Cash as income

[distefam]

I'm new to this forum and relatively new to the Permanent Portfolio. I've read the threads at Bogleheads, many online articles, and the Permanent Portfolio book written by this forum's Craig. I still haven't implemented the portfolio myself as I am still in the research phase, evaluating all of my options. I have every intention of implementing the portfolio as soon as possible and once I've answered all of my questions and come up with a concrete plan (I still have some questions into HR about adding acceptable funds to my 401k)

I am a currently employed software engineer with around $65K in assets. Here's a rough breakdown:

• around $45k in tax deferred accounts (401k and IRA)
• around $3k in taxable investment account
• around $17k in a savings account (I'll explain below)

I plan on leaving my job on May 1st of this coming year (2017) and starting my own company. According to my savings rates I should have (barring any crazy market shifts, of course) the following:

• around $55k in tax deferred accounts (401k and IRA)
• around $3k in taxable investment account
• around $42k in a savings account

This is around $100k total.

The intention was to use this $42k to provide living expenses before raising capital for my company (while building a prototype, pitching, etc.) this is slightly above a year's worth of expenses in San Francisco (yes, I might consider moving someplace cheaper while building and pitching).

So, the primary question is whether a part of that $42k should be considered for the cash portion of the Permanent Portfolio or whether I should just leave it in a savings account in full so I have ready access to it as income.

In short, I have the following simplified options (unless I'm missing others):

• 1. break up total of ~ $100k into Permanent Portfolio allocations, with $25k as cash
  2. keep the $42k separate and break up the remaining $58k in the Permanent Portfolio
  3. keep a large chunk of the $42k separate and break up remaining, say $70k, in the Permanent Portfolio

With option 1, assuming I take out $3k/mo for living expenses, then it would take me three months to hit a rebalancing band. That could potentially get costly in terms of fees and/or capital gains.

Option 2 seems flawed in that it ignores a large portion of my assets, which if included would heavily skew the equal diversification of the Permanent Portfolio.

Option 3 would simply delay the rebalancing needed for option 1.

Does anyone here have experience with a similar scenario?

Thank you in advance for your help.

[I Shrugged]

I think you need to separate out the living and startup expenses from the PP or any other long term plan. Which more or less means your #2.

[sophie]

Given the uncertainties in your near future, I wouldn't touch any of the money in taxable accounts, including investments. The PP usually doesn't mix well with corporate 401Ks, if that's the case just put the money into a standard Boglehead-type portfolio and call it a day.

More importantly, try not to raid the 401K if things get tight with your business venture. Once the dust settles, put a high priority on establishing your new retirement plan. As a sole proprietor you will have good PP-friendly options. If you allow the PP to include taxable savings and you put all cash into taxable at the start, you'll automatically start building an emergency fund.

Best of luck!

[Jack Jones]

I would break off $27,500 from your $42k, and consider that outside of your PP. I would also draw down from that pile once you lose the income from your job.

Then, I'd implement a PP w/ the remaining $72,500.

So I guess, option 3.

Also, good luck with your business venture! I plan on doing something similar this March after I receive my yearly bonus.

[distefam]

Wow, thank you everyone for your thoughtful responses.

In some sense, you might consider your expected $42k for living expenses as part of a variable portfolio, as this is money you can afford to lose (and which you actually plan on "losing").

That's a fantastic way of thinking about things. Viewed through this lens my primary aversion to Option 2 evaporates. It's not over-exposure if that money is earmarked for a specific alternate purpose.

Given the uncertainties in your near future, I wouldn't touch any of the money in taxable accounts, including investments. The PP usually doesn't mix well with corporate 401Ks, if that's the case just put the money into a standard Boglehead-type portfolio and call it a day.

This is very true. The offerings I have are very limited, though my HR department has promised to look into providing better funds. They even asked me for the specific ones I'd like so that's promising, though I won't keep my hopes up. If they do add those funds I'll implement the PP immediately with Option 2. If not, I'll just hang onto my target date fund in the 401k and IRA and taxable accounts with Betterment (I know, I know...) until I leave and am able to roll everything over into more flexible accounts.

Also, I'd never raid my retirement accounts. Thank you for the reminder though!

I did some digging recently and found that I might be able to sell my options (I work at a pre IPO tech company) on the private markets. If this is the case, I might gain some additional cash that would allow me to implement the PP with a full $100k while still having enough to keep outside to fund living expenses for a year. Not getting my hopes up on this as it's probably a long shot, but might be an option.

I'll be sure to post what I end up doing after I hear from HR and the private options market company. Thank you again!