← Ready For Retirement
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- [00:00]
James
Having $15 million in Nvidia stock sounds like winning the lottery. But here's the reality. Having a concentrated position like this can either buy you freedom or it can lock you into fear of losing it all. In today's case study, we're going to walk through an actual sample plan of someone with this exact amount in Nvidia stock to show what planning opportunities exist to turn that success, to turn that wealth into peace of mind and confidence going forward.
- [00:22]
Ari Taublieb
Here's a comment from one of you. On one of our recent videos. You had said here 20 million is very significant, but not enough to be completely financially worry free. There's a differ between accumulating wealth and keeping it. My name is Ari Taublieb and I am recording this with James. This is a collaborative video which we are putting out every Saturday for the next few weeks. So that if you are in a similar position where you have saved and invested well and you have concentrated stock, wondering what the heck you should do to make the most of your situation, then you're in the right spot.
- [00:57]
James
So today we're talking about a case study that's based on a few clients we've worked with in very similar positions. This individual has about $15 million in Nvidia stock, which begs the question, how relevant is this?
- [01:07]
Ari Taublieb
Actually, Nvidia has 36,000 employees. Half of those employees, 18,000, have a net worth of 25 million or higher.
- [01:17]
James
So what we're doing today is not just saying how do you get there? But what do you do once you're there? What do you do when you have that level of wealth? What planning opportunities exist?
- [01:26]
Ari Taublieb
James, I know what you do. It's very easy. You cry when your friend says diversify, because I know I should diversify, but I don't want to pay the tax bill and I've done so well. What if it just keeps doing better? Do I even need to diversify?
- [01:40]
James
Yes, Ari. So the video that we're going to do today is we're going to look at real strategies, not just, yeah, diversify everything and you'll be good. We're looking at real strategies specific to Nvidia employees that say, here's what you can do to make the most of what you have. And what you can see here is we're looking at Paul and Tammy. Paul and Tammy are sample clients, sample plan, but they have about $15 million in concentrated Nvidia stock. You can see they do have other assets here. They have an investment account that has some other investments in it. Apple, Amazon, a few other funds, but overall they have about $21 million in liquid net worth. And then they also have some cash, some real estate, some cryptocurrencies here that bring their total net worth to about 24 million. Ari, last week we did a video talking about what can you do when you retire? How much could you spend when you retire with a net worth like this? So we're going to skip over some of that. Take a look at next week's video or last week's video to see what can you actually do? How much can you spend? Because as you can see here, they want to spend a good amount of money, but they're still projected to pass with significantly more money at that time than they have today. That's not the topic of today's video. Today's video is about what planning opportunities exist beyond just diversify and protect what you have. You're right.
- [02:52]
Ari Taublieb
And James, last week we showed a couple that has less money than the couple you're talking about right now. And they were spending $50,000 a month. And assuming they do the right things, they're in a good spot. So we're just glossing over the fact that we've talked about their goals. They clearly are in a good position. They want to know how do I truly optimize?
- [03:11]
James
So here's the first thing that I like to look at. If you're an Nvidia employee right now, the first thing we want to look at is where are new contributions going, where is new savings opportunities going? And one of the things that you can see here with Paul and Tammy is the way that they're saving is Paul is maxing out his Nvidia 401K. Nvidia offers a kind of unique and a very generous match where they're going to match a flat $11,500 if you're contributing a certain amount to your 401k. So what this means is you can start building some pretty serious wealth in non brokerage accounts. So if you have that concentrated stock position that's in a brokerage account, that's in an after tax account, you want to supplement that ideally with pre tax and even Roth accounts. So when you go into retirement, you've got a good mix of different types of investments. But to pull from, here's the thing that Nvidia also offers. Nvidia offers the ability to do an after tax contribution for Paul. If he's maxing out his elective deferral, his normal contribution, and he's receiving that full $11,500 match, then for 2025, he could do an additional $27,500 as an after tax contribution. And if he does things right, he can immediately convert that into the Roth portion of his 401. This is a concept called a mega backdoor Roth contribution. So what he's effectively doing is he's getting money in pre tax to save on taxes. Today, he's getting in money to the Roth accounts, all while building net worth outside of these accounts as well with Nvidia stock and other investments.
- [04:35]
Ari Taublieb
Okay, James, I'm going to pretend to be one of these very fortunate people to now be a multimillionaire, because I work at Nvidia. So, James, I get the value here, that I can save a lot of money, I make a healthy salary. But my bigger concern is what do I do today with the fact that I already have lots of Nvidia stock?
- [04:53]
James
Yeah, let's jump right into that. All right. Two things come to mind. Number one, I remember several years back working with a lot of employees from Qualcomm, so Qualcomm's local San Diego company, a lot of the clients we worked with were Qualcomm executives. And one of the things that struck me there is you typically think of, oh, concentrated stock, that's going to really hurt. It's going to really be a drain on you and your energy when the stock falls. But what struck me was the same thing applied when the stock was up. Even when things were going well, these people were addicted to their phones, checking the stock price of Qualcomm, checking to see their account balances, checking to see what impact is that having on my overall net worth. And what it showed me is, yes, things really hurt when they go down, but it's not like things are magically good when things go up. Of course it's exciting, but it's still really drawn you in. And these people weren't able to focus on a lot of the other things they wanted to do. So the first thing is, just because this stock continues to grow even if we knew it would, does not necessarily mean you're going to have that full confidence and that peace of mind. Here's the second thing that I want to look at, though. And by the way, there's about 10, 15 things I'm going to talk about here. Actual strategies that you can apply so that you can start to understand what might be most beneficial to you. When I look at this Nvidia stock, you can see here, the cost basis is 1.2 million. It's worth just shy of 15 million. If you sold everything to diversify today, that's a gigantic tax bill. Here's the thing though, I'm going to say I don't think you need to diversify all of it. I think that's a common thing. People think, okay, the thing I'm supposed to do, the thing the financial advisor is going to say is just diversify everything. And it sounds kind of boring. It sounds kind of like, why would I do that? Well, you don't need to diversify everything, but you do need to diversify a certain portion. And here's a couple points on that. Let's assume that we knew this client needed $200,000 from their investments to meet their living expenses. So they have Social Security, maybe they have other income sources. They need an additional $200,000 from their investments. You don't need to diversify all of your investments to support that. What you need to do is work backwards to say how much of your investments need to be diversified to support that. So here's an example. If you need $200,000 and let's assume that you have a portfolio, a diversified portfolio that can sustain a 5% per year withdrawal rate, you need to have $4 million that is invested in a diversified way to create that 200,000 on a go forward basis. So let's bring that back here to Paul and to Tammy's plan. We need $4 million in that example to ensure that they're going to be okay, to ensure they're going to have a sustainable amount that will support that minimum amount needed on a go forward basis. Well, they already have half of it between the 401k and 403b. So they have more than half of it. Actually, they've got a good chunk there. What that tells us is the remaining 1 1/2, 2 million or so that does need to be div. From here. So yes, it might be ideal to diversify more than that, but there's a minimum threshold that you need to think about diversifying so that even if Nvidia stock has an absolutely horrible go forward return, and by the way, it's not obvious already, this applies to every stock, not just Nvidia. But how much do you pull out of that to say what's the core amount needed, what's that base amount needed? So that regardless of what happens to this single stock, I have enough going forward to support my income needs. So that's step one. The second thing, Ari, is how do you do it? Well, if you look at this, there's something called separately managed accounts, SMAs. If you look at the S&P 500, for example, 7, 8% of that is already in Nvidia. 6, 7 plus percent of that is already in Apple. A big portion is already in Amazon. So when we look at their brokerage accounts, those are investments they already own. So if they just sold, let's say, $2 million of stock and put it all in the S&P 500 because they thought that meant diversifying, they're just stacking on top of the Nvidia, the Apple, the Amazon stock they already own instead. What if you built a separately managed account around that? Keep some of your Nvidia stock, keep a good portion of it. It represents. It's the single largest holding as of today's video in the S&P 500. Keep some of your Amazon stock, keep some of your Apple stock. It's a large holding in whatever ETF or mutual fund you buy. So instead of just stacking a mutual fund or ETF on top of that, purchase the other remaining securities to balance that out so that you get a more equally weighted distribution of where your investment should actually be.
- [09:01]
Ari Taublieb
I'm going to explain an SMA to you like you're a five year old. Now, the way I like to talk about SMAs are like rice, literally rice. So if you currently own Nvidia stock and that's all you own, you own one grain of rice, a very valuable grain of rice if that individual stock has done really well, like it has for you if you're one of these 18,000 employees. But you might also have a mutual fund or an etf, just like James went over. And if you have the S&P 500, which is all these different stocks, that's lots of different grains of rice, including Nvidia. So you might be having multiple grains of rice that are essentially the same thing. So the value of something like an SMA is when you check out at the grocery store, if you are checking out with one grain of rice, it's pretty easy. You can hold it in your hand.
- [09:49]
James
But.
- [09:49]
Ari Taublieb
But the reason people buy mutual funds is imagine trying to hold a hundred grains of rice. Some would slip through. You're just not managing it efficiently. Not a perfect analogy, but stick with me here. Now, what if you could have a bag of rice, but you could go inside the bag, pierce it, take out a grain of rice and put different grains in, you can have your own bag. It's not just the one bag of basmati rice from Trader Joe's, you can customize it. That's when SMA is. Now let's learn some more topics.
- [10:19]
James
So that's the estimate that's kind of at its basic level. How can you use that to build around what you already have? Because you already have a few of the core positions that will be the foundation of most diversified portfolios. A second thing that you can consider doing, and this might be more for that business owner that's looking to exit or if you were looking to sell a big significant portion of this Nvidia stock, is ideally you have some losses, some capital losses that you could use to offset those significant capital gains that you're going to experience. There's something called a long short sma and the details of this, I'm not going to all them in this video, but essentially what it's doing is it's leveraging what you have with that sma. It's creating deeper losses and it's creating larger gains. So what you're able to do is in those losses, if you're constantly able to sell some of those investments that locks in a capital loss, then you're able to repurchase those investments you 31 plus days later. So here's why that matters. In any given year, Ari, the s and P 500 might be up 10%. It might be down 20%, it might be up 40%. Whatever it is, that does not mean that all 500 plus companies in the S and P 500 are up 10 or are down 20 or are up 40. You have a huge variance of some up triple digits and some down large double digits. Well, what you can do is you can start to pinpoint, can you sell those investments that are down not to lock in the loss forever, but to lock in the capital loss temporarily and then repurchase that investment so that you don't lose your overall investment exposure. But you're harvesting these losses. You're harvesting these losses that you can then use to offset the gains that you're going to realize once you sell that Nvidia stock. The long short SMA allows you to do this to an even greater degree. So it's really about the tax plan to say, how does it start with the right investment allocation to ensure that we're starting to diversify here, but also harvest losses without you actually suffering losses long term remaining out of the market as the market starts to recover.
- [12:16]
Ari Taublieb
Would it be safe to say I'm in a sense resetting my cost basis without losing exposure to this position? That's done so well, for me, I
- [12:25]
James
wouldn't say you're resetting your cost basis, but you are using losses to offset what the cost basis effect will be on selling Nvidia. So the example is, what if I have the S&P 500 as as an ETF? Well, what if the S and P is just up this year? There's no losses to harvest. But what if, and this is very common, maybe three quarters of the S&P 500 investments are up, but one quarter of them are down. If I'm selling all those individual stocks at the individual stock level, even at the specific lot level, I can control how much I'm realizing in losses and I can use that over here to offset Nvidia stock. So one thing that I'm going to do if I go back here to Paul's investment account, he has $2.4 million in cash. He had a bunch of RSUs that were coming due. He sold a lot of those. That money is just sitting in cash. And he's wondering, what do I do with that? Well, that 2.4 million, if he uses that as a foundation to say, I'm going to start building out around these Apple positions, these Amazon positions, these Nvidia positions, if he starts building around that of that 2.4 million, let's assume that half of it, just to use simple numbers, is growing. Because that 2.4 million might be distributed across a thousand individual securities or 500 different securities. Half of them are up, half of them are down. Start selling the ones that are down, repurchase them again after waiting the required timeframe to avoid any wash sale rules and you've used or you've built in losses, you've baked in losses that when he does go back to his Nvidia position and says, wow, I've got, What is this, $13 million in gains here. If I have 500,000 losses, I can at least offset a good chunk of those gains here. If I use a long short sma, I might even have more losses to go along with that. And again, all right, the thing I'm going to re emphasize here is this isn't saying that this individual has to sell all of Nvidia. It's saying, can we sell enough of it, take enough chips off the table to quote, unquote, lock in? Obviously, you can't guarantee this. There's no perfect way of saying this is perfectly predictable. But get closer to saying we have enough chips off the table that our core needs, my family's needs are met long term. And now I Don't need to be as anxious about what's the rest of Nvidia doing. Because even a worst case scenario, I have enough diversified money, I have enough core money to maintain my lifestyle. I'm not solely dependent on Nvidia success.
- [14:43]
Ari Taublieb
I'm going to pretend to be one of these lucky 18,000 employees again. So I now see the value. I harvest these losses. I essentially bank these losses over time. That's going to save me in taxes. But it sounds like a lot of work. I mean, how on earth am I going to be able to track this and know the right time to sell and understanding I do need to wait so that I don't run into any wash sale rules or other tax things. How on earth does someone manage all this?
- [15:08]
James
Someone does. Any individual trying to do this on their own, it's going to be a full time job and you're probably going to do a horrible job at it. This is where thankfully, with the progression of technology and software, this should be done in an automated way. This should be done, you know, when we offer separately managed accounts to clients, there's an entire team, an entire back office, an entire technology suite dedicated not just to picking the stocks to complement Apple and Amazon and Nvidia, but to do that daily tax loss harvesting screen to ensure the tax benefits are being realized along with this.
- [15:39]
Ari Taublieb
So James, I understand you love this stuff. It sounds like it. I'm working with AI all the time. What else don't I know? Because I'm not doing this all day.
- [15:49]
James
So here's the last thing they'll mention here. At least the core thing is let's assume you've done this. You've managed your tax strategy in alignment with your investment strategy. You freed up say a couple million dollars of Nvidia stock with minimal tax implications for doing so. That's a couple million dollars. But you're not going to be able to diversify all of your portfolio like we mentioned. You don't need to, but you're not going to be able to get as much probably diversified as you would want with that $2 million. If your total net worth is 21 here or your total investable assets are 21 here's another thing you should be thinking about. You don't have to. Let's assume you have the allocation that you want. 70% US investments, to put it simply in 30% international. There's no way you're going to get that 30% if all of it or the majority of it is here in Nvidia stocking your brokerage account. So do you think about taking your 401ks, taking Tammy's 403B, can you use those in over index on the investments that you don't have in your brokerage accounts? Is this small cap investments, mid cap investments, real estate? Is this international developed markets? Is this emerging markets? What other types of investments can you over index to? Because keep in mind you can trade as much as you want in your 401k, you can rebalance or reallocate as much as you Want in your 401k without tax implications there. So can you over index to those there? So you're highly concentrated in the stuff you don't have in your brokerage account within your 401ks, and you use that in a coordinated way to say across the board, I have a good core allocation that's going to allow me to lock in, that's going to allow me the highest degree of success going forward without realizing a seven figure tax bill here. So that's kind of the last piece on the diversification. There's other things you can do. You can look at exchange funds. Ari, can you contribute part of your Nvidia stock to an exchange fund? The exchange fund within that, it's going to help you get exposure to other investments. There's a lot of details with this, there's some lockup periods with this that may or may not be the best strategy for everybody. But for the right person, it's a great strategy. Can you look at covered call strategies, writing options on this so that you get some income here without actually selling all of your Nvidia stock? There's a lot that you can do if you do any charitable giving. I'm hoping that you're gifting this Nvidia stock directly to a charity or directly to a donor advised fund. So you're not paying taxes when you realize the gains the charity isn't either. You're getting the full value, the full deduction of the gifted mount. But what you can start to see is there's so much you can do without just blindly saying I'm going to diversify everything and realize a seven figure tax bill.
- [18:19]
Ari Taublieb
So if my neighbor looked at Tammy's 403B, for example, they might think I'm nuts. Is that safe to say? Because they're just looking at over index in one account, but they don't know that I've got a plan going on in all these other accounts to have a truly holistic strategy?
- [18:35]
James
Yes, exactly. You're not managing the account level you're managing the portfolio level. And what we're looking at is the overall portfolio, some of which is going to be held in Tammy's 403B, some of which is going to be held in the 401k. And by the way, within the 401k, there's the Roth portion and there's a pre tax portion. So you can be very intentional about what's held where and then what's being held in the brokerage assets. So if you're just looking at the account, you're probably missing the big picture. In the same way, if you just look at one specific investment within one account, you're missing the bigger picture and the accounts roll up into the overall portfolio. And that's what we're concerned about to make sure. Can you live the life you want to live while protecting yourself as much as possible?
- [19:13]
Ari Taublieb
If you've ever been to the doctor and they just say it depends, when you explain your issue, there's probably some frustration. Now, there's also an honesty where you're going. No, I know it depends. Every situation is different. But this happened to me recently and this is going to connect to the takeaway that we hope you truly take from today's video. Because I went to the doctor and I had an ankle, an ankle issue. And they said it really depends. And that's where they stopped. I said, okay, well, I know it depends. I need more than that. So, James, beyond just someone saying, once again, I'll pretend to be the one of the lucky people, and I say lucky, but you do make your own luck to put yourself in this position as a multimillionaire, high, you know, compensated, high equity position of Nvidia employee. I don't want an advisor to just tell me, hey, it depends. You should diversify. Hey, it depends. You should make sure you have enough money to never run out. But also consider retiring early because you're in a good spot. I need more than that. So beyond it depends, what are the main takeaways? And if you also don't mind adding on just some myths that either I'm worrying about or my spouse is potentially worrying about when it comes to retiring early with significant concentrated stock.
- [20:23]
James
Yeah, the takeaway is this. I think so often people look for just a simple number. How much should I keep in Nvidia Stock? Is it 10%? Is it 20%? Is it 30%? That's not the right question. The right question is what do you need to do to lock in the type of life that you want to live? On a go forward basis, are you taking advantage of the opportunities in front of you with a mega backdoor Roth contribution, are you taking advantage of strategies like SMAs, long, short SMAs, exchange funds, covered call options, giving strategies, tax strategies? Not all those are going to be appropriate for everyone, but all those are appropriate for someone. So are you doing the right thing? And I think the bigger overarching question here is how do you do this on a go forward basis? A lot of people enjoy doing this on their own and they feel completely confident in that. That's great. But for a lot of people, I would caution you this. I would say that what got you here is not going to get you there. In other words, the success that you've had to this point, it's awesome, it's wonderful. But the same strategies that got you here, which are primarily keeping your head down, working, growing, being fortunate to be part of a company where you've contributed a lot and that stock has grown like crazy, that's amazing. That's not going to get you through this next phase. That's not going to allow you to fully optimize what you're doing. A lot of people, when they reach out to us, says, well, what's the cost of working with a financial advisor? Which is a very, very fair cost. You absolutely need to ask that. The cost of a good financial advisor can be a significant amount. But here's the other thing that I'll tell people is what's the cost of not working with an advisor at this point? What's the cost of not doing anything with your Nvidia stock? Because you're paralyzed by this analysis paralysis of do I sell, Do I keep, Do I diversify? Do I not? What's the cost of that when Nvidia stock underperforms the rest of the market, what's the cost of that? When you realize the wrong tax strategy or you don't realize any tax strategy and you leave tens of hundreds of thousands of dollars on the table, what's the cost of your peace of mind as you're looking at your Nvidia stock all day, every day, knowing that your success and your family's success hinges upon this thing that's completely outside of your control, which is the daily price movement of one single company's stock. So as you think of this, what got you here won't get you there. Make sure that you understand the options available to you and then ask yourself, are these options that I can implement on my own? If so, wonderful. Make sure that you're doing so because you need to take what you have and turn that into success, turn that into peace of mind on a go forward basis. If you know that you need a partner to help with that. Ari that's why we exist. That's what Root Financial does. We have a private wealth division that's helped many clients in situations just like this. To say, how do you implement these strategies not just for the sake of implementing them, but to help you live a better life, higher quality of life going forward, knowing that the financial pieces have been optimized along the way.
- [22:57]
Ari Taublieb
James, you said it best. Not every strategy is right for everyone, but it is for someone. So if you're the type of person who's going, yep, this was my situation, this is very close to what I'm looking at and I want to partner throughout my financial journey so that I look back and go, wow, I really made the most of what put me in this awesome position. It's, as James said, something we would love to help out with. If you go to our website, rootfinancial.com, you click the little button that says see if you're a fit. We might be talking very soon. If you enjoyed this video, please, as always like it, comment below. What resonated and then thirdly, it's more fun to retire with friends. So please share this with someone who you think might resonate with it.