Shifting Gears

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Topic Author
alurker
Posts: 6
Joined: Sat Jun 19, 2021 11:20 pm

Shifting Gears

Post by alurker »

Hi all,

Life Context: We're in our mid-to-late-30s. One child; more on the way. We are Americans but live abroad, probably will acquire secondary citizenship in place due to naturalization. Not planning on returning to the U.S. really, but want to keep doors open. By and large, we pay the difference in taxes to the U.S., which is relatively minor. Don't have to worry about capital gains here, but we have a minor wealth tax (doesn't scare me in the slightest); plenty of wealthier folks store their money here without reservation. For the kids, college education fees are generally a non-issue here, though everyday expenses appear nominally expensive but are cheap on local salary. We're not planning on renunciating citizenship, though that has been a thought for the past decade for non-tax reasons. Our family ties state side are good, but our families are generally supportive and encourage us to remain where we are for the same reasons. Spouse and I come from middle class families. The family the spouse and I built stumbled into wealth through luck of accidental timing of entrance into an up-and-coming lucrative career sector and general thrift.

Financial Context: We have no debt, and our net worth is about USD 1,900,000 (about half-half between USD and another moderately stable currency). 350,000 is in America retirement (mostly old 401K) and two traditional IRAs, which we max out each year (income too high for Roth). These accounts are invested about 80:20 stocks:bonds (aggressively). Another 300,000 is placed in a foreign retirement account that grows less aggressively (semi-analogous to 401K) that I contribute pre-tax and employer matches. I have no choice on the investment allocations there. We have about 500,000 tied up in Vanguard brokerage account in various funds (about 80:20 again), which I will return to. The rest is kept as cash (almost equally divided between both countries). We kept a lot of cash on hand to facilitate a house down payment here, which is extremely expensive (more options than renting for a growing family), though we're looking at punting purchasing for the time being. A down payment reasonably requires 400,000 to 600,000 here (yes, multiply that by 5 to guess the total). It's not luxury; it's the price of a house in a small, prosperous country. As you can see, that amounts to consuming a lot of the cash on hand — too much for now. Salary is good, but we treat that largely to cover the pre-primary school care of the kids, and it eats a lot. For the time being, we are liquidating restrictive stock units as they come in to diversify: about USD 200,000 per year. These go into the Vanguard brokerage account per the 80:20 I mentioned above. Work values me, so they keep giving me good grants. I'm not looking at changing employers/career for the time being. A bubble to a degree touches my employer, so I'm only banking on about five years of continued grants like this.

Questions:

I'd like to keep about 360,000 cash on hand as liquid as possible for emergencies and floating living expenses. I plan on keeping that in savings accounts. Is that reasonable?

The rest of the cash on hand (390,000) could be used opportunistically for buying a house. We're not in a rush on this yet: 3-5 years out, maybe? I'm inclined to place this about 30:30:30:40 BND:VMFXX:VGIT:BSV. Is that reasonable? Low risk, low return are OK. Just want to not be beat too heavily by inflation.

To the restricted stock liquidation, we are reinvesting 200,000 per year into our brokerage. In practice, some years see greater values when liquidation (250,000 - 300,000) instead of 200,000. Would it make sense to restrict investment to 200,000 per year and hold the excess (hypothetical 50,000 - 100,000) similar to the cash on hand to later liquidate and reinvest back into the original 80:20 in the brokerage during years where restricted stock does not make 200,000 year? In short, smoothing out noise and depositing at a constant rate? Mainly, I estimate continuing these deposits for five years into the future. Is this sensible?

Any other advice? Goals are hard to elucidate. I would like to arrange it such that I can quit working in 5-10 years, but I don't hold unrealistic views about that. My current location is nominally very expensive, but it is home. I've spent a lot of time in the U.S. itself in the first 2/3 of my life, and no place there really calls out to me as home (cheaper places). Leaving here means learning a new language should I move country (I can do 2 fluently and 0.5 passingly), so I'd really like to be creative in finding a way to make a low job stress future support a long-term life where I am.
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oldcomputerguy
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Location: Tennessee

Re: Shifting Gears

Post by oldcomputerguy »

alurker, welcome to Bogleheads! :happy

Since you state that you are living abroad and that you may remain there, I have moved your question to our Non-US Investing forum, where the members are more familiar with things that might affect you that wouldn't if you were living in the US. If you feel comfortable telling the members which country you live in, it will likely help them give you better answers.
Topic Author
alurker
Posts: 6
Joined: Sat Jun 19, 2021 11:20 pm

Re: Shifting Gears

Post by alurker »

We reside in Switzerland and are reasonably close to passing the require residency durations (yes, plural) for naturalization. My questions were more tinged toward the U.S. side of things as I can figure out the Swiss side without too much difficulty. Just that we have a slightly more complex baseline.

Switzerland: three layers of usually modest income tax (national, cantonal, community/county), two or more layers of modest wealth tax. No capital gains tax (still not free form Uncle Sam).
ivk5
Posts: 1218
Joined: Thu Sep 22, 2016 9:05 am

Re: Shifting Gears

Post by ivk5 »

We're also US citizens living in CH (I also have a second EU nationality) and very close to your profile on most relevant points. When we first came we assumed we'd eventually return to US after few years but now not so sure we won't stay. I don't have all the answers but maybe we can help each other think these things through.

One modest difference- we feel somewhat more comfortable renting here (stadt zh) and a bit less inclined to buy a house, at least for next ~5 yrs. Older kid is just finishing 1. Chindsgi but already feel pretty attached to local school, friends, other ties. Think it's enough space at least until pre-teen years, not interested in giving up near-zero commute, etc. That may bias our thoughts on saving for house.
alurker wrote: Sun Jun 20, 2021 12:12 am I'd like to keep about 360,000 cash on hand as liquid as possible for emergencies and floating living expenses. I plan on keeping that in savings accounts. Is that reasonable?

The rest of the cash on hand (390,000) could be used opportunistically for buying a house. We're not in a rush on this yet: 3-5 years out, maybe? I'm inclined to place this about 30:30:30:40 BND:VMFXX:VGIT:BSV. Is that reasonable? Low risk, low return are OK. Just want to not be beat too heavily by inflation.
It would be helpful to know your target Asset Allocation (see Asking Portfolio Questions). Highly personal, and my approach may be somewhat idiosyncratic, but as a data point here's how I view our AA:
  1. 75/25 including illiquid fixed income assets. Those include our 2nd pillar balances, some employer-linked funds that are liquid only upon separation/retirement, and no separate emergency fund, house fund, or other stash of cash. I include checking/current account balance (roughly subtracting current month's CC balance). This is the main target I manage and benchmark against.
  2. ~85/15 excluding the above-mentioned illiquid FI assets. I don't manage to this target but I track it for reference/gut-check.
  3. Could also look at absolute amount of liquid FI assets. I generally don't but may help as a sleep-well-at-night check.
I find the "all in" asset allocation approach works better for us than a "bucket" approach (separate house fund etc).
  • Our 75/25 "all in" AA reflects our risk appetite and prioritizes flexibility for life changes we may want to make without being overly constrained by market conditions. Wouldn't want to be 100% equities and then find myself either wanting to walk away from my work, move out of CH, and/or buy a house amid a market downturn. (There is a material possibility of any/all of those life events in the medium term for our family.) Clearly ymmv.
  • Our equities are 70% US (VTI and equivalent) / 30% non-US (VXUS and equivalent). Reflects a modest "home country" bias dating to when we were more confident we'd end up back in US. May need to reassess and consider moving to market weight.
  • Our FI is needlessly complex (see here) but BND seems fine if you're ok with USD exposure. We do have all our liquid FI in USD (again dating to when we expected to end up back in US). I'm not in a rush to make a change in any case; as long as we're here, we have CHF income to cover CHF living expenses plus the 2nd pillar we can't touch, and don't really imagine retiring here (but could imagine retiring elsewhere in Europe / EUR expenses). If we knew where we were likely to retire/decumulate, we could consider shifting at least some liquid FI to that currency, but again in the grand scheme of things I don't think it's moving the needle much for us at this stage.
BTW my rationale for counting the 2nd pillar in FI was that we expected to leave eventually so the funds would become liquid. As it becomes more likely that we stay, we may need to rethink that; it become more like SS - a future income stream / reduction of net expenses we need to fund from portfolio decumulation - rather than a liquid asset. At some point will have to figure out WEP impact since I will have US SS based on past earnings record.
alurker wrote: Sun Jun 20, 2021 12:12 am To the restricted stock liquidation, we are reinvesting 200,000 per year into our brokerage. In practice, some years see greater values when liquidation (250,000 - 300,000) instead of 200,000. Would it make sense to restrict investment to 200,000 per year and hold the excess (hypothetical 50,000 - 100,000) similar to the cash on hand to later liquidate and reinvest back into the original 80:20 in the brokerage during years where restricted stock does not make 200,000 year? In short, smoothing out noise and depositing at a constant rate? Mainly, I estimate continuing these deposits for five years into the future. Is this sensible?
I would liquidate 100% upon vesting and redeploy according to your AA/IPS. Anything already vested I would liquidate today for diversification. I would never voluntarily invest money that is mine (vested) in a single concentrated stock position, much less stock in my employer where there's already plenty of human capital (future income) risk. Triggering taxes on embedded post-vest gains would likely not change my view. Just my $.02.
alurker wrote: Sun Jun 20, 2021 12:12 am By and large, we pay the difference in taxes to the U.S., which is relatively minor.
[...]
Any other advice?
If you are contributing to 3rd pillar, strongly encourage you to reconsider - that's likely not helping from tax perspective since it reduces your CH income and creditable tax but not your US income/tax, and US will tax gains (not basis) upon withdrawal even though CH won't.

I only mention it because you mentioned paying additional income tax on your US return. We find ourselves in the opposite position: accumulating Foreign Tax Credit. The first year it was quite large due to some one-off income timing factors, annual impact is now small but not immaterial. If we're still here at the 10-year mark we'll feel the sting when that first year drops off.

I realize this could also just reflect differences in our incomes (different place on relative US/CH curves), or differences in location and associated kanton/local taxes (eg maybe you're in ZG). Just thought I'd mention the 3rd pillar in case that's a factor.
ivk5
Posts: 1218
Joined: Thu Sep 22, 2016 9:05 am

Re: Shifting Gears

Post by ivk5 »

I guess I should also mention make sure you minimize leakage on currency conversion fees/spread, esp if you are using a US/USD-based brokerage.

IB looks like the best solution to this but I concluded I couldn't make it work due to employment-related financial reporting/compliance requirements.

I use Revolut for CHF>USD conversion (simpler now that as of a year or two ago they have a CH IBAN for inbound transfers). It's suboptimal but measurably cheaper than TransferWise and other similar services.
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