Complex case study - Robustify my portfolio!

[marcus_aurelius]

This might be a fairly detailed post, so I appreciate your patience. We’re in a pretty good situation overall, but it’s pretty complex (or appears that way to me.)

Me: 49, DW: 47. Living in the VHCOL SF Bay Area. Two kids, ages 18 and 15.
Income: DW: $215K. Until a few months ago, I was earning ~$300K as a marketing exec but was laid off. I was burnt out at work, so am taking a year off and noodling on a few ideas to do my own thing. I’m enjoying my sabbatical a lot! Definitely don’t miss having a boss or dealing with corporate BS.

Here are our goals:

• Retire in the next 3-5 years. As I said, I’m semi-retired already, and my wife is looking forward to it too.
  Balance the portfolio, “robustify” it against a possible economic downturn.
• Minimize capital gains tax during rebalancing.
• Minimize taxes in retirement, minimize estate tax.
• Figure out order of withdrawing funds for reducing volatility, minimizing tax.
• Plan social security timing.
• Help kids with down payment, (perhaps) grad school. Leave a financial legacy for children/grandchildren.

The question is not whether we can retire or not (we know we can), but how should I rebalance my portfolio considering the above goals?

Here are the detailed numbers:

Liabilities: $0. Mortgage is paid off. Kids’ college is fully planned for. We have no car loans, credit card debt, etc. The only ‘liability’ we may have is to pay for health insurance if/when DW leaves her job before medicaid kicks in.

Assets:
$2.3M house, fully paid for. We don’t plan to move out of the Bay Area.

$1.69M in retirement accounts ($834K me, $856K DW). Here's the breakdown:

For me:
Name   Balance
VBTLX   $124,362
VHGEX   $104,819
VSEQX   $345,185
VTTHX   $110,711
VWILX   $66,592
Total   $751,668

Name   Balance
SPAXX**   $6,465
TRRDX   $76,919
Total   $83,384

For DW:
Name   Balance
Fidelity TARGET 2040 fund   $640,838
VFORX   $216,482
Total   $856K

$796K in individual stocks (post-tax). Breakdown:
Ticker   Total value
MSFT   $272,876
AMZN   $83,136
MCK   $80,460
AAPL   $74,976
GOOGL   $54,470
CRM   $46,856
NVDA   $45,918
GOOG   $36,459
NFLX   $34,398
META   $15,898
SFTBY   $15,034
ZS   $11,544
HDB   $9,825
SQ   $4,357
SPLK   $4,151
JD   $3,192
BRK.B   $1,785
BABA   $1,687
Total   $796K

$423K in mutual funds (post-tax). Breakdown:
Fund   Balance
VFIAX   $90,368
VGSLX   $25,582
VTSAX   $5,647
BND   $19,385
VTI   $169,874
VTV   $112,299
Total   $423,155

Other assets:
$230K in Fundrise REIT (post-tax)
$260K in kids’ 529s, will cover in-state tuition for both
$142K in cash
$35K in crypto (post-tax)

Rebalancing means I will need to sell some individual stocks and mutual funds and incur a long term capital gains tax. I guesstimate my overall profit is ~70% right now.

Our social security statements say that I can expect $3300 per month if I retire at 65, DW can expect $3000 at age 65.

In terms of spending in retirement, I have a minimum budget of $5,800 per month, or $72 per year. That’s not what I’m worried about.

I guess you see the complexity now. Luckily, our nest egg and investments have grown nicely, but I need to take steps to reduce volatility in the face of retirement, esp. my tech stocks. Plus, a lot of my mutual funds have FAANG stocks, so my exposure is even higher than what you see here.

I was thinking of hiring a fee-only financial advisor to do a one-time analysis and recommend changes (again, to reach the goal of reducing volatility and tax). I can definitely learn from the experts here.

Thank you.

[former player]

Congratulations on getting to where you are and on planning your move to FIRE.  You look set for the future subject to getting out of those individual stocks.  I suspect that there is only so much in the way of tax avoidance that can be done so I think the thing to do is not to go all complicated trying to avoid tax completely, just try to be reasonably tax efficient where you can.

Can Bogleheads help with the rebalancing and tax stuff at all?  A financial adviser sounds like a good idea but it would have to be the right one.  I guess you are more likely to find the right one in the SF Bay Area than in most locations.

Have you worked out what your social security looks like if you retire a long time before 65?

Do you have earthquake/ flood insurance on that $2m house?

Apart from the finances you haven't mentioned what your plans are for retirement.  Your timetable should have you and your wife both retiring at about the same time your younger kid leaves home, that's two very big psychological changes coming at the same time.  The two of you putting some structured thoughts into what that change looks like and what life after it looks like could be a good idea.

[ATtiny85]

At a first glance it looks like you have enough room in tax deferred to do a lot of rebalancing, thus minimizing realized capital gains. Remember to treat your entire family portfolio as one when determining asset allocation.
 
For those stocks in your taxable account I would turn off dividend reinvestment. Then route those dollars to your VTSAX holding. I am a big indexer and have been doing exactly this for our (much smaller) individual stock holdings for the last decade. More favorable tax treatment in general, and starts to ease some of risk (though as you stated VTSAX is heavy tech as well.)


What is your desired asset allocation? Given your ages, I would think somewhere between 55% and 75% equities? With maybe a up to 15% of those equities being international.

[zolotiyeruki]

I wish you had asked the question eight months ago, when the market was still down significantly from its peak, so you could do some tax loss harvesting.  Still, do you have any shares bought at the peak that you could TLH and thus rebalance into index funds?

I'm guessing your marginal rate today is still higher than it will be in retirement.  One thing to keep in mind: the individual tax rates will reset higher in 2025.  How that'll affect you, given that your income is temporarily lower, is left as an exercise to the reader.  You're currently deep into the 22% bracket, even with one income, but with the expected rise in rates, you may find it advantageous to rebalance more while you're unemployed.

[mistymoney]

since DW is bringing in 200k+ in income, LTCG for married filing jointly is 15%, and it looks like you won't get better than that unless you are both not working for a salary.....anthing short term, just leave it in until it is long term!

Seems pretty straightforward. You pay 15% LTCG taxes to rebalance, or wait for a time when you have no income coming in.....if in fact you could keep income below 90k for a calendar year - which seems iffy.

[Laura33]

I think you're overcomplicating your path to simplification.

There is no tax consequence to rebalancing in your retirement accounts, which are well over half your investable assets.  So unless you want to move to something like 20% stocks, just buy and sell there to get to the overall allocation you want (note that you do have cash and REIT outside of the retirement accounts, so keep those in mind when you're figuring out percentages).  As ATtiny85 said, it's all one single portfolio; each separate account and investment type doesn't need to have the specific asset allocation you want, as long as they all do when you put them together.

Once you're at your target AA, just shift your dividends and any new contributions away from individual stocks and into ETFs/MFs, again per your desired AA.

If your question goes beyond your desire for more diversification and you feel overweighted in certain individual stocks, then you can certainly sell those and just pay the CGs (or figure out if you have any losses that you can use to offset those gains).  But I would worry about that after you've readjusted to hit your overall AA.

[GilesMM]

ChatGPT sez:


[font=Söhne]It's great to see that you have a clear understanding of your financial situation and goals. You've provided a comprehensive overview of your assets, liabilities, and objectives, which will help you make informed decisions as you approach retirement. Let's break down your situation and address your goals and concerns step by step:[/font]
[font=Söhne][/size][color=var(--tw-prose-bold)]1. Rebalancing and Reducing Volatility:[/color] Given your concern about exposure to tech stocks and your wish to minimize volatility, it's wise to consider diversifying your portfolio. Your tech-heavy individual stocks and mutual funds could indeed introduce higher risk due to concentration. A more diversified mix of assets across different sectors and asset classes could help mitigate this risk.[/size][/font]
[font=Söhne][/size][color=var(--tw-prose-bold)]2. Tax Efficiency and Capital Gains:[/color] You're right to be mindful of capital gains taxes when rebalancing your portfolio. Since you have considerable post-tax investments, it's important to carefully manage your selling strategy to minimize the impact of taxes. A fee-only financial advisor can help you develop a tax-efficient selling plan, considering factors such as the tax basis of your investments, capital gains rates, and potential strategies to reduce your tax burden.[/size][/font]
[font=Söhne][/size][color=var(--tw-prose-bold)]3. Social Security Timing:[/color] You and your wife have estimated Social Security benefits, and deciding when to start taking them can significantly impact your retirement income. Since you both have relatively high earning potential, delaying Social Security benefits beyond the age of eligibility (typically around 62) can result in higher monthly benefits. This could be an important strategy to consider to enhance your retirement income.[/size][/font]
[font=Söhne][/size][color=var(--tw-prose-bold)]4. Estate Planning and Legacy:[/color] You've mentioned a desire to leave a financial legacy for your children and grandchildren. Estate planning can play a crucial role in this aspect. Consulting with an estate planning attorney can help you structure your assets and estate to minimize estate taxes while ensuring a smooth transfer of wealth to the next generations.[/size][/font]
[font=Söhne][/size][color=var(--tw-prose-bold)]5. Fee-Only Financial Advisor:[/color] Hiring a fee-only financial advisor for a one-time analysis and recommendation can be a smart move. A professional can provide you with personalized advice tailored to your situation, taking into account your goals, risk tolerance, and tax considerations. They can help you create a comprehensive retirement plan that aligns with your aspirations.[/size][/font]
[font=Söhne][/size][color=var(--tw-prose-bold)]6. Retirement Withdrawal Strategy:[/color] In retirement, the order in which you withdraw funds from your various accounts can impact your tax liability and portfolio longevity. A strategic withdrawal plan, considering factors like required minimum distributions (RMDs), tax brackets, and the sequence of returns, can help optimize your retirement income and minimize taxes.[/size][/font]
[font=Söhne][/size][color=var(--tw-prose-bold)]7. Legacy and Gifting:[/color] You've mentioned the desire to help your children with a down payment and possibly grad school. Consider structuring these gifts strategically to minimize potential gift taxes and take advantage of gifting allowances.[/size][/font]
[font=Söhne][/size]In summary, your situation does indeed have several moving parts, and each decision you make could have implications for your retirement and legacy goals. While the initial complexity might feel overwhelming, consulting with financial professionals, including a fee-only financial advisor and an estate planning attorney, can provide you with the expertise you need to navigate these decisions successfully. They can help you create a comprehensive retirement plan that addresses your goals, minimizes taxes, and optimizes your financial well-being.[/font]

[ATtiny85]

Another item that would help understand what you have and what action(s) might be helpful is how much in dividends/interest/capital gains do all those taxable holdings throw off in a typical year? I know some of those stocks distribute, some don't. You have a lot of REIT, which normally do. etc. And how much of the total is normally Qualified Dividends?

Still need your desired Asset Allocation...

[Must_ache]

Just as I told another poster: Reduce your holdings in individual stocks.  16% of your wealth is tied up in MSFT, and there is more within other funds ($6,073 in VFORX for instance).  I wouldn't want it any higher than 5%, preferably less.  I don't allow myself to put more than about 1.5% of my assets in any one stock, in addition to normal index investing. 
Even if it has done well and could continue to, it saw a 35% drawdown between Nov21 & Nov22 and it could happen again.