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Please help with asset re-balancing and possible mortgage payoff...

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  • Please help with asset re-balancing and possible mortgage payoff...

    An advanced thank you! to any posters who are inclined to offer an opinion.  I am not financially savvy.  Over the years Ive put taxable $$ in a potpourri of funds without much of a plan.  We live a comfortable middle class lifestyle, and have frugal inclinations.  Lately Ive been voraciously trolling the WCI website trying to learn and the more I read, the more difficulty I have understanding what I need to do.

    I'm 50 years old, employed in private practice, salary $400k/yr, no partnership or business buy-in offered.  Would like to (hopefully) go part time at age 55.

    My spouse is 50 years old, part time worker, salary $25k/yr.  We both max out our 401k each year.

    2 children: 15 and 11 years old.

    Only debt is 350k mortgage at 2.875% on a home worth $650k.

    Our current asset allocation is 96% stock funds/2.6% bond funds/1% cash.  Again, I had no plan.  But here we are.

    All of our assets are in Vanguard except 401ks, which are in employers fund houses.


    Amounts are roughly........

    401K/IRAs            1.25m, of which 800k in Vanguard IRAs (mostly in 500 index/Total St Mkt index), 450k in employees 401k, mostly aggressive growth                                   funds.

    Vanguard 529s      217k total, evenly split between both kids, in TSM index

    taxable                5.3m, of which 40% is in 500 index/TSMI.  The other 60% is in 8 other funds including

    328K extended mkt index

    123k global equity fund

    688k health care fund

    237k REIT

    737k small cap index

    260k target retirement 2045 fund

    274k tax managed balance fund

    430k tax managed cap appreciation fund


    Question 1.  Im thinking of selling some appreciated funds, paying the cap gains tax and paying off the mortgage in order to 'take some chips off the table.' The market has been very red hot.  The paper gains could disappear in a downturn.  I have no desire to open a business, and little desire to become a landlord/own rental real estate as this can be burdensome.  In the past I've been inclined to hold a low mortgage rate for a long time, but in this case, given the market status I may pay off the house.  Does this make sense?


    Question 2.  I know I need to address my asset allocation.  I want to do this soon.  Im way too heavy in stocks.  How do I do this while minimizing the tax hit?


    Question 3.  I think the REIT is in the wrong place.  It kicks off large tax-inefficient dividends.  Should I sell it?


    Thank you WCI and many of the other financially smart posters for helping me with my rudimentary financial education!  At this point however I would kindly ask for some direction because I cant seem to figure out  the next moves.  Thank you to anyone who is willing to offer an opinion.









  • #2
    Congrats on building a nice portfolio while making ~$400k per year.

    Yes, it makes sense to pay off your mortgage.  You can either stop contributing to taxable and pay down from cash flow or you could sell off some stocks in your taxable account, starting with the assets with the least appreciation.

    The best place to rebalance assets is in your retirement accounts since you can do that without any tax impact.  You can also rebalance by selling down assets with the least appreciation or you can start putting any new contributions and dividends into bonds or another asset.  Personally, I would get rid of the REIT, although it isn't a large part of your portfolio, so probably doesn't matter much either way.


    • #3
      Amazing job saving!  Can’t add anything to what Donnie said other than i think as long as you keep with the budget you have devised you will be fine regardless of rebalancing.

      You should be able to go part time in five years as desired.  Great job on defining a goal and working towards it!


      • #4
        Agree with other folks you have done an amazing job with your savings rate and obvious discipline within equities.  A couple of points:

        a. Do you have a financial goal/trigger for going part time?  With 6 odd million in retirement assets, you are able to withdraw $240k/year with a 4% withdraw rate.  I'm going to guess based on the assets accumulated, that your family lives below that spending level now.

        b. Could pay off the home, but would imo have a lower priority relative to a revised asset allocation.  Your available assets and mortgage debt level combined with the interest rate don't make this a priority imo.

        c.  Asset allocation challenge (imo)-  You are heavily weighted towards taxable retirement assets which is great as it provides maximum flexibility.  The challenge is that even if you moved all of your tax deferred to bonds (VBTLX- Vanguard Total Bond Market), you would be at roughly an 80/20 split between equities/bond.  Per Donnie's point you will likely need to put new taxable monies to bonds also.  I am very impressed with how aggressive you are with equities, though at your age I would suggest deciding upon a more conservative asset allocation relative to current.

        d.  Taxable- You'll probably need an accountant to help you determine the cost basis of your current taxable holdings towards a combination of mortgage repayment, changing asset allocation, and tax pain you are willing to endure.

        e. 529's-  Though WCI would be fine with the all equity here, I will disagree and think about some portion into a bond fund for your eldest child, given age/time until college (unless you know he/she is getting a full ride somewhere and this is for future grandchildren).

        f. REIT-  See d. above, but a consideration is to liquidate and apply proceeds towards mortgage debt, with any remaining mortgage amount to be address via cash flow over the next year or two.

        g.  Stay away from annuity/WL/VUL insurance salespeople.


        • #5
          Great job with your savings!!!  Have you thought about your "number"?  You may already be there.  If you start carefully tracking your spending you can figure out if part-time or retirement is doable.  I would start to de-risk some at this point.  Stop reinvesting dividends in your taxable account and sell the REITS.  Reits are beaten up right now and you may not have a huge gain.  They really belong in a tax protected account.  I like you acquired many different mutual funds, stocks, ETFs with out much of a plan.  The early stuff has too large of gains to sell.  With Vanguard you can look to see if you have any tax loss possibilities (maybe some of REITS).  Would use the money you free up to buy intermediate muni bond fund VWIUX.  Another candidate to sell would be the healthcare fund.  It is a start.  It may take a few months to work on this.


          • #6
            BTW.  Pay the mortgage off by using your new money that you usually put in the taxable account.  You know 20k at a time or so.


            • #7
              @Donnie, thank you for your thoughts. I plan to pay off the house and sell the REIT

              @q-school, thank you for your kind words

              @ajm184, Im not ready to stop working yet, though Im beginning to think about what that might feel like.  Too many potential future unknowns, including cost of health insurance.  Good point, I plan to adjust the 529 of my older child to a less equity heavy fund. Thank you for your very helpful comments.

              @hatton1, I cant believe Im 50 years old!  Dont really think any specific "number" will push me out of practice, but I kinda have a crazy thought that it would be cool to reach 10 million, more as a personal accomplishment on essentially 1 salary, not so much that we will live a larger lifestyle.  Agree that I plan to derisk my allocation.  I never really understood bonds, and Im of the understanding that now is not the best time to invest in bonds, but I think I will slowly add them as 96% equities has the potential to create substantial worry in a prolonged down market.


              • #8
                Great job.  I think it's time for a financial advisor at least for a once over on your gameplan.   The missing part is your spend to determine a parttime/retirement plan income needs to plan on and real thoughts about generational wealth as you fly towards that 10M mark.

                Agree with hatton on using cashflow to paydown that mortgage instead of generating a taxable event unless you are really interested in retiring out early and moving assets completely off the table.

                Short of really wanting to get to that 10M mark, you're heavy on the growth equities.  If you're not a bond friendly type or ever that, a more balanced dividend equity maybe worthwhile considering for more stability.  Or changing your retirement date fund to an earlier date to automate things for you.

                are your 529s sufficient?  private vs public college -- remember high school is eligible too now for 529s.



                • #9
                  To answer your questions individually:

                  1)  No, I would not withdraw from taxable to pay off the mortgage.  I'd wait to start paying long term capital gains when you get to a lower tax bracket.  Additionally, I don't think the math makes sense, even with all the other variables.

                  2&3) hatton1 has some really good thoughts on this.  Probably buy up bond funds or REITs in taxable.  If the REITs don't have a huge tax gain attached to them, then sell them and replace them in taxable seems wise.  You could then use that money for mortgage or tax-efficient bond funds.

                  While the asset allocation is currently suboptimal, it's certainly made you a ton of money these last few years.  You should consider yourself lucky.  Figure out what your number is since you have so much already saved.  You may already be at it.  When you've won the game, stop playing.

                  Best of luck!


                  • #10
                    Agree with lots of good comments. On the stock/bond ratio, this may be fine given your level of spending, etc...and honestly since you plan to work longer you could just put all further investments into bonds and be diversified by retirement, or not change anything since its highly likely you could live comfortably off dividends/etc...on that amount.

                    Even at 2% dividends a 5M portfolio throws off 100k/yr. Build up your bond side over the next 5 years and you will probably have a much better allocation without doing too much selling/capital gains taxes and could use any dips to harvest those and change allocation more at your favor.


                    • #11
                      I also have >5 mill in a taxable account.  The dividends, cap gains, and muni bond interest is more than I spend.  When I realized this I quit Ob.  You are probably in this position also.  I am still working part time.  Bonds are not fun.  You will not make money on them.  They protect you as your work income goes away from 2008 type events.  I like intermediate muni bonds.  I also have Vanguard total bond in tax protected accounts.  I don’t own any TIPs because I don’t see the point. Maybe I am wrong on this. I am 60 and have 65/31/ 4 allocation.


                      • #12
                        Bonds are valuable because (i) they are historically uncorrelated with stocks, (ii) have lower volatility than stocks, and (iii) are senior on the capital structure to stocks (meaning it’s possible that a stock can be worth 0 but the bond worth par in the same company).  The trade off for the lower volatility is a lower return.  Given your portfolio is probably 50x your expenses, you can survive a 50% downturn in the market.  Therefore, I see no reason to derisk your portfolio for bonds unless that 50% downturn will cause significant emotional distress.

                        People say stop playing the game once you’ve won, but those people never experienced real winning :P .


                        • #13
                          I think it is all relative to the individual but I would find your allocation somewhat aggressive given your age and this could be why you are reluctant to go part time.

                          As an example I had 9m taxable investments but 1.2m debt. I liquidated the last 1.5m investment I made for 300k capital gain and extinguished the debt. This made it easier for me to go to 4 days a week work recently. It is just psychological but debt and risk allocation were affecting me.

                          So now I am 7.5m in taxable real estate investments, no debt. 500k cash in taxable account. 500k in retirement accounts in cash allocation. 2.5m house that we live in with no debt. I am 43.

                          I think if you have reached a FI amount, it is worth considering dialling down the risk. Some would say my current portfolio is too lazy, but I am still 85% in risk assets : 7.5m real estate and 1m in cash. I feel much better lately with raising some cash. Ok it doesn't appreciate but it helps me feel better with reducing work. The property I sold recently for 1.5m could be 2m or 2.5m in 3 years. Even if it is I think I am happier selling. Although the cycle could go on for many more years, chances are it is late stage and could well turn the corner in the next 3 years and it isn't worth the stress.

                          Being 95% equities at age 50 with 300k debt is possibly more aggressive than you need to be given your age/assets.


                          • #14

                            Therefore, I see no reason to derisk your portfolio for bonds unless that 50% downturn will cause significant emotional distress. People say stop playing the game once you’ve won, but those people never experienced real winning ???? .
                            Click to expand...

                            Donnie I think of myself as an example of someone who has won the game and is trying but admittedly failing to derisk her portfolio.  I think Dont know dont mind is doing this as well.  A 50% correction is going to bother anyone with assets in the market.  This is Bernsteins philosophy I think.  My advice to the OP is he/she is close to or at FI it is time to derisk.


                            • #15

                              Therefore, I see no reason to derisk your portfolio for bonds unless that 50% downturn will cause significant emotional distress. People say stop playing the game once you’ve won, but those people never experienced real winning ???? . 
                              Click to expand…

                              Donnie I think of myself as an example of someone who has won the game and is trying but admittedly failing to derisk her portfolio.  I think Dont know dont mind is doing this as well.  A 50% correction is going to bother anyone with assets in the market.  This is Bersteins philosophy I think.  My advice to the OP is he/she is close to or at FI it is time to derisk.
                              Click to expand...

                              It depends on your goals.  You are not likely to get from $5M to $10M by allocating a ton to bonds.  You probably didn’t have a significant bond allocation at 50 (maybe I’m wrong).

                              My main point is that once you achieve a certain level of net worth, all you really need to do is keep a certain number of years of expenses (say 5) in cash or conservative investments and you will be fine.  If you spend $100k per year, keep $500k in cash/bonds, and have a $4.5M equity portfolio, it’s hard to see how you are ever going to have any issues.  Likely that $4.5M will grow substantially over your retirement.

                              Another option for folks with higher net worth would be to use the age in bonds or glide path allocation for 25x your expenses and keep the rest in equities.