Author Topic: Suggestions for the timid investor with access to a big chunk of change  (Read 3016 times)

SDH

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So I used to think rental properties are the way to go so we now have 2 plus a primary home.  However, the property taxes in my area are kinda ridiculous, and now I've discovered MMM, so have all new questions and thought processes now.

 We have a total of about 280-300K in equity if we sold them both right now.  Likely we would only sell one though, due to the cap gains tax that we would have to pay on one of the houses since we've never lived in it.  The other, we lived in for 7 years and now have a 2 year tenant with 1 1/2 yrs left on the lease.  So we could sell it after the lease is up and still avoid cap gains taxes, unless something changes in the next couple of years.

My question is, if you were to do this, what would you suggest to do with all that cash?  We are in our mid 40's so the thought of putting all into VTSAX terrifies me. 

I've guessed that our total nest egg for a SWR of 4% needs to be about 750K if we want to keep a 30K/yr lifestyle so this would be a good easy push to get us there.  In addition, we have about 240 k in a Roth 401 (just switched it back to a tIRA), then another ~100K in both of our Roth IRA's...so we are getting close, right? 

Im currently obsessed with trying to make this work!!

TIA!

ysette9

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We are in our mid 40s so the thought of putting all into VTSAX terrifies me. 

Expand on this if you would. People here throw around the word "risk" without clarifying what type of risk they are afraid of. Let's talk about what the real risks are and what you feel about them, and hopefully that will help you set aside the emotions and take a rational look at what to do with your money.

Just as some examples, if you need your money short term for something like a down payment, then a "risky" place to put your money would be something that is volatile, because you would risk having the value of your investment be down at just the moment that you need to pull the money out.

Alternatively, if your goal is FIRE and you need to live off of your money for 30-50 years, a "risky" investment would be something like bonds or another stable value/cash fund that has a very high likelihood of not keeping up with inflation and leaving you broke in your old age.

There is also the purely emotional side of things where the investment may be a good fit for you on paper but you panic for whatever reason and sell during a drop, locking in a loss and putting your financial stability at risk.

SDH

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How much rent are these properties generating?  What's the total value of the properties?  How much of a hassle is it to be a landlord with these tenants and homes?  What's your ROI after anticipated vacancies and repairs?

I'll discuss the one we are considering selling to keep the conversation easier :) We may move into the other one when that lease is up to close the cap gain gap.

So we have a 35K heloc on the otherwise paid for property. T&I ~6K a year so with no tenant we are out 500-600 a month. Valued at ~250K, no hassle with these tenants and we are 6 mo into a 2 year lease.  Rents 1700/mo.  Current ROI (didn't include the vacancy) but with initial investment (167K) plus a bath remodel (~10k) I figured it to be about 8%.  The problem I'm struggling with is the property taxes can go up even further at the whims of the county since there isn't a homestead exemption on it any more.  Best to just sell it and have the cash?

I don't own rental properties - I own a substantial amount of REITs.  You could look at VGSLX to get the exposure to real estate you want without the hassle of managing properties.
I'm not sure its overly important to have REITs unless it's like a smoking deal to own them, but Ill have to research more.  I've just been conditioned for whatever reason to think that owning RE is a good path to retirement income.  Which it is, and if we were on track to retire at a "normal" age, I wouldn't really consider selling them at all, I'd just keep doing what we're doing.


Thanks for the feedback! Ask away, I like that it makes me dig deeper into our situation, I tend to go on autopilot. 

ysette9

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RE certainly can be a path to retirement income. It is just that it is not the only path. Depending on what type of RE investments you have they could be great or there could be better, more passive places to invest your money.

Another thing to take into consideration is your tax situation. RE income will be taxed as ordinary income whereas if you had that money tied up in a stock index fund you could be ina more favorable tax situation in retirememt being taxed for long term capital gains instead. It just depends on your situation. GoCurryCracker has some god blog posts about not paying taxes in retirement and gets into this in detail.

SDH

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RE certainly can be a path to retirement income. It is just that it is not the only path. Depending on what type of RE investments you have they could be great or there could be better, more passive places to invest your money. 
The only RE investments I have are the 2 houses.

Another thing to take into consideration is your tax situation. RE income will be taxed as ordinary income whereas if you had that money tied up in a stock index fund you could be ina more favorable tax situation in retirememt being taxed for long term capital gains instead. It just depends on your situation. GoCurryCracker has some god blog posts about not paying taxes in retirement and gets into this in detail.
I do think about the taxes because that is the thing I understand the least and is why I am all about this forum to help me muddle through.  Our situation is that I don't want our money tied up where we can't use it for FIRE'ing which is why I ask about selling vs keeping. We are wanting to FIRE ASAP!  haha  I just want others opinions on the matter since I may not always think about all the options or consequences of my actions since I am "emotionally involved".  And, if we do sell, where to stash that cash so that it continues to grow And allow us to draw from it.  I'm not sure I'd want it all in stocks since that is the most volatile and that money would be a huge part of our early retirement .

neo von retorch

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My question is, if you were to do this, what would you suggest to do with all that cash?  We are in our mid 40's so the thought of putting all into VTSAX terrifies me. 

I've guessed that our total nest egg for a SWR of 4% needs to be about 750K if we want to keep a 30K/yr lifestyle so this would be a good easy push to get us there.  In addition, we have about 240 k in a Roth 401 (just switched it back to a tIRA), then another ~100K in both of our Roth IRA's...so we are getting close, right? 

What does your investment policy statement tell you to do? OK, assuming you don't have one, can you make one? It's OK to have some real estate as one of your assets, but since you want more liquid investments, and want to reduce your RE holdings, what do you want your new allocation to be? This is different for everyone, and you do want to take risk aversion into consideration, but balance that with the advantage that equities/stocks hold in growing your wealth and maintaining your spending power.

What kind of assets do you hold in your retirement accounts? How did you decide on those? Why can't you use similar decision-making while investing in a brokerage account after you convert RE into cash?

ysette9

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I'm not sure I'd want it all in stocks since that is the most volatile and that money would be a huge part of our early retirement .

Again, I think this gets back to what I was saying earlier. I really think you need to put some time and thought into what you are afraid of and why. Let's talk about volatility.

Why does volatility matter? It matters if you need a good chunk of your 'stash in a short time period and that time period happens to coincide with a market dip. In the beginning of your retirement you run the risk of what is called sequence-of-returns. Meaning, that you happen to hit a rough patch of a few down years in a row while you are drawing down your stash that permanently impacts your portfolio in a negative way. This has been discussed a lot and (in my humble opinion) reasonable ways of avoiding this risk include keeping a couple years' expenses in cash/CDs, drawing down first from your bond allocation, or deploying a reverse glide path asset allocation where you retire with more bonds and slowly dump your bonds and increase your stock percentage as your retirement ages. Basically if you can get through the first 10 years of retirement in the clear, your portfolio should be too big to fail.

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a portfolio that starts at 60% in equities and ends at 60% in equities ) has a 93.2% probability of success. However, a portfolio that starts at 30% in equities and finishes at 70% in equities actually has a higher (95.1%) probability of success, not to mention a lower average equity exposure through retirement (an average of only 50% in equities instead of 60%).
reverse glide path reading https://www.kitces.com/blog/should-equity-exposure-decrease-in-retirement-or-is-a-rising-equity-glidepath-actually-better/

If you really are talking about an early retirement, then you need your money to last you a long time, more than a traditional retirement. When you are talking about time frames past 30 years, inflation and outliving your money become the very biggest risk, provided you have successfully gotten past the first 5-10 years of retirement and are past the sequence of returns risk part. People readily underestimate the power of inflation and how powerful a force it is in reducing your spending power. You might be afraid of volatility when the market swings up and down, but the truth stealth scary risk is waking up one day and realizing that your stash has not kept up with the cost of living.

I'd recommend checking out this analysis https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/ which is very detailed. Looking at the first table, at the extreme of a 60-year retirement at the traditional 4% withdrawal rate, the % success of 100% stocks is 89%. Pretty good, but I expect you can't stomach 100% stocks. Dropping that down to a potentially more palatable 50% stock allocation reduces your % success to 65%. Pretty much everyone around here will tell you that this is an unacceptably low chance of success and that you need to continue saving. To achieve the same success rate you need to drop your withdrawal rate down to 3.5%, which measurably adds years to your working career. I'm not saying there is anything necessarily wrong with this, but you need to be aware of what the real risks are and make your decisions based on your risk tolerance, logic, data, and what will keep you sleeping well at night. If you fully understand the upsides and the downsides and consciously say that an extra 5 years of work is worth it to you to have an asset allocation that makes you comfortable, then more power to you. Just make sure you understand the implications of the choice you are making.

As a personal anecdote, I've been told that my grandparents retired early (50?) with what was apparently a portfolio of $1M back in the late 70s/early 80s. As you can imagine, that was a ton of money (they were very frugal). Today my grandmother has about a years' worth of living expenses left and will be relying on her kids to pay her assisted living care bills when she runs out of money. How could this have possibly happened? A big factor, though not the only one, is that she has had her money in CDs earning less than inflation for the past 15+ years. That is a really powerful lesson to me in the importance of having an asset allocation appropriate to your real risks. In her case, longevity and running out of money is and was a real risk that was not properly balanced against her desire for a "safe" place to put her money.

That said, this is all academic if you can't hold the course and ride the inevitable ups and downs of the market. The market WILL go down eventually, and just as assuredly it will eventually go up. Check out this article on the "worst retirement ever" http://www.gocurrycracker.com/the-worst-retirement-ever/ about someone who has terrible luck timing retirement and still comes out just fine, because he/she didn't panic and sell at the bottom. Know thyself! If you don't have that kind of stomach and think you will panic and sell at a downturn, then shield yourself against that. Either purposefully set your AA and then don't look at your investments, pay someone like Vanguard personal investment services to do some hand-holding, or opt out entirely by having your retirement income stream come from something like real estate that won't be as volatile.

SDH

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My question is, if you were to do this, what would you suggest to do with all that cash?  We are in our mid 40's so the thought of putting all into VTSAX terrifies me. 

I've guessed that our total nest egg for a SWR of 4% needs to be about 750K if we want to keep a 30K/yr lifestyle so this would be a good easy push to get us there.  In addition, we have about 240 k in a Roth 401 (just switched it back to a tIRA), then another ~100K in both of our Roth IRA's...so we are getting close, right? 

What does your investment policy statement tell you to do? OK, assuming you don't have one, can you make one? It's OK to have some real estate as one of your assets, but since you want more liquid investments, and want to reduce your RE holdings, what do you want your new allocation to be? This is different for everyone, and you do want to take risk aversion into consideration, but balance that with the advantage that equities/stocks hold in growing your wealth and maintaining your spending power.

What kind of assets do you hold in your retirement accounts? How did you decide on those? Why can't you use similar decision-making while investing in a brokerage account after you convert RE into cash?

Thanks for the IPS tip.  This will help me organize my thoughts.  In the past, we were always guided to be moderate in our selections.  We are in the process of moving funds to Vanguard so will be working on asset allocations in the next few weeks.  I"m trying to learn where the best place for our Roth ira's will be, then max those out, then move to taxable accounts.  I think I will start with the VTSMX for taxable account since I won't be opening with 10K (I think that is what I read, that you need a 10K deposit to get into the VTSAX, but once VTSMX hits 10K it will switch to VTSAX).  The part that sorta makes me nervous is putting ~200K all in at once, I don't know why that is other than what if my timing is really shitty and it all gets tanked.  I like the idea from Ysette9 to put about 2 years in cash/cd's, then maybe I'd put the rest into the VTSAX at that point. Who knows, maybe I"ll have more experience by then and just go all in.   If we do this, it won't be for another 1 1/2 years, at which point we may even be working still for another  couple of years.  Will just have to reassess, but certainly in 5 years I'd like to think we will be successful.  Hubs will be 51, I'd really like to done before then though, because of his never ending night shifts! 

SDH

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I'm not sure I'd want it all in stocks since that is the most volatile and that money would be a huge part of our early retirement .

Again, I think this gets back to what I was saying earlier. I really think you need to put some time and thought into what you are afraid of and why. Let's talk about volatility.

Why does volatility matter? It matters if you need a good chunk of your 'stash in a short time period and that time period happens to coincide with a market dip. In the beginning of your retirement you run the risk of what is called sequence-of-returns. Meaning, that you happen to hit a rough patch of a few down years in a row while you are drawing down your stash that permanently impacts your portfolio in a negative way. This has been discussed a lot and (in my humble opinion) reasonable ways of avoiding this risk include keeping a couple years' expenses in cash/CDs, drawing down first from your bond allocation, or deploying a reverse glide path asset allocation where you retire with more bonds and slowly dump your bonds and increase your stock percentage as your retirement ages. Basically if you can get through the first 10 years of retirement in the clear, your portfolio should be too big to fail.

I need to remember that even if I set aside cash for ~2 years, my accounts will still be growing.  I'll review the reverse glide, and see how comfortable I"ll feel with that.  I think my problem now is just that I'm educating myself and am having a little inner battle on going against what I've always been told.  Buy, hold for the long term, moderate risk and set and forget it, which we've done.  But now, I want it faster!  LOL  I understand the point in all equities and my taxable account that I'm going to open will be and I'll put every dime I can in it for the rest of this year, then next year, max out IRA's again then back to pounding $$ into the taxable account. 

Quote
a portfolio that starts at 60% in equities and ends at 60% in equities ) has a 93.2% probability of success. However, a portfolio that starts at 30% in equities and finishes at 70% in equities actually has a higher (95.1%) probability of success, not to mention a lower average equity exposure through retirement (an average of only 50% in equities instead of 60%).
reverse glide path reading https://www.kitces.com/blog/should-equity-exposure-decrease-in-retirement-or-is-a-rising-equity-glidepath-actually-better/

This makes sense, I understand what its telling me!  So then my question becomes, if I did sell the house should I keep 1-2 years out in cash (because I think this would help me sleep at night), then half in equity and half in bonds?
If we retired at 50, we would need the money to last ~10 yrs, at which point other retirement monies would kick in, such as work 401 and roth Ira, provided we didn't tap into it early.  So realistically, if I calculated we need 30K/yr to live, I could just save up and have ~400K in cash to get us through 10 yrs, then use the other funds that have continued to grow over that time.  Of course, I wouldn't do that, I'd put it in stocks because I'd still have another house I could sell if I NEEDED to or go back to work, but I'm just saying I COULD...right? I get that is sort of a rhetorical question since you don't know my entire situation inside and out, but my point being...am I making this to hard?


If you really are talking about an early retirement, then you need your money to last you a long time, more than a traditional retirement. When you are talking about time frames past 30 years, inflation and outliving your money become the very biggest risk, provided you have successfully gotten past the first 5-10 years of retirement and are past the sequence of returns risk part. People readily underestimate the power of inflation and how powerful a force it is in reducing your spending power. You might be afraid of volatility when the market swings up and down, but the truth stealth scary risk is waking up one day and realizing that your stash has not kept up with the cost of living.

This would totally suck, we don't have anyone that would take care of us!

I'd recommend checking out this analysis https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/ which is very detailed. Looking at the first table, at the extreme of a 60-year retirement at the traditional 4% withdrawal rate, the % success of 100% stocks is 89%. Pretty good, but I expect you can't stomach 100% stocks. Dropping that down to a potentially more palatable 50% stock allocation reduces your % success to 65%. Pretty much everyone around here will tell you that this is an unacceptably low chance of success and that you need to continue saving. To achieve the same success rate you need to drop your withdrawal rate down to 3.5%, which measurably adds years to your working career. I'm not saying there is anything necessarily wrong with this, but you need to be aware of what the real risks are and make your decisions based on your risk tolerance, logic, data, and what will keep you sleeping well at night. If you fully understand the upsides and the downsides and consciously say that an extra 5 years of work is worth it to you to have an asset allocation that makes you comfortable, then more power to you. Just make sure you understand the implications of the choice you are making.

Im in the process of learning more about asset allocations and learning what my threshold is.  For our Roth IRA's, I'm not sure what funds yet, but beyond those being maxed out, my plan is to put everything else in a taxable account. However, back to the original point of putting that much cash in at once, that is the scary part to me. 
 
As a personal anecdote, I've been told that my grandparents retired early (50?) with what was apparently a portfolio of $1M back in the late 70s/early 80s. As you can imagine, that was a ton of money (they were very frugal). Today my grandmother has about a years' worth of living expenses left and will be relying on her kids to pay her assisted living care bills when she runs out of money. How could this have possibly happened? A big factor, though not the only one, is that she has had her money in CDs earning less than inflation for the past 15+ years. That is a really powerful lesson to me in the importance of having an asset allocation appropriate to your real risks. In her case, longevity and running out of money is and was a real risk that was not properly balanced against her desire for a "safe" place to put her money.   :(

That said, this is all academic if you can't hold the course and ride the inevitable ups and downs of the market. The market WILL go down eventually, and just as assuredly it will eventually go up. Check out this article on the "worst retirement ever" http://www.gocurrycracker.com/the-worst-retirement-ever/ about someone who has terrible luck timing retirement and still comes out just fine, because he/she didn't panic and sell at the bottom. Know thyself! If you don't have that kind of stomach and think you will panic and sell at a downturn, then shield yourself against that. Either purposefully set your AA and then don't look at your investments, pay someone like Vanguard personal investment services to do some hand-holding, or opt out entirely by having your retirement income stream come from something like real estate that won't be as volatile.
I read that article, it was awesome and eye opening.  I wouldn't go and sell, if for no other reason, I don't know what the EFF I'm doing. haha  I tend to set it and forget it, but I feel with this new way of doing things I'll be paying a little closer attention. However, It has been drilled into me to not try to time the market and I get that when its down is when bargains are to be had and I should buy buy buy!  My fear is, I guess, quitting to soon and not fully understanding the ins and outs and ensuring we have the money. 
I don't think we have enough RE to actually sustain us in retirement, which is kinda why Im thinking just sell it and get that cash to work!  We may even sell our primary home (that we just bought in october) and get into a cheap mobile home just so we can stash more paycheck money!!  Then when the leases are up, sell one and move into one.