Head swimming, too many investment options

[Neo]

Since becoming Mustachian I've freed up a lot of income and am having trouble deciding where to put it all. I'll lay out my options below. I'd appreciate any insight. I'm 33 years old.

1. 401k - saving 9% right now. Company matches 7% if I put in at least 6%. Not maxing out at my current savings rate. My wife works part time but she also has a 401k where she puts in 4% and they match 4%. EDIT - I'm allocating 100% to JPMorgan 2050 Target Date Fund. Expense ratio of .62.
2. Company stock - I can buy company stock with a match of 15% each paycheck. This is all post-tax money. Not participating at the moment.
3. I own 4 rental properties with a partner. They profit about $36k/year ($18k each) after mortgages and bills but we leave all the money in the LLC account for future acquisitions. The plan is to build quite a large portfolio and eventually have that income replace my work income completely.
4. I get a bonus of approximately $25k each March. I can put some in 401k and company will match it up to 7%. I always do at least that much in 401k to get the match.
5. My mortgage is 15 years but I've considered doing a no-cost refi to 30 years to free up more investment dollars. Rate is 3.125.
6. I have $1,500/paycheck to put toward additional savings. This is really the money I'm trying to determine what to do with. I opened a Vanguard account (post-tax) and started buying VTI (total stock market ETF). But instead should I max out 401k? Max HSA? I don't plan to work to normal retirement age so I hesitate to put too much in accounts with age restrictions for withdrawals. I have emergency fund covered and no debt aside from mortgage and a car loan with a low rate. Between the $1,500/paycheck and $25k bonus (pre-tax) I have quite a bit of money that I'm just not sure how to best utilize.

I realize I've kind of thrown up on the paper here with a lot of random information, but that's how it feels in my head too! Too many options with conflicting pros and cons. Any advice?

[boarder42]

2. - what are the terms around how long you must hold this company stock
5.  Your rate is right in line with what the current rates are now so a no cost REFI could make sense.  - if you plan ot live there at least 7 years or longer you will come out ahead on a 30 year investing the difference
6. you should just go look at the investment order sticky at the top of investor Alley MDM wrote it up and its a pretty good book to follow.  this will answer all your questions and the why.  After you read that come back here if you have more questions.

[Neo]

Thanks for the input. I had reviewed that sticky prior to posting. My main concern is putting lots of money in 401k and HSA bc it cant be used until later.

Regarding #2, I can sell immediately but then I cant invest again for 6 months.

[SuperSecretName]

But instead should I max out 401k? Max HSA? I don't plan to work to normal retirement age so I hesitate to put too much in accounts with age restrictions for withdrawals.

yes, max those. start keeping track of medical expenses for HSA even if you pay with cash and let hte balance grow.

search up the roth conversion ladder to get money out of 401k.

[boarder42]

Thanks for the input. I had reviewed that sticky prior to posting. My main concern is putting lots of money in 401k and HSA bc it cant be used until later.

Regarding #2, I can sell immediately but then I cant invest again for 6 months.

i'd front load my 401k and use my whole bonus to buy stock then sell it immediately effectively giving you a 15% bonus on your bonus.  or somehting on that level.  the stock is the only non standard investment here that you'd have to give more data on to get help with optimizing the value on that.

[Mr. Boh]

I agree about buying the company stock. You are making a 15% profit right out of the gate. Do you know the market cap of your company?

[Neo]

Market cap is roughly $20.5B. I dont think I can put my entire bonus toward the ESPP. Its limited to 10% of total pay.  I have participated in the past but sold occasionally to finance rental property down payments. I just worry about being overweight on one stock. Plus i think its priced a little high right now.

[ChpBstrd]

1) Sounds to me like the immediate 15% ROI of the company stock beats all other options. But that answer depends a lot on long vesting requirements, fees, etc. If you could sell anytime, it would be a no-brainer. But I know there's a catch. Check the fine print. A 15% head start more than makes up for diversification, up to a point. Put in the entire 10% of pay if making a quick 15% is that easy!

2) My 2nd recommendation is the 401(k). It sounds like you are in a high-ish tax bracket, so deferring taxes to the post-FI phase of your life makes sense. It's like borrowing hundreds of thousands  Also, it's a fast way to reach a predetermined FIRE number and build a savings snowball, even if it's a pre-tax savings snowball. Plus you have options to withdraw from these accounts without fines. Look up how to do a Roth conversion ladder. You actually don't need as much post-tax savings as you might think. Plow into your 401k up to the limit.

3) The real estate partnership seems to be doing well as a side gig, but as it grows it will require more of your time in one way or another. Will you be able to maintain your apparently well-paying job while doubling or tripling the size of the side gig? It's something to consider.

4) Ask if you can put 100% of your bonus in your 401(k). Tax withholdings are usually higher on bonuses, so you'd be flipping from paying a crapton of taxes you'll only partially recover with a big refund check a year later to making a huge tax-exempt investment ASAP. Double win.

5) I wouldn't bother changing the mortgage to juice your savings rate. It's a matter of taking money from the left pocket and putting it in the right pocket. Unless, that is, you want to leverage your house to pursue riskier investments. There's a lot of low-hanging fruit before you reach the point of risk arbitrage.

6) The investment order sticky thread covers what to do if you still have savings left over after maxing the ESOP, the 401(k), and then your Roth IRA in that order. My comments address your unique circumstances, such as the ESOP program and RE partnership. VTI is a fine investment choice. Just be sure to set dividends to reinvest!

[Neo]

Wow ChpBstrd thanks a lot for the thorough reply. The only catch with the ESPP is if you sell you are suspended from contributing for 6 months before you can invest again. The shares and the 15% match vest immediately. So the 15% match really outweighs diversification concerns?

[boarder42]

Wow ChpBstrd thanks a lot for the thorough reply. The only catch with the ESPP is if you sell you are suspended from contributing for 6 months before you can invest again. The shares and the 15% match vest immediately. So the 15% match really outweighs diversification concerns?

you say you're lmited to 10% of total pay.. if thats the case and your bonus is greater than 10% of your pay why not dump in whatever that 10% is at that point in time and collect the 15% then dump and repeat next year.

[Neo]

Our bonuses are separate direct deposits from our normal checks, and our normal checks are where our ESPP contributions come from. I will have to ask HR if its possible to put bonus money into ESPP. If i cant take 10% of my pay straight from my bonus to invest in ESPP, I suppose I could hold the bonus and deposit entire paychecks into ESPP until I get to 10% of total pay. The buys would just be more spread out which means there is more risk.

[boarder42]

Our bonuses are separate direct deposits from our normal checks, and our normal checks are where our ESPP contributions come from. I will have to ask HR if its possible to put bonus money into ESPP. If i cant take 10% of my pay straight from my bonus to invest in ESPP, I suppose I could hold the bonus and deposit entire paychecks into ESPP until I get to 10% of total pay. The buys would just be more spread out which means there is more risk.

your company has a pretty large market cap i'd make that move in a minute to get a 15% bonus on my money then you sell and repeat the next year.

[Neo]

I checked with HR and there is no way to contribute bonus money to ESPP. so now I need to figure out the best way to get a return with minimal risk since once i sell I am locked out of contributing for 6 months. I can contribute entire paychecks to ESPP until I hit 10% of my salary, but that opens me up to market risk bc that will take several months. Yes I get a discount but I would be very heavily overweight in a single stock. The safest option is just to allocate one entire paycheck to ESPP and sell immediately but that only earns me a few hundred bucks. The final alternative is to contribute year-round with all the contributions totalling up to 10% of salary. This allows for the most dollar cost averaging but also the most market risk over time. Thoughts!?

[jc4]

On the ESPP, my wife's company has one of those. Here's what we're doing. We're buying in with the 15% discount. She can only buy / sell every six months (paycheck deductions are stored evenly for six months then the purchase is made).

She could sell the day after purchase and lock in that 15% gain, but then we're taxed as income at 25%. Instead we'll hold for a year, and pay capital gains tax, at that point, 15%.

The risk of losing more than our 15% is slim, so we're not worried about it. We're early on so this single stock will be a larger percent of our portfolio, but we can tolerate more risk for higher likely gains since we have plenty of time to go.

Not a answer, but at least one datapoint.

[ZiziPB]

On the ESPP, my wife's company has one of those. Here's what we're doing. We're buying in with the 15% discount. She can only buy / sell every six months (paycheck deductions are stored evenly for six months then the purchase is made).

She could sell the day after purchase and lock in that 15% gain, but then we're taxed as income at 25%. Instead we'll hold for a year, and pay capital gains tax, at that point, 15%.

The risk of losing more than our 15% is slim, so we're not worried about it. We're early on so this single stock will be a larger percent of our portfolio, but we can tolerate more risk for higher likely gains since we have plenty of time to go.

Not a answer, but at least one datapoint.

I think you're wrong on how the ESPP is taxed.  The discount is always taxed as ordinary income, it's only the profit (if any) above the discount that is taxed as short term or long term capital gain, depending on how long you hold your stock. 

[Telecaster]

I checked with HR and there is no way to contribute bonus money to ESPP. so now I need to figure out the best way to get a return with minimal risk since once i sell I am locked out of contributing for 6 months. I can contribute entire paychecks to ESPP until I hit 10% of my salary, but that opens me up to market risk bc that will take several months. Yes I get a discount but I would be very heavily overweight in a single stock. The safest option is just to allocate one entire paycheck to ESPP and sell immediately but that only earns me a few hundred bucks. The final alternative is to contribute year-round with all the contributions totalling up to 10% of salary. This allows for the most dollar cost averaging but also the most market risk over time. Thoughts!?

Don't worry about the overweight (but you are smart to consider it).  You are starting off 15% to the good.  We've gotten used to double digit market returns in recent years, but that's exception, not the rule.  I'll take an automatic 15% gain balanced by few months of market risk any day of the week and twice on Tuesdays.  Maybe three times. 

[Neo]

So you would put the whole 10% of salary into ESPP? Thats my limit.

[Telecaster]

You are betting a 15% gain against market risk.  I'd back up the truck and buy as much stock as I can.  It won't work out every year, but over time....it is kind of like the golden goose.  Sure, the market can and does go down by more than 15% from time to time.  But it mostly goes up.  So you mostly get more than 15% a year on your contribution.  That's the path the wealth, right there.