Getting more efficient in a good situation

[Kyle]

Hello there!  This is typically a time of personal finance reflection to me as it's bonus month, and I do some inventory to ensure efficencies in 401k and ESPP to ensure maximum potential (or adjust down for the remainder of the year if my bonus pushes me over limits).  This year, I'm going a step further, and I find myself with more questions than answers.  Rather than hire a financial advisor, I'm trying to figure some things out on my own to greater drive efficiencies in my financial life, yet some of these are big decisions and am seeking some second opinions!

This what is top of mind to me right now:

• Putting cash to work: I'm sitting on too much cash -- I've known this for a while, but now I'm willing to do something with some of it.  Do I put this to work in the market, start aggressively paying down the mortgage, or something else?  Last weekend, I put together an exact ammoritzation schedule spreadsheet and ran several scenarios (some of these are pretty exciting) including crazy things dropping like a lump sum principal payment, $5000 monthly, or just an extra $1,000 or so a month for a while and see how that feels. In researching, there's a lot of debate out there on this topic, and I know it doesn't have to be black and white, and can do both (invest and early payments -- which is where I am leaning).
• Asset allocation: Over time, I've accumulated quite a bit of MSFT stock through bonuses vesting and my ESPP contributions (10% discount).  It's gotten to the point that I think I need to build in some more diversity into my portfolio.  I've never sold any of this, and I'd take a pretty significant capital gains hit selling some of this - my initial positions have grown quite a bit (some nearing 300%) since I started acquiring it in 2015.  I would be open to selling bonus shares as they vest for a smaller capital gains hit (I think I can choose which positions to sell, right?)
• Define goals: My main goal right now is growing wealth (and reducing taxes as much as possible).  I know that's not a goal in itself.  This is something I probably need to do for myself rather than get help on.  I took an interest in personal finance since graduating college debt-free and starting my career 12 years ago.  I've worked hard, and had some luck along the way.  I've always been frugal, don't carry debt, and had good money habits instilled growing up.  I haven't really defined what early retirement would look like.  For now, I'm throwing out a goal of retiring comfortably at 50 (16 years).  I've always saved for the future, but I'm at a point where I've accumulated some real assets and want to leverage them to better drive efficiencies.

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Life Situation: Male, software developer @ MSFT, 34, Bought my house 3 years ago.  Girlfriend of 5 years lives with me.  Proposing by EOY, no kids, just the dog.  Pacific Northwest.

Gross Salary/Wages: After recent merit raise (earlier this month) now make $186K a year + cash bonus and stock bonuses (base up slightly from last).  I don't factor in bonuses in my yearly budgeting, and allow them to be a pleasant surprise.  I have about $200K in unvested company stock that will vest at various points over the next 4-5 years.

GF just got a raise to about $80K or so.  She gives me $800 a month to aid in the mortgage, bills, and groceries.  I count this as income in the below. 

Monthly Income/Expenses:
Income: Average of $11,800 over the last 8 months.  I include ESPP contributions (~$2,000), what my GF pays for monthly bills in this ($800), and $400 in interest income -- so a under $9,000 without these (I do not include 401K contributions in this).
Expenses: Average of $4,400 over the last 8 months.  Mortgage/taxes/insurance is about $3000 (and that's with me throwing a few hundred at it at month).  We live pretty simply and don't do or buy many frivilous things -- meal plan based on what is on sale, cook mostly at home, I take my own lunch to work 90% of the time.  Minimal cable package, no cleaning service, no lawn service, and do most house maintenance myself with the help of YouTube.  Do little dares with myself like not spend money during work/week days.  Would rather watch a movie at home on Netflix than go to a movie theater.  Fun for us is a pint or two at a local brewery on a Saturday, really nothing lavish.  My point is, there are not many efficiencies to further milk here.

Assets:

• 401k: ~$400K in an S&P 500 Index fund.  I've been maxing this for years, employer matches 50% of everything.  Don't ever see not doing this.
• Roth IRA: ~$100K in various Index funds.  I haven't contributed to this in several years since I started out-earning the usual limits, but I discovered earlier this month that I can do an after-tax 401K contribution and in-plan rollover into a Roth IRA through Fidelity's industrialization of this process.  I've enabled a contribution of small percentage of this, but I haven't had a paycheck since doing so.  I don't think I'll max it next year, I surely could if I started allocating cash to paying the mortgage for a while.
• Individual: ~300K in MSFT stock.  Will pay a dividend of about $1000 quarterly, set to reinvest.
• Individual: ~105K in FZROX, Fidelty's zero-commission and zero-expense ratio S&P 500 Index fund.  I've just been dumping extra cash in here for the last year and a half or so.
• Cash: ~250K in a 2% money market.  I take the $400 or so interest a month and pull it into checking, and inevetably gets swept off into FZROX.  Want to better put this to work somehow, while still maintaining an ample emergency fund.

Most recent Zestimate of my house is $719K (paid $585K in 2016).  It's too much house for just us, but I bought it as an investment with the intent of raising a family here.  It's in a quiet neighborhood with a good school system.  See us staying put for a while.
 
Debts:
Just the mortgage.  Girlfriend is debt-free as well.  We both own our cars outright, and won't need to be replaced any time soon.

Mortgage:
I'm 3 years into a $464,000 loan @ 3.75%.  I put 20% down, so no PMI.  I've paid down a little extra here and there, but nothing drastic.  $426,500 principal due.

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Well MMM'ers -- have at it.  What to do for maximum efficiency?  I am leaning towards a combination of slightly increasing monthly principal payments, mega-back door Roth, and diversifying out some of my MSFT into index funds.

[MDM]

The standard Investment Order may not fit everyone, but it's not a bad place to start.  How does it look to you?

[FamilyGuy]

I am sure there will always be some room for improvement. But this is so great and inspiring for me.

[Kyle]

The standard Investment Order may not fit everyone, but it's not a bad place to start.  How does it look to you?

Thanks for the link!  Definitely has me thinking if I should prioritize the mega-backdoor Roth over ESPP.

[Goosey]

Invest in a HSA? I believe MSFT contributes a decent amount if you go for the HSA option (I used to work there, but maybe things have changed)

[Kyle]

Invest in a HSA? I believe MSFT contributes a decent amount if you go for the HSA option (I used to work there, but maybe things have changed)

This is a good reminder.  I do have about $4000 in HSA from the former high-deductable plan that MSFT made the contributions of.  Last year, I switched to a different plan but I'll take a deeper look in this year's open enrollment process, potentially back to the HSA plan.

[lutorm]

$250k in cash for emergencies? That seems like ... a lot. I've never understood having a gigantic emergency fund in cash. I mean, a month's expenses seems reasonable, but if it's an emergency it's by definition an outlier event, which means I don't mind liquidating some stocks for it. Yeah, it means a small risk of having to sell at an inopportune time, but on the other hand not investing it means a 100% probability that you're not making market return on it.

[marty998]

Are you going to combine finances with the Girlfriend after marriage?

What does her balance sheet look like?

[Kyle]

$250k in cash for emergencies? That seems like ... a lot. I've never understood having a gigantic emergency fund in cash. I mean, a month's expenses seems reasonable, but if it's an emergency it's by definition an outlier event, which means I don't mind liquidating some stocks for it. Yeah, it means a small risk of having to sell at an inopportune time, but on the other hand not investing it means a 100% probability that you're not making market return on it.

100% agree, which is why I want to rectify it.  It just kind of 'happened'.  I was using the account to initialy save for the down payment in the house, then I 'repaid myself'.  I just started investing in taxable ETFs (outside of what MSFT received as a bonus or ESPP) last year. Buying a first $585K house, single, in your low-30's causes a little bit of trepidation to ensure you can make the mortgage payment in the event that something goes wrong, but this is basically a 5-year emergency fund, and it's a ridiculous amount to keep earning 2%.

My current plan essentially has me maxing pre-tax 401k, Mega Backdoor Roth (started last paycheck), and ESPP which leaves me with little leftover every month.  I'm ok with this as I want to slowly start to draw away from cash reserves, dollar-cost average into the market, or pay extra principal on the mortgage to allow for this to occur.  I'm no longer thinking about it "by paycheck", which is nice.

[Kyle]

Are you going to combine finances with the Girlfriend after marriage?

What does her balance sheet look like?

We'll have to sort that out.  Probably not -- the system we have going is working well for both of us.  Her parents never combined finances (they are well off) so she's comfortable with that situation and it works for them.

When we first got together about 5 years ago, she had a condo that she bought when markets were down in 2009.  Prior to this, she lived with her parents to save up a downpayment.  She sold the condo, and lived with her grandparents for a year to go back to school to get her RN, while working part-time.  She cleared about 50K on the condo sale, paid her lease pay-off on her car to own it outright, and her tuition costs of going back to school, and cleared some cash on the deal.  After this, she moved in with me.

When she got her raise last month, I put together a spreadsheet and convinced her to raise her 401k from 15% to 18% based on a per-paycheck calculation (I did the same last year to get her to 15%).  I'll push her to probably max it next year.   I don't know what her 401k balance is, but she's always contributed at least something and it's invested in a target-date fund.  She has no debt and about 50K in cash as well.  She's not irresponsible with money, she's just not as organized or into personal finance as much as I am (she would never put together a spreadsheet for a 401k deferral calculation on her own), nor has had my level of income building up over time. 

This is one of those efficiencies I'd like to drive, but I've tried not to push her too much right now, but I do want to get a better idea of this soon -- and this is a good reminder to have the combined conversation.

I haven't pushed her too much as I know she already feels like she's 'getting ahead' at a higher rate than she ever has before and really putting liquid assets aside based on the situation we're in. I also never wanted her to feel dependent on me.  She doesn't spend frivilously, but I also want her to feel like if she wants something, she can buy it for herself rather than impose all of my frugality on her.  After all, it's her money and she's worked hard for it.

I don't think she truly believes we can retire early, but I don't mind seeing her seeing her own cash stack up in her accounts (in the ones she actually looks at) for now, to make her a believer.

[mistymoney]

GF is also doing pretty great - I'd leave her to figure out her own priorities there.

Figure out how little actual cash you need for EF and invest the rest. With your stats here - I'd go with 0! Absolute most is 1 year expenses.

You have the monthly income to cover thousands of dollars for most typical budget emergencies. Plenty of investments outside of retirements to draw from if necessary for larger emergencies.

[MoneyizHere]

you're pretty efficient as is - especially if you're planning to MEGA it.  Glad you and your GF are like-minded about how to handle the finances. 

Crank it up!
For this year - since you have such a huge stock pile of cash already - almost 4 years worth -
Crank that 401k contribution to maximum available for the remainder of the year.
For your GF - tell her to do the same as well - and investigate if she has Mega available as well.
If you've not already funded your ROTH this year - max it out right now. 
If your GF did not already fund an tIRA - have her max it out right now.

Consider yourself without any further income in 2020 and just live off the residual of your Cash stock pile. 

Don't go crazy on the wedding expenses including the ring. 
Definitely stay put on your current home and consider if worthwhile to refinance it again at current rates (maybe recast it out).
Once you've thrown all your funds to max out retirement accounts via 401k, MEGA, ROTH - then consider paying down your mortgage instead of excess cash into taxable - its a great feeling not to have to be concerned about that large mortgage payment each month so knocking down your annual expenses even further.  Since your current annual expenses is around $50k - whatever you have above this amount drop it into a principal payment. 

[Kyle]

Crank that 401k contribution to maximum available for the remainder of the year.

Pre-tax will be maxed after my 10/15 paycheck.  I've done the math and 11% will do it next year.

For your GF - tell her to do the same as well - and investigate if she has Mega available as well.

She does not have a mega available, but a Roth IRA would probably be the next logical step for her.

If you've not already funded your ROTH this year - max it out right now. 

I out-earn the standard Roth IRA limits, but I have started after-tax 401k conversion to Roth, which I'm now doing 25%.  That happened to coincide with my bonus check, giving the Roth contributions a nice $5,000 basis contribution.  Considering hiking it up this year even further, then on January 1st changing it to the percentage that will max over the course of 2020 (15%).

If your GF did not already fund an tIRA - have her max it out right now.

Will have the Roth conversation.  I'll find out how much cash she has.

Consider yourself without any further income in 2020 and just live off the residual of your Cash stock pile. 

That's kind of the conclusion that I've drawn, is just to maximize the benefits and draw the cash down.

Don't go crazy on the wedding expenses including the ring. 

I'm thinking about 10K for the ring.  We both want a small wedding.

Definitely stay put on your current home and consider if worthwhile to refinance it again at current rates (maybe recast it out).
Once you've thrown all your funds to max out retirement accounts via 401k, MEGA, ROTH - then consider paying down your mortgage instead of excess cash into taxable - its a great feeling not to have to be concerned about that large mortgage payment each month so knocking down your annual expenses even further.  Since your current annual expenses is around $50k - whatever you have above this amount drop it into a principal payment.

I threw $1200 extra Principal at the mortgage last month and it felt pretty good.  I'd rather pay extra principal and "make my own 15 year plan" then to refi into a 15 year, since it allows the option to make the current payment if something were to go wrong.  After my bonus check, I'm looking at a larger principal payment next month.

I've also put a limit order to sell off my 125 shares of most recently earned bonus MSFT shares once the price recovers a bit, will allocate re-allocate to index funds.  Choosing to sell these shares as those with a long-term basis will end up costing me more in taxes.

[bacchi]

Re: MSFT shares

It'd be ideal if you could sell those shares when you're ER and have little income but that could be years.

Possible solutions:

* Donate some appreciated shares to a DAF (Donor Advised Fund). If you donate >$24k, you'll hit the deduction minimum.
* Take a year off and sell enough to cover expenses while keeping below the 12% income bracket.
* Sell a far OTM call and buy a far OTM put to protect the shares in the meantime.

[Kyle]

Re: MSFT shares

It'd be ideal if you could sell those shares when you're ER and have little income but that could be years.

Possible solutions:

* Donate some appreciated shares to a DAF (Donor Advised Fund). If you donate >$24k, you'll hit the deduction minimum.
* Take a year off and sell enough to cover expenses while keeping below the 12% income bracket.
* Sell a far OTM call and buy a far OTM put to protect the shares in the meantime.

It's certainly an interesting problem to have.  I don't know how much of a problem the lack of diversficiation really is, and I could think of worse stocks to hold longterm.

[Kyle]

I've taken the advice from above and jacked up my After-Tax 401k contributions to 50% for the remainder of the year.  It should get pretty close to maxing.