What to do with our $300k windfall?

[MacGyverIt]

My company was recently purchased by a VC firm and their purchase of my stock has resulted in a $300k profit (on top of our annual income… taxes gonna hurt next year...) Only debt is our mortgage - $288k @ 3.375% - and since we know it’s not our forever home and at such a low interest rate there’s no big temptation to pay off the house. (Also, DW and I are in our early-fifties.) We’re struggling with if/how to potentially rebalance our Vanguard portfolio and where to invest this huge surplus.

We've tried to follow the Jim Collins model, so maybe we don't overthink it and go as simple as $150k into VBTLX and $150k into VTSAX? Welcome recommendations and questions.

Where we stand as of Jan 2023:
Net worth ~1.9 mil:
401k - $135k and maxed out at annual contribution
Traditional IRA (Vanguard) - maxed out annual contribution

Our Vanguard portfolio is a bit all over the map… Over allocation is Stocks - 53% / Bonds - 28% / Short term reserves - 19%:

Traditional IRA - $518615 total consisting of:
VBTLX - 14,385
VSMGX - 493k
VTIVX - 11,200

Roth IRA - $128k total consisting of:
VBTLX - $10,800
VTIVX - $117k

General Brokerage account - $184k total consisting of:
VMRXX - $153 (basically our “savings” account)
VTSAX - $30,700

[RWD]

Sounds like you need an investment policy statement.

I definitely wouldn't pay off the house at such a low rate. There are savings accounts paying higher interest rates right now.

[MacGyverIt]

Sounds like you need an investment policy statement

.
Thank you!

I definitely wouldn't pay off the house at such a low rate. There are savings accounts paying higher interest rates right now.

Appreciate this confirmation. It makes my head hurt to pay interest but I know it's the right thing to do in the long term.

[ATtiny85]

I’d put it all in VTSAX and adjust IRA holding to keep AA in check. And some estimated tax amount in a one year CD first.

[MacGyverIt]

I’d put it all in VTSAX and adjust IRA holding to keep AA in check.

AA?

And some estimated tax amount in a one year CD first.

CDs hadn't even occurred to me, thank you! This windfall has pushed us into the next tax bracket for 2023 so anything that'll help with tax mitigation is welcomed.

[MustacheAndaHalf]

We've tried to follow the Jim Collins model, so maybe we don't overthink it and go as simple as $150k into VBTLX and $150k into VTSAX? Welcome recommendations and questions.

With 50% bonds/stocks I assume you're close to retirement, and also that you plan to keep that allocation in retirement?

I'd consider adding some allocation to international, if you're okay turning the two fund portfolio into a three fund portfolio: Vanguard Total International Stock Index Fund Admiral Shares (VTIAX).  Maybe 1/5th stock holdings, so replace 50% VTSAX with 40% VTSAX / 10% VTIAX.

[ATtiny85]

I’d put it all in VTSAX and adjust IRA holding to keep AA in check.

AA?

And some estimated tax amount in a one year CD first.

CDs hadn't even occurred to me, thank you! This windfall has pushed us into the next tax bracket for 2023 so anything that'll help with tax mitigation is welcomed.

Asset Allocation.

https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

[MacGyverIt]

With 50% bonds/stocks I assume you're close to retirement, and also that you plan to keep that allocation in retirement?

I figure we're about 5 years out from retirement if my next professional step lines up as we're planning. At that point, I'll likely start moving more towards the Total Bond Market to be safe.

I'd consider adding some allocation to international, if you're okay turning the two fund portfolio into a three fund portfolio: Vanguard Total International Stock Index Fund Admiral Shares (VTIAX).  Maybe 1/5th stock holdings, so replace 50% VTSAX with 40% VTSAX / 10% VTIAX.

I was looking at VTIAX last night based upon this 2012 (but still highly relevant!) OP's post on Bogleheads -
https://www.bogleheads.org/forum/viewtopic.php?t=88005&sid=168edc78176721e8d2022fa80bbb05c4

Wow, the VTIAX expense ratio is substantially higher (.11%) than VTSAX (.04) and VBTLX (.05)!

[nereo]

You may wish to take a deeper dive into stock/bond ratios and risk during retirement phases. Very short and incomplete version is that holding a majority percentage of bobds in you AA can actually result in more historical failures with roughly equal volatility towards a 60/40 or even 70/30 stock/bond ratio.

[BicycleB]

My guess is if you write an Investment Policy Statement, it should:

1 include an annual evaluation of your asset allocation, and some rebalancing toward a target that matches your goals. For example if you decide that 60% stock 40% bonds is the target because it will let you sleep at night but also grow over time, and on Checkup Day your portfolio is 53% stock, your rebalancing target would be “add 7% stock.” Or if 50/50 is the most stock you can stand, the IPS has 50% as the target; on Checkup Day, you determine the new goal is “3% less stock”.

2 include a procedure for doing the rebalancing. If taxes don’t affect you, maybe you sell and rebalance immediately. If tax minimization is important in your case, maybe you just direct all upcoming dividends toward the category that needs investment. Design a procedure that meets the needs of your situation.

[Mr Mark]

As per above, you should have a written investment strategy and subsequent asset allocation. As we all should. Then when you get a nice dose of cash, assign it accordingly as soon as possible. And just because you're close to retirement doesn't mean all bonds. I'm 85/15 and want the 'stash to last forever.

Regular rebalancing is over rated, I would focus on tax optimisation. Depending on how complex your financial situation is in general, paying a tax/CPA a few bucks might pay for itself.

Certainly, paying off a low fixed rate mortgage right now if you don't have to sell is silly. Free money.

[Mr Mark]

As per above, you should have a written investment strategy and subsequent asset allocation. As we all should. Then when you get a nice dose of cash, assign it accordingly as soon as possible. And just because you're close to retirement [aka should be FIRE already] doesn't mean all bonds. I'm 85/15 and want the 'stash to last forever.

Regular rebalancing is over rated, I would focus on tax optimisation. Depending on how complex your financial situation is in general, paying a tax/CPA a few bucks might pay for itself.

Certainly, paying off a low fixed rate mortgage right now if you don't have to sell is silly. Free money.

Forgot to add, treat you and partner to a really nice vacation. ;-)
You can't buy time. And what you have is in strictly limited supply.

[dividendman]

While you're deciding what to do you can get 26 week treasuries at ~5% (or 4 week treasuries at ~4.5%): https://www.treasurydirect.gov/auctions/announcements-data-results/

[FLAFI]

Since most of the windfall will not be in a tax advantaged account, consider 45% VTI, 15% VSUX and 40% VTEB. Consult with your CPA about whether or not it makes sense to invest a tax exempt bond fund like VTEB or the non-tax advantaged BND. It will likely depend on your tax bracket. With yields rising, bond funds throw off a significant amount of taxable income.

Consult with your CPA on when to pay taxes on the windfall.   
   

[secondcor521]

Most advice so far seems to be about your AA and taxes.  Both important topics.

This resource may be helpful in terms of managing the windfall itself:

https://www.bogleheads.org/wiki/Managing_a_windfall

[ATtiny85]

Since most of the windfall will not be in a tax advantaged account, consider 45% VTI, 15% VSUX and 40% VTEB. Consult with your CPA about whether or not it makes sense to invest a tax exempt bond fund like VTEB or the non-tax advantaged BND. It will likely depend on your tax bracket. With yields rising, bond funds throw off a significant amount of taxable income.

Consult with your CPA on when to pay taxes on the windfall.   
 

Not sure a CPA is the correct person to ask for investment advice. Actually, I am 100% sure that is not the correct person.

There is enough room in tax advantaged accounts to not have to consider a bond fund of any type in taxable. I would not even keep international in taxable. I would use VTI/VTSAX for the entire windfall dollars and adjust things in the IRA accounts where there are plenty of equities that can be exchanged for bonds / international.

My reasoning is that it drives simplicity in taxable where it will hopefully get tougher and tougher to adjust over the years as the equity market rises. Again, there are plenty of dollars in tax advantaged already to be able to reach any allocation that should be suggested.

[FLAFI]

The CPA suggestion is not for investment advise but for tax advice. You are not incorrect that the OP could hold more bonds in tax advantaged accounts and put 100% of the after tax windfall in VTI but there are also good reasons not to take this approach. A tax exempt bond fund may be an option depending on the OP's tax situation.

[MustacheAndaHalf]

With 50% bonds/stocks I assume you're close to retirement, and also that you plan to keep that allocation in retirement?

I figure we're about 5 years out from retirement if my next professional step lines up as we're planning. At that point, I'll likely start moving more towards the Total Bond Market to be safe.

I'd consider adding some allocation to international, if you're okay turning the two fund portfolio into a three fund portfolio: Vanguard Total International Stock Index Fund Admiral Shares (VTIAX).  Maybe 1/5th stock holdings, so replace 50% VTSAX with 40% VTSAX / 10% VTIAX.

I was looking at VTIAX last night based upon this 2012 (but still highly relevant!) OP's post on Bogleheads -
https://www.bogleheads.org/forum/viewtopic.php?t=88005&sid=168edc78176721e8d2022fa80bbb05c4

Wow, the VTIAX expense ratio is substantially higher (.11%) than VTSAX (.04) and VBTLX (.05)!

Over 20 years, a 0.07% expense ratio adds up to 1.4%, which I would not call "substantially higher".  Assuming 10%/year stock market returns for 20 years, the returns add up to +573% total.  It's worth keeping the gap in those numbers in mind, and the benefit of international diversification.

If you are 5 years from retirement, you should already be shifting towards your retirement bond allocation.  Assuming your portfolio is already be enough for retirement, it is likely time to shift from growing your nest egg to preserving it.

[Must_ache]

I don't think I would change a thing right now.  When the economy and inflation settles down I would probably move some of your short-term holdings to stocks but right now I would be happy with that setup.