashing 50% out seems fairly safe but is there any quantitative way of evaluating this?
I've never had RSUs or access to ESPP, but from what I've seen on the forum, the general recommendation is to sell the employer stock as soon as you're allowed. There's no reason to have a lot of individual stock in the place where you work; that's a lot of concentration risk.

General thoughts:

I would stop adding money to the individual "safe" stocks in taxable. They appear to be ~11% of your overall portfolio at this point. That's also a lot of concentration risk.

Do you and your spouse each have adequate term life insurance and own occupation long-term disability insurance? I would definitely get those.

In general, you're doing very well, and I agree with user above that you should just set this investing stuff on autopilot and enjoy your life otherwise. Reevaluate your plans in the future when you have a clearer picture of what things will look like.
PersonalFinanceJam
Posts: 685
Joined: Tue Aug 24, 2021 8:32 am

Re: Early 30s-- planning for the long term

Post by PersonalFinanceJam »

mb189 wrote: Wed Dec 01, 2021 9:37 am Goals
(1) I would like us to have 4-5m investable assets by age ~53 (so assume ~20 year time horizon). I am *not* expecting this number to fully sustain retirement at that point. Once our second child goes off to college, we plan to transition to part-time positions that would cover living expenses. I find the alphabet soup of FIRE labels a little confusing, but something resembling barista fat FIRE would be the goal.

In both of our occupations it's feasible to transition to part-time/contract positions and we pretty much know what our lifestyle is. I don't expect a ton of lifestyle creep (except housing location, as below) in the future. We pretty much know what our hobbies, travel, and housing needs are.

https://www.bankrate.com/retirement/cal ... alculator/
In this calculator, I get ~4.8m in 21 years assuming:
15% savings rate
8% CAGR
300k starting balance
3% annual raise on average

Right now we can *definitely* do better than 15% savings rate with 401k matches included. If we move to a higher COL area in a few years we would still continue to max out 401k's for the tax benefit but it would be a little harder to save a bunch beyond that (other than "bonus" money such as RSUs).
Both of us lost a parent in their early 60s and plan to avoid working full time continuously into our 60s. We would both be willing to work part time for as long as necessary to achieve this.
My unsolicited advice is to run your numbers with slightly less rosy CAGR and raise assumptions. I'm assuming all of your numbers are nominal and not adjusted for inflation. What happens to your numbers if CAGR turns out to be 5-6% and annual raise is only 2%? I'm 42 and wife is 36, for better or worse the best way I have found to not worry too much about my portfolio and what market returns will be is to have a fairly high savings rate. So, if you say you can save more than 15%, do it. Make it explicit. I think you will find you worry less about leveraged strategies or what hot stocks/funds you should be in.
We target our savings rate at 30% of gross not including any company matches. We exclude the company match because those can come and go. A company I worked for had not explicit match, but had profit sharing which was "always" paid in the range of 8-15%. Then 2008 hit and there were several years of 0%. We have a 70/30 total market portfolio, which I believe is good for almost any age, with no explicit emergency fund. We have found all the above helps frame the conversation when it comes time to make irregular expenditures on say a car with respect to our goals. It also helps prevent major lifestyle creep. It appears, we are on track to do as you describe and start pulling back/semi retire when I hit the age of 50.
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