Two 30-year old techies - Keep on keeping on?

[BenjaminGraham]

My other half and I are both techies and are each 30 years old. We are based on the West Coast, so a high cost area. However, we keep a relatively low expense profile. Below is our profile and investment approach - should we keep on keeping on or should we diversify a bit (perhaps real estate)?

NET WORTH

Cash: $150k
Brokerage: $750k (80% S&P 500 ETFS; 15% Global ETFS; 5% single name stocks)
Roth: $90k (similar mix to above)
401K: $340k (similar mix to above)
Debt: None
Other Assets: None

ANNUAL P&L

Combined Annual Compensation: $450k
(-) 401k contribution: $41k
Taxable Annual Compensation: $409
(-) Taxes: $140k
After Tax Annual Compensation: $269k
(-) Annual Rent: $42k (includes utilities)
(-) Annual Other Expenses: $40k
Total Take Home: $187k

INVESTMENT APPROACH

We each max out our 401K (as shown above) and each receive $5k match from our respective employers. We allocate our remainder Total Take Home to brokerage accounts each month (DCA) based on the brokerage mix above. Should we keep on keeping on or should we diversify a bit (perhaps real estate)?

[frugal_c]

I would keep working but sure diversification is not a bad idea. The issue would be that real estate has vmbeen on a tear.  Personally I couldn't justify the amount people are paying out there.  Maybe you could buy a house or duplex somewhere where the cashflow makes more sense.  Ideally you move and live somewhere with saner prices but probably not an option.

[zolotiyeruki]

You currently have expenses of $82k and assets of >$1.3million.  Without changing your expenses, you'd need a bit over $2 million.

fugal_c is right about real estate being on a tear the last couple years, but so has everything--real estate, equities, commodities, cars, etc.  Could you diversify? Sure.  But you need to define specifically what your goal is (reduce risk?), and then evaluate the alternatives according to that risk.  WRT real estate, the adage goes something like "you make your profit when you buy it."  And right now, housing is crazy expensive everywhere, which makes it a bit hard to justify as an investment.

One other thought--if you were willing to move to a lower CoL area, and take a hard look at your budget, you might already be FI.  $40k of non-housing expenses for two people seems high to me.

[BenjaminGraham]

@frugal_c & @zolotiyeruki - thank you very much for the helpful replies

Do you guys think we should continue our investment strategy of maxing out our 401K and investing any of our take home pay into low-cost ETFS (80% U.S. / 20% Global)?  Assuming no market appreciation and no change to our investment strategy / annual earnings, below is how our profile would change over the next 5 years:

Cash: $150k -> $150k
Brokerage: $750k -> $1,685k (80% S&P 500 ETFS; 15% Global ETFS; 5% single name stocks)
Roth: $90k -> $90k (similar mix to above)
401K: $340k -> $590k (similar mix to above)
Debt: None
Other Assets: None

[alm0stk00l]

@frugal_c & @zolotiyeruki - thank you very much for the helpful replies

Do you guys think we should continue our investment strategy of maxing out our 401K and investing any of our take home pay into low-cost ETFS (80% U.S. / 20% Global)?  Assuming no market appreciation and no change to our investment strategy / annual earnings, below is how our profile would change over the next 5 years:

Cash: $150k -> $150k
Brokerage: $750k -> $1,685k (80% S&P 500 ETFS; 15% Global ETFS; 5% single name stocks)
Roth: $90k -> $90k (similar mix to above)
401K: $340k -> $590k (similar mix to above)
Debt: None
Other Assets: None

Your current investment strategy is great; albeit, on the risky side. But you are both 30 and it doesn't seem like retiring tomorrow is your goal. Everything you are doing right now is moving in the right direction. Your spending is a little high, but your income is A LOT high so it is up to you if you want to optimize in that area. There is no "set it and forget it" adjustments that could be made to your investing profile that would have a high chance of improving your financial situation.

Because of your tax profile you should always max your 401ks; low cost ETFs are great unless you want to learn how to be an active trader; your asset mix makes sense unless you want to learn about the push/pull of foreign markets.

Ultimately, you are doing fine and it is up to you if you want to become active in your finances (boring to me but could be interesting to you) or continue to coast your way to what can easily become a multi-million dollar retirement.

[jeroly]

My other half and I are both techies and are each 30 years old. We are based on the West Coast, so a high cost area. However, we keep a relatively low expense profile. Below is our profile and investment approach - should we keep on keeping on or should we diversify a bit (perhaps real estate)?

NET WORTH

Cash: $150k
Brokerage: $750k (80% S&P 500 ETFS; 15% Global ETFS; 5% single name stocks)
Roth: $90k (similar mix to above)
401K: $340k (similar mix to above)
Debt: None
Other Assets: None

ANNUAL P&L

Combined Annual Compensation: $450k
(-) 401k contribution: $41k
Taxable Annual Compensation: $409
(-) Taxes: $140k
After Tax Annual Compensation: $269k
(-) Annual Rent: $42k (includes utilities)
(-) Annual Other Expenses: $40k
Total Take Home: $187k

INVESTMENT APPROACH

We each max out our 401K (as shown above) and each receive $5k match from our respective employers. We allocate our remainder Total Take Home to brokerage accounts each month (DCA) based on the brokerage mix above. Should we keep on keeping on or should we diversify a bit (perhaps real estate)?

Remember, if you are doing that DCA into total market funds like VTSAX or VTI, you are already diversifying into real estate in the form of the REITs which are part of the market.  So adding real estate into your investment portfolio is essentially becoming 'overweight' real estate.  That's not necessarily a bad thing, but it's definitely worth being aware of what's going on.

[Dicey]

We have roughly $3M in CA real estate* and the same in equities. I love real estate because it represents security. (I had cancer in my early twenties, so security, or the illusion of it, is important to me. ) It's also endless problem solving, which is right up our alley.

I'm guessing you're in Silly Valley. While your rent seems high, as a percentage of your income, it's nothing. If I was in your shoes, I'd skip the real estate route and stay the course. You have made a great start; you're not missing out on anything. The middle part of the FIRE journey is the most boring.

*Primary in NorCal, 3 SoCal SFH rentals, plus we occasionally flip houses.

[iluvzbeach]

What type of health plan do you have through your employer? If a High Deductible Health Plan is available and you’re using it, make sure to max your HSA each year.

[frugal_c]

@frugal_c & @zolotiyeruki - thank you very much for the helpful replies

Do you guys think we should continue our investment strategy of maxing out our 401K and investing any of our take home pay into low-cost ETFS (80% U.S. / 20% Global)?  Assuming no market appreciation and no change to our investment strategy / annual earnings, below is how our profile would change over the next 5 years:

Cash: $150k -> $150k
Brokerage: $750k -> $1,685k (80% S&P 500 ETFS; 15% Global ETFS; 5% single name stocks)
Roth: $90k -> $90k (similar mix to above)
401K: $340k -> $590k (similar mix to above)
Debt: None
Other Assets: None

Those are some impressive numbers but I keep thinking it's all tied up in equities.  I like having real estate as I have seen how it can diverge from stocks.  We were once down 60% in 2009 and yet our home value was only off 5-7%.  I like having some money in both.

I don't think there is a right or wrong answer here. It's a question of diversification vs your time and stress.

[zolotiyeruki]

@frugal_c & @zolotiyeruki - thank you very much for the helpful replies

Do you guys think we should continue our investment strategy of maxing out our 401K and investing any of our take home pay into low-cost ETFS (80% U.S. / 20% Global)?  Assuming no market appreciation and no change to our investment strategy / annual earnings, below is how our profile would change over the next 5 years:

Basically, yeah--I'd maximize deductions of all sorts now, while you have the high income, and plow whatever you can into low-cost index funds.  I wouldn't keep that much cash--I'd at least have it in bonds, with only an emergency fund in cash.  I wouldn't be terribly worried about sequence of returns risks either--they have the greatest potential impact early in retirement, when it's also easiest to get some sort of work to supplement income.

If you consistently make significant charitable donations (like some people tithe or consistently give to a charity or their alma mater or whatever), you might also consider setting up a Donor Advised Fund as a way to reduce your current taxable income during your high-earning years.

[SeaWA]

@frugal_c & @zolotiyeruki - thank you very much for the helpful replies

Do you guys think we should continue our investment strategy of maxing out our 401K and investing any of our take home pay into low-cost ETFS (80% U.S. / 20% Global)?  Assuming no market appreciation and no change to our investment strategy / annual earnings, below is how our profile would change over the next 5 years:

Basically, yeah--I'd maximize deductions of all sorts now, while you have the high income, and plow whatever you can into low-cost index funds.  I wouldn't keep that much cash--I'd at least have it in bonds, with only an emergency fund in cash.  I wouldn't be terribly worried about sequence of returns risks either--they have the greatest potential impact early in retirement, when it's also easiest to get some sort of work to supplement income.

If you consistently make significant charitable donations (like some people tithe or consistently give to a charity or their alma mater or whatever), you might also consider setting up a Donor Advised Fund as a way to reduce your current taxable income during your high-earning years.

I think that aolotiyeruki and frugal_c have given good advice, but I'd add one thing. I don't see you mention Roth IRA (via backdoor), or after tax contribution to 401(k).

I work in tech as well, for one of the big companies. They allow us to max our full 401(k) plan contribution to the IRS limit of 61K (not 20.5K) by allowing after-tax contributions. So I put in the 20.5K in pre-tax contributions, get the employer match, and top up the rest of the with after-tax contributions. I then convert the after-tax contributions from after-tax 401(k) to Roth 401(k), then move to a Roth IRA. I do the conversion immediately, so there are no taxes incurred. I also do the 6K Roth IRA backdoor. This allows me to get 67K into tax advantaged accounts per year. On then do I put money into my brokerage account.

You might also check out this thread: https://forum.mrmoneymustache.com/investor-alley/investment-order/