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Case Study: Financial Planning for Working Professionals

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Meet Kyle and Maya.

Kyle (42) and Maya (39), are working professionals in the San Diego region. Kyle is a Product Manager at Google and Maya is a research scientist at a small biotech company. They have a small child, Ava, that they wish to start a college fund for.

Their Goals

  • Kyle and Maya live very busy lives and would like to know when they can reach work optional.
  • Kyle has Google restricted stock units (GSUs) and would like to better understand how they operate and how to best manage them.
  • Kyle and Maya would like to save for their daughter’s college education, but they are unsure how much they should set aside for this goal. How much would they need to set aside for a private university? A public university?
  • Maya has a significant number of stock options in her company and wants to know how to best plan for this. There is a good chance that her company will either go public or be acquired in 2-5 years.
  • Their tax situation is also getting quite complicated and want to know if they are doing everything they can to lower their tax liability. Can they do anything with their equity compensation? Can their investment portfolio be tax-optimized?
  • Finally, they have been accumulating a large cash position and would like to know how much they should invest and the best methodology for doing so.

Resources & Facts

  • Kyle’s annual base salary is $475K + $275K GSU equity/bonus
  • Maya’s base salary is $225K (not including her stock options)
  • Their primary home is worth $1.8MM with a mortgage balance of $710K (3% fixed with 17 years left on their mortgage).
  • They both have 401(k) retirement plans with a combined balance of $335K and brokerage accounts worth $450K.
  • They have a savings account balance of $800K at the bank.
  • They have a 529 plan for their daughter, which they contribute $500/mo.
  • They contribute to their 401(k) plans and save their monthly cash surplus into a taxable account.
  • Maya’s incentive stock options (ISO) are currently worth $350K with significant upside potential (a realistic range of $0 – $10MM).

Our Recommendation

Kyle and Maya should:

  • Establish an emergency fund
  • Take advantage of Mega Backdoor Roth option
  • Increase their current 529 plan contribution amounts
  • Plan to be work optional in 7-10 years

Our first goal was to ensure that Kyle and Maya have enough funds set aside for their emergency fund. While Kyle’s income is relatively stable, Maya’s was not. As such, we recommended that they set aside 6 months of living expenses for this emergency fund. This amount is on the higher end of normal recommendations, but we feel this is prudent due to the nature of their income. We recommended that they open a high-yield savings account outside of their traditional bank to receive a better return on their deposits.

We determined that they should continue to contribute an extra $2,000/mo towards their mortgage principal balance. While they will likely receive a higher ROI by investing these funds in their investment portfolio, there is something to be said for being debt-free and achieving peace of mind. With this payment schedule, they will be mortgage free (and cashflow positive) by the time they reach work optional (retirement).

Regarding their excess cash balance at their primary bank, we transferred and invested these funds according to their risk tolerance (which is Aggressive) in their newly created accounts with Bull Oak Capital. This way, their funds can grow appropriately, fund their lifestyle, and ultimately leave a legacy for their daughter.

Based on their incomes, current living expenses, and near-term goals, they have a high likelihood of being work optional in 7-10 years. Due to the variability of Maya’s incentive stock options, we did not factor this into their projections. However, if her company achieves its goals and she receives an exit payout, this will undoubtedly accelerate the time horizon of their financial goals and provide them with more flexibility and options.

Both Kyle and Maya are contributing the maximum amount to their 401(k) plans. However, we recommended that Kyle take advantage of Google’s retirement plan of participating in its Mega Backdoor Roth option. This will allow him to contribute an additional $43,000/yr to his corporate retirement plan with after-tax dollars, which he can invest and withdraw later completely tax-free.

We determined that their current 529 plan contribution amounts were too low and recommended increasing this amount to $950/mo for their daughter as they wish to pay for four years of private college living expenses.

Financial plans are not set in stone and it is imperative that they constantly be updated as assumptions and goals change. We have established the following schedule for all clients (including Kyle and Maya) and believe it to be an excellent cadence for financial success.

Or course, as all of our clients lead busy lives, we meet with our clients outside of these regularly scheduled events as needed. Our availability is just as important to our client needs as having a predetermined planning meeting cadence.

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