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PostPosted: Sun May 06, 2012 5:39 pm 

Joined: Sat Apr 14, 2012 11:15 pm
Posts: 83
Location: Bay Area, CA

Over the past week I have been researching the permanent portfolio and know several of you utilize this strategy to some extent.


My question hasn't been covered much on crawlingroad forums (I found one brief thread about it) so I'm here to ask those of you who plan to retire early, but are accumulating, and have 401ks and the like . . .


Do you consider all of your accounts (long-term retirement & ERE accounts) all together in the 25x4 balance or separately and why?


My instincts lean towards keeping them separate, as they are for separate phases of life and my 401k does not have the options that would enable a PP strategy for the most part anyway (no gold and the bond options are mixed term length funds).




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PostPosted: Sun May 06, 2012 6:01 pm 
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Joined: Fri Jun 28, 2013 8:38 pm
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Location: Chicago, IL

Since 401k's can eventually be rolled over into something with more freedom and since tax-deferred accounts don't suffer from capital gains taxes, I arrange my funds so as to minimize the tax burden.


For example, I keep my gold in my IRA so I don't have to pay the 28% collectible tax.


Also, for PP purposes, the 30 year bonds and equity covers the long duration and the cash and gold covers the zero duration. Gold is in there as an inflation hedge. Averaging cash and bonds into a medium duration bond fund (I have BND) accomplishes almost the same purpose. Then you can have 1 unit of gold, 2 units of medium bonds, and 1 unit stocks. In short, you can use medium bonds by reducing your cash position.




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PostPosted: Sun May 06, 2012 6:04 pm 

Joined: Fri Dec 02, 2011 1:24 am
Posts: 1028
Location: Bodymore, Murderland

I consider all my accounts (which at this point is a savings account, a Roth, and a 401k) in my total PP allocation. I don't try to do a separate PP for each account. Here's how it breaks down:

--Stocks: Mostly in 401k index fund (low fees), some dividend stocks in Roth

--Bonds: Mainly in 401k index fund for now although this tracks AGG (aggregate bonds), not long-term bonds; I also am slowly buying individual 30-year treasuries in Roth (no taxes, and Fidelity doesn't even charge for transactions on bonds)

--Cash: Split between 401k index fund (~2% yield) and savings account (~.75% yield)

--Gold: Held in IAU ETF in Roth, may hold physical in the future


I made a spreadsheet where I update the value of each asset and it calculates the allocation of stocks/bonds/cash/gold so it's not hard to track.




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PostPosted: Sun May 06, 2012 7:29 pm 

Joined: Sat Apr 14, 2012 11:15 pm
Posts: 83
Location: Bay Area, CA

Ok thanks for your insights.


I'm going to take a closer look at the bond fund I have available in my 401k. Maybe I'll do the stocks/bonds in the 401k.


For the short term (6 mos) my 401k has more than I have in savings. After that time, I'll need to start contributing to all four in taxable accounts and/or balance the most "taxing" component to the 401k until my outside accounts really get big and I have no choice. That would be the long-term bonds, right? It goes: bonds, cash, stocks, then gold, right?


I've done a little math and I *may* be able to contribute to a roth for this year . . . MAYBE . . . unless my espp keeps blowing my mind and then I'll be kicked out of that possibility.




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PostPosted: Mon May 07, 2012 6:53 pm 

Joined: Thu Jul 22, 2010 10:43 pm
Posts: 505

I accumulated a large 401(k) balance, entirely invested in VTSMX -- because the other options were high on fees and low on performance -- long before I discovered the PP. My combined taxable, Roth IRA and savings accounts wouldn't equal 75% of the 401(k); so as a practical matter I have to consider it separately until I can roll it into a self-directed IRA at separation from employment. For now, I allocate a percentage of the 401(k) holding in VTSMX as the 25% stock portion of the PP. Along with my VP of dividend growth stocks, I hold some of my gold in my taxable account (IAU), but enough in my Roth IRA to sell without incurring the 28% gain if I need to re-balance in future. I am exploring the possibility of purchasing some physical gold in Oregon (I'm in northern CA) to avoid the sales tax. I hold my bonds (TLT) in the Roth. Finally, my cash is in an ING savings account. But I am beginning to allocate all my 401(k) contributions (since Jan. 2012) to VMMXX, a money market fund that pays 1bp, so it loses value at the rate of inflation but has little down-side risk otherwise. Not only will it be a proxy for cash in the PP, but I will value avergage it into or out of the VTSMX every four months to artificially ensure a 6% p.a. yield on the VTSMX holdings.




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PostPosted: Tue May 08, 2012 6:04 am 

Joined: Mon Aug 02, 2010 4:45 am
Posts: 766

I think most people on the PP forum lump all their accounts into one big PP. That way you can optimize placing assets in the most advantageous account to minimize tax exposure, transaction frequency, transaction fees, expense ratios, total number of funds, and other factors. This may in fact be the only way to build an orthodox PP using 401k plans since those plans rarely have suitable gold or long term bond options.


That said, IMO that level of optimization is at the level of fine-tuning and is not required. A separate PP in each account is probably OK.


That would be the long-term bonds, right? It goes: bonds, cash, stocks, then gold, right?


You can either look at this in a timeless way or optimize for the tax code as it stands right now.


The US seems committed to the paradigm of taxing interest and dividends yearly at a higher rate and capital gains only when realized and at a lower rate. In principle the most tax-efficient asset would be one whose returns come entirely from capital gains and the least tax-efficient would be one whose returns are entirely dividends/interest. From that perspective, ranking of PP assets from worst to best tax treatment (equiv. highest shelter priority to lowest) is: cash, bonds, stock, gold.


Right now cash interest rates are practically zero. In this environment, which is a bit of a historical oddity, the ranking becomes: bonds, stock, gold, cash. So there's an argument that you should shelter assets in that order. However you'll need to move things around again when interest rates eventually pick up.


(IMO this topic has actually been discussed extensively on the Crawling Road forum. Maybe you are searching for different terms than the ones that are used there?)




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PostPosted: Tue May 08, 2012 9:09 pm 

Joined: Sat Apr 14, 2012 11:15 pm
Posts: 83
Location: Bay Area, CA

Thanks for your help, KevinW. I have pretty much read about half of the threads in the main forum and skimmed the titles of all threads ever made there. Sometimes nuggets of unrelated knowledge do slip into threads like that, though.


What I meant was that there wasn't much discussion on implications of 401k/retirement accounts being treated separately due to an early retirement situation and the benefits/downsides of that. I think you addressed some of that in your response.


I have thought about the fact that currently cash is not a tax issue due to low return, but probably will be again in the future at some point. Since I can't get the long-term bonds or gold allocated in my 401k account, I'm going to have to do some creative balancing for a while and very soon all 4 will spill over into my taxable accounts. This part gives me a headache just thinking about it, but I'm working on streamlining/planning.




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PostPosted: Wed May 09, 2012 3:26 pm 

Joined: Thu Mar 31, 2011 12:55 am
Posts: 61

Maybe scale back your 401k contributions and redirect the max allowable to an IRA and get at least that much gold in a tax sheltered account?


Also, what is your time frame for leaving your job? You can always roll your 401k into an IRA when you leave, and reallocate then.




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PostPosted: Wed May 09, 2012 6:37 pm 

Joined: Mon Aug 02, 2010 4:45 am
Posts: 766

IMO doing ERE or ER doesn't factor in to how you positions assets very much.


The only major difference I can think of is that, under ERE, you'll only be living with your 401k for 5ish years so bad 401k funds can't really do very much damage. You could do something simple like put the 401k 100% into a bond fund or their default conservative allocation fund and let it sit until you retire, roll it over, and merge it with your grownup portfolio at that time. The same goes for anyone who switches jobs frequently. A bad 401k is only a serious problem when you're locked in to using it for your entire portfolio for decades.


If you notice anything in those forum threads that's relevant to ERE and not in the wiki page, would you mind adding it? :)

http://earlyretirementextreme.com/wiki/index.php?title=Permanent_Portfolio


If you're investing that much time into reading the forum, I recommend listening to all of the podcasts too.




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