Cashing out brokerage once hitting FIRE (too tha moon)

[dizzy]

Ok, actually NOT about $GME...

My partner wanted me to do some research on what he should do with his stonks.  He, like me, didn't know anything about investing until late 30s.  Unlike me, he had a "real job" during 20s/30s (I was a broke musician basically) and was saving in a bank account.  Then he learned about investing, bought some stocks over the last 7 years.  Had ~7x gain through combo of luck, smarts, and consistent stashing.  Still some way to go for him but he is closing in on his number.

All of this excepting like, $20k, is in a taxable brokerage.  >facepalm<

Meanwhile in my journey last 2 years I have learned all about ways to tax shelter your money in IRAs, 401k, etc.  He has been nervous to put in those because he thought he couldn't get it out in case something crazy happened, didn't trust the government, etc.  With patience I've helped him understand that it's really going to make his money go a lot further in these accounts, if you REALLY needed it you could even get out (with a fee if not Roth, but it's not locked forever which is what he thought).  Also with this past year where he has been out of work (quit job 2 weeks before shutdowns, whoops) he knows now in worst case scenario we can get through it (emergency fund, getting a side gig, also we are a team- we were both single for a long time before we met, depended only on ourselves).  He is into using 401k, IRA, etc going forward until he hits his number.  Even is seeking out a job with a pension which fingers crossed we should know about this week after final interview.  So awesome habits and understanding from my awesome partner.

His question is what happens if his one stock (already up a crazy amount) continues to do well (big merger coming up, it's biotech and new approvals expected this year, everyone is apparently bullish on it) and he hits his number.  He wants to sell and lock in his gains at some point.  I've convinced him to not do it ALL at once.  Some stocks  (he has like 5, and 2-3 ETFs) like Apple are good to hold longer term.  But once at FIRE he wants to 1. diversify 2. get invested in something safer/more conservative.  So what would he shift to?  An "income" portfolio (dividend ETF, REITs, IDK what else?). How does he decide on bond/stock/cash etc ratios?  How much of it does he "cash out" at once?

Also how does the cashing out affect things as far as taxes go- how should he factor this in?

I referred him to the excellent series by Millenial Revolution with their yield shield but he's finding it overwhelming to read.  Don't need a whole plan here but some references (especially video- he does better with those than books) would be great resources for us.

BTW we are not married yet but plan to once pandemic is over/chilled out/etc.  When he FIREs he wants to be totally done working; I like what I do and also want to get to my number myself- which is massively less than his- and still work a bit after but a looser schedule so we can travel etc.  He's 45 I'm 39. 

[MustacheAndaHalf]

So there's a big bio company buying the small biotech company your partner invested in?  When you divide the big bio company by the small biotech company, what's the ratio like?  Close to 1, or close to 20?  It's possible the great gains of the small biotech company are about to be spread over the big bio company, and won't be as significant.

I don't know what "everyone is bullish" means, but if you want the professional analyst views, search for "apple stock" (replace apple with the company or stock symbol) and click the Yahoo Finance link.  If you scroll down far enough, on the right should be a red/yellow/green graph of analyst views.  Do they say "strong buy"?  What are the most recent changes?  That might be something to consider.

There's a tax impact to selling stock.  After 1 year, the "long term capital gains" rates kick in.  Up to $200k is taxed at 15%, followed by 18.8% from $200k to $440k (the "net investment income tax", not shown in tax tables).  Is it reasonable for him to keep his income + dividends + stock sales below $200k year?  Or at least below $440k per year?

[HumanAfterAll]

Tax Gain Harvesting is the idea:
https://www.schwab.com/resource-center/insights/content/how-to-save-money-with-tax-gain-harvesting

[dizzy]

It's a merger between a bigger bio company currently not listed and a smaller one which is listed which he owns.   Apparently it's not clear yet how the stock will be divvied- originally it was sounding like 1:2 or 1:3 (the big bio company is privately listed as of now).  But it's also sounding like maybe he will still end up with same # of stocks. 

Yes, the main stock we are talking about says "Strong buy".  Up 13% today, 190% since last month, 420% in last year, 330% in 5 years.  His average cost/stock is about $1 so it's up much more than that for him.  It is projected to do well this year, and in the future, though with biotech of course they are risky.  He doesn't want to hold it long term (or would only keep a small position).

He says he needs $40-45k/year to live on.  For myself I plan to provide for myself, but I only need $12-15k/year to live on and I'll keep working somewhat- his number doesn't include my COL.  But he wants to cash out once he gets to a certain amount so he can put it into a more diverse portfolio, it's not very diverse right now.  And also we are trying to understand about income/dividends etc.  These stocks don't have dividends really, everything is tech/biotech.

I don't know that tax gain harvesting applies when he cashes out since it would be so big?  He doesn't want to hold onto the biotech/tech stocks once they get high if they do- he knows it's not as safe, would want to take profits.  He understands there would be taxes.  I am understanding that one way is to split a sale like that over 2 years if possible (example if end of year).  We did mess with tax gain harvesting for him last year since he made so little money in work, saved him a chunk.

[ctuser1]

Please discuss an investment policy statement with him. https://www.bogleheads.org/wiki/Investment_policy_statement

Yes, it is a big undertaking. But none of these things would make any sense unless you think about the big picture, have an IPS and execute on it. Whether your partner can hold those individual stocks now, after hitting his number, or after hitting 2X the number would all depend on the "Risk Tolerance" part of the IPS. Please make sure he is accurate and honest on what will allow him to sleep like a baby through the night when there is a 60% (or maybe even a 90%, like great depression) drop in the markets - and you will have his "risk tolerance".

I was the OP on another thread dealing with this in MMM: https://forum.mrmoneymustache.com/investor-alley/investment-policy-statement-2020-edition/

I have a similar issue to your partner's. My portfolio is > 50% in single stocks that have significantly appreciated (mainly AAPL). My plan is to keep riding it till I am lean-FI. If the stock(s) in my portfolio tanks, my lean-FI would be delayed - which is fine because I have no plans for RE.

In case, however, things keep up the same way it has for the last few years then I will likely hit my lean-FI soon. After that, my risk appetite would change (I have the money, why lose it all?), and hence I will sell my single stock positions and stick with indices. I will still need to figure out the exact allocation among indices and asset types (stocks/bonds/cash). However, I have put in my IPS to start thinking about that allocation the first time my portfolio crosses my lean-FI number, and action on my new risk tolerance no longer than 1 year later than that date assuming my portfolio is still > my lean-FI number.   

 

[Financial.Velociraptor]

There is a lot to be said for letting your winners run with a trailing stop loss in place.  The market tells you when/if to get out, protecting most of your gains.

[tarheeldan]

There is a lot to be said for letting your winners run with a trailing stop loss in place.  The market tells you when/if to get out, protecting most of your gains.

Yep, limit your losses,  not your gains :)