Achieving the Permanent Portfolio across multiple taxable and tax advantaged accounts

General Discussion on the Permanent Portfolio Strategy

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distefam
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Achieving the Permanent Portfolio across multiple taxable and tax advantaged accounts

Post by distefam » Thu Dec 22, 2016 8:27 pm

I am trying my best to figure out how to implement the permanent portfolio as faithfully as possible but running into some difficulty due to the large percentage of funds in my 401k and its limited selection of funds.

My present situation:
  • ~ $18,800 in 401k (see funds below)
  • ~ $20,800 in IRA
  • ~ $5,000 in Roth IRA
  • ~ $3,000 in taxable account
  • ~ $20,000 in savings account --> $46,000 at time of quitting
I will be leaving my job in 4 months after which I will be using the $46k to fund living expenses while I work on starting a business and seeking funding for that business. From the excellent responses to my earlier post I think it's best to treat that $46k as my "variable portfolio" as it's money I plan on "losing".

With that in mind, I have $47,600 to construct a permanent portfolio with. $3000 of this is in a taxable account and the rest is in tax advantaged accounts, of which $18.8k (almost 40%) is in my 401k, which is where the issues come in.

These are the available funds in my 401k.
  • A bunch of target date funds
  • Vanguard S&P 500 ETF (VOO)
  • Vanguard Russell 1000 Growth ETF (VONG)
  • Vanguard Total International Bond ETF (BNDX)
  • Vanguard Inflation protected Sec Adm (VAIPX)
  • Vanguard Total International Stock ETF (VXUS)
  • Vanguard FTSE Emerging Markets ETF (VWO)
  • Vanguard Total Bond Market ETF (BND)
  • Vanguard Prime Money Market Inv (VMMXX)
  • Vanguard Mid-Cap Value ETF (VOE)
I do not have access to a brokerage window and my employer will not add new funds for me.

Based on the book, I'm to fill assets into tax advantaged accounts in the following order:
  • 1. Bonds
    2. Cash
    3. Stocks
    4. Gold
25% of $47.6k is $11,900.

Here's what I was thinking:

First, I can fulfill the bond allocation in my IRA. No problem.

Next, I was thinking VMMXX might be a decent temporary substitute to fill in for cash. If this is the case, I can fill that in my 401k.

Next, I don't see any Gold funds in my 401k so I'd have to use stocks in there. I'd fill the remaining $6,900 of my 401k with VOO.
Of the remaining $5,000 for stocks I could put $3,000 into my taxable account.
Then, the $2,000 remaining could go into one of my IRAs.

This leaves Gold, which I can do in my IRAs.

So...
  • 11,900 LTT Bonds in IRA
  • 11,900 Cash in VMMXX in 401k
  • 6,900 stocks in VOO in 401k
  • 3,000 stocks in taxable
  • 2,000 stocks in IRA
  • 11,900 gold in IRA
Once I leave in four months I'd roll over the 401k into my IRA and be done with it. Then, I'd be able to more faithfully implement the PP.

This seems to be the best I can do, unless I've missed something. Does anyone have a better suggestion or think this is ok? And, not to revive the other thread, but could some of that cash be put to better use while I'm not using it? It feels odd to tie it up for a year when I have a constant withdrawal rate that I know ($3k/mo).
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ochotona
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Re: Achieving the Permanent Portfolio across multiple taxable and tax advantaged accounts

Post by ochotona » Fri Dec 23, 2016 5:59 am

The only time period of concern is the four months until you can Rollover the 401k right? Don't worry about four months... keep it in cash or short term bonds for four months. Having $18,800 in cash for that long won't scar you for life, nor will they force you to wear a "cash is trash" sign,
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distefam
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Re: Achieving the Permanent Portfolio across multiple taxable and tax advantaged accounts

Post by distefam » Fri Dec 23, 2016 9:04 am

The cash would be $46,000, not $18,000. But you're probably right, keeping it as cash outside of PP is not that bad for a year if I have concrete plans to use it.

My main question is surrounding the asset allocation I outlined above. Do you think those funds are appropriate for the permanent portfolio given my options?

Another option I was thinking of is just leaving the 401k in a target date fund and implementing the permanent portfolio with my IRA and taxable accounts, then rolling over the 401k in four months and buying lagging shares. Ideally, I'd like to implement it across all accounts but this might be much easier given my options.
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Re: Achieving the Permanent Portfolio across multiple taxable and tax advantaged accounts

Post by sophie » Fri Dec 23, 2016 9:46 am

Didn't you post in another thread about this situation? If so, part of your question has been answered already - namely the bit about not investing any money that you expect to spend sometime in the next 3-5 years. That's my $0.02 anyway, but it's been echoed by several people e.g. ochotona's post above.

The other part of your question is how to incorporate a non-PP-friendly 401K into a spread-out PP. The answer to that is, I would seriously not even try, unless you intend to start a self-employment retirement plan and roll your 401K funds into it. Like most plans, you can put stocks and cash in the 401K, but not bonds or gold. The problem is that 401K funds often increase faster than taxable, so your PP quickly becomes impossible to manage. Set it up with a nice simple Boglehead portfolio or target date fund, set for annual rebalancing, and forget about it.

Spread out PP's are a great thing provided all accounts are PP friendly. I keep a mix of assets in all my accounts, but focus taxable on cash (for emergency funds) and physical gold. I also keep T bills in a Roth IRA. There are lots of possibilities to optimize, eg keeping some gold ETFs in retirement funds, savings bonds for deep cash in taxable, and mixing up different brands and types of stock funds depending on what's available commission-free in each account. Keep a spreadsheet and update it regularly. I do it monthly mainly because logging into all my accounts that often is a good idea. Something always needs attention. For example, once I caught my university making a mistake on my retirement account, which they were able to rectify. They couldn't have done that, per IRS rules, if the issue was more than 3 months old.
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Re: Achieving the Permanent Portfolio across multiple taxable and tax advantaged accounts

Post by Mr Vacuum » Fri Dec 23, 2016 9:54 am

Good point about different accounts growing at different rates, but in this case there's no new money going into the 401k if I understand correctly. It looks like a good balance with the bonds and gold invested in textbook PP assets and the stocks and cash split in the 401k. It's too bad you have no Treasuries options for cash, but I'd say you did well with the available options.

But hey, if you can keep it in cash for a few months and consolidate accounts, save yourself the hassle of more complicated investing now and focus on your business.
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distefam
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Re: Achieving the Permanent Portfolio across multiple taxable and tax advantaged accounts

Post by distefam » Fri Dec 23, 2016 10:49 am

sophie wrote:Didn't you post in another thread about this situation? If so, part of your question has been answered already - namely the bit about not investing any money that you expect to spend sometime in the next 3-5 years. That's my $0.02 anyway, but it's been echoed by several people e.g. ochotona's post above.
Yes, I did. My intention was to keep the threads separate as this was a different question, around asset allocation across accounts with different tax scenarios rather than what to do with cash as income—hence the titles—but you're right, they kind of converged. Apologies for cluttering the forum with multiple similar threads.
sophie wrote:The answer to that is, I would seriously not even try, unless you intend to start a self-employment retirement plan and roll your 401K funds into it. Like most plans, you can put stocks and cash in the 401K, but not bonds or gold. The problem is that 401K funds often increase faster than taxable, so your PP quickly becomes impossible to manage.
Sorry I wasn't clear above. My 401k is moribund. I will not be contributing to it any more and I will be rolling it over to a self-managed IRA in four months. I wanted to do a spread out PP if possible and then rebalance once I roll it over into my IRA. Since nearly all of my assets are in tax advantaged accounts (except the cash as income portion) I figured this would not be a problem as it would not trigger a taxable event.
sophie wrote:Keep a spreadsheet and update it regularly. I do it monthly mainly because logging into all my accounts that often is a good idea. Something always needs attention. For example, once I caught my university making a mistake on my retirement account, which they were able to rectify. They couldn't have done that, per IRS rules, if the issue was more than 3 months old.
This is great advice, thank you.
Mr Vacuum wrote:Good point about different accounts growing at different rates, but in this case there's no new money going into the 401k if I understand correctly.
Yes, that's correct.
Mr Vacuum wrote:It looks like a good balance with the bonds and gold invested in textbook PP assets and the stocks and cash split in the 401k. It's too bad you have no Treasuries options for cash, but I'd say you did well with the available options.
Thank you, that's what I was trying to figure out.

Because I can't stop thinking about this I came up with another strategy which might be better considering cash is basically not growing and therefore doesn't need tax-advantaged status and that my 401k has limited options for everything except stocks.

Here goes...

Since I have almost $20k of cash sitting around in a savings account (to which I'll be adding almost $4k monthly until I quit) and I won't be needing this for another four months I thought I might use a portion of it to help achieve a more balanced PP across accounts and then rebalance once I quit and need that cash.

Note: all of this is rounded for easy math

Stocks:
  • $16,000 in 401k's S&P 500 plan
Cash:
  • $13,200 in separate savings account that I earmark for PP use (I'll keep the rest separate)
  • $2,800 in 401k's VMMXX
this fills out the 401k assets while minimizing exposure to cash in the 401k

Bonds:
  • $16,000 in IRA -- probably as TLT for now as I'll need to rebalance in four months and I expect it to be easier to do so with an ETF rather than buying treasury bonds directly. Is this misguided?
Gold:
  • $10,100 in IRA
  • $5,900 in taxable ($3,200 is already in there; $2,800 will come from my savings cash) I can actually buy some physical bullion with this as it's in my taxable account, though I might hold off until the rebalance to do so (see below).
This all evens out across accounts while maximizing stock exposure in my 401k and minimizing cash as the S&P 500 ETF is way better than the cash money market fund there.

When I leave my job in four months, I'll do the following:
  • 1. Move the $13,200 in my PP savings account to my "income" savings account
    2. Roll over my 401k to my IRA
    3. Rebalance everything to bring cash back up to 25%, which will now reside between my IRA and taxable accounts
This allows me to achieve the PP allocation as best as I can imagine with minimal transactions. Unless, of course, I'm mistaken about the costs of rebalancing within my IRA after the rollover. Anything I might be overlooking there?

The only "cost" this incurs is pulling $2,800 from my "income" savings account to make all the numbers work. This will not be a big deal.
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