How much is "enough" in the Permanent Portfolio?

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sophie
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How much is "enough" in the Permanent Portfolio?

Post by sophie » Sun Dec 10, 2017 3:38 pm

I thought we could all use a nice, warm & fuzzy financial question to sink our collective teeth into...

Since the goal of the Permanent Portfolio is to protect the money you can't afford to lose, one might argue that once you're got that amount socked away, there's no longer a need for the "insurance" assets of gold, bonds, and cash. You could instead park any additional savings in a stock fund, enjoy the dividends, and just let the balance ride through whatever comes.

So the first two questions are:
1. What do y'all think of the idea of using the PP as a base portfolio, then switching to 100% stocks once the PP is big enough? And is anyone doing this already? Of note, I've been planning to do this, just haven't yet hit the "enough" spot.

2. How much is "enough"?

Question #2 of course has plenty of offshoots. My current definition is enough to meet expenses at a 4% withdrawal rate, taking into account known future income sources such as social security. I determined this based on current, actual expenses for the last 12 months plus anticipated extras (medical insurance, regular savings into a capital costs fund for dealing with rare, big expenses like replacing the fridge or fixing up the bathroom, etc). And SS was calculated as 80% of whatever it is the SSA tells me I should expect. So, three more questions:

3. How do you calculate projected future expenses?

4. How do you take Social Security income into account?

5. Is a 4% withdrawal rate safe? I'm comfortable with it given that the PP is much safer than a typical stock/bond portfolio at a 4% SWR.

3, 4, and 5 obviously depends on how close you are to official retirement age - if I were contemplating a true early retirement (< age 40), I'd probably ignore SS and go for a 3% SWR.
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Re: How much is "enough" in the Permanent Portfolio?

Post by Tyler » Sun Dec 10, 2017 4:40 pm

Good topic, Sophie.

1) What do y'all think of the idea of using the PP as a base portfolio, then switching to 100% stocks once the PP is big enough?

It's funny -- I have a completely different reaction to finally accumulating "enough". The idea of gambling more on stocks to maybe earn more money that I really don't need just doesn't click for me. The incentives just aren't there anymore. But I understand that others may think about this a lot differently than I do, and I have no problem with taking more risk with money you can afford to lose. And I also fully admit to having small caps in my VP (to make a Golden Butterfly overall), so maybe I just have mentally compartmentalized the same idea a little differently.

2) How much is "enough"?

Of course that's kindof subjective. You've got it right by thinking about it as a multiple of expenses. Rather than detailing out extensive non-recurring expenses (house repairs, medical expenses, etc), I simply bake in a bit of extra overhead. Toss an extra 25% spending buffer on top of your base expenses, and that could go to a roof one year, a vacation the next, or an unexpected health insurance deductible after that. I also personally found that the answer depends a lot on your own self-confidence, happiness with your career, and general place in life. It's not just a numbers question, as if you're determined enough I bet you can lower your expenses (and necessary stockpile to meet those expenses) quite a bit.

3) How do you calculate projected future expenses?

Rather than doing mental gymnastics over future expenses, I personally moved to my target retirement city about 2 years before I hit my number to prototype that lifestyle first-hand. My future expenses were simply my current expenses + health insurance.

4) How do you take Social Security income into account?

I personally don't count on SS. It's too unpredictable this far out so I consider it the icing on top of a good plan.

5) Is a 4% withdrawal rate safe?

With the PP in the US? Absolutely. In contrast to the typical 4% rule for a generic stock/bond split that never went bust over a 30 year retirement, 4% with the PP would have maintained inflation-adjusted principal! The PP is a very good retirement portfolio because its low volatility is especially helpful once you start accounting for annual drawdowns.

6) if I were contemplating a true early retirement (< age 40), I'd probably ignore SS and go for a 3% SWR

Because of that 4% Perpetual WR, IMHO there's no need to save for 3% even for a very early retirement provided you've allowed some buffer in there for any unexpected future expenses (see item 2).
Last edited by Tyler on Sun Dec 10, 2017 5:24 pm, edited 9 times in total.
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Re: How much is "enough" in the Permanent Portfolio?

Post by ochotona » Sun Dec 10, 2017 4:41 pm

sophie wrote:1. What do y'all think of the idea of using the PP as a base portfolio, then switching to 100% stocks once the PP is big enough? And is anyone doing this already? Of note, I've been planning to do this, just haven't yet hit the "enough" spot.
Core-Satellite, with PP being Core, is an excellent idea.

2. How much is "enough"?

Enough to cover on the one hand an extended period of unemployment, and if close to retirement, that the PP should cover bare essential living expenses.

3. How do you calculate projected future expenses?

To be safe, assume your current expenses will be your retirement expenses. Murphy's Law.

4. How do you take Social Security income into account?

Take the SSA estimate, multiple it by 0.50. Murphy's Law.

5. Is a 4% withdrawal rate safe? I'm comfortable with it given that the PP is much safer than a typical stock/bond portfolio at a 4% SWR.

Tyler shows the PP SWR at about 5.3% for a 30 year retirement
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Re: How much is "enough" in the Permanent Portfolio?

Post by Kriegsspiel » Sun Dec 10, 2017 4:56 pm

sophie wrote:I thought we could all use a nice, warm & fuzzy financial question to sink our collective teeth into...

Since the goal of the Permanent Portfolio is to protect the money you can't afford to lose, one might argue that once you're got that amount socked away, there's no longer a need for the "insurance" assets of gold, bonds, and cash. You could instead park any additional savings in a stock fund, enjoy the dividends, and just let the balance ride through whatever comes.

So the first two questions are:
1. What do y'all think of the idea of using the PP as a base portfolio, then switching to 100% stocks once the PP is big enough? And is anyone doing this already? Of note, I've been planning to do this, just haven't yet hit the "enough" spot.
Yes! This is what I'm doing, mostly. I have some cash set aside to purchase real estate in the near future if I choose to do that (or else it's going back into stocks), the rest of my VP is in stocks. I think about it exactly like St. Harry said to: money you can afford to lose, money you can't.
2. How much is "enough"?

Question #2 of course has plenty of offshoots. My current definition is enough to meet expenses at a 4% withdrawal rate, taking into account known future income sources such as social security. I determined this based on current, actual expenses for the last 12 months plus anticipated extras (medical insurance, regular savings into a capital costs fund for dealing with rare, big expenses like replacing the fridge or fixing up the bathroom, etc). And SS was calculated as 80% of whatever it is the SSA tells me I should expect.
If you can have 2-5 years of living expenses available (liquid, non-tax deferred) in the cash section, and around 10-15 years expenses in the PP overall (mostly non-tax deferred) I think that's pretty good. You could put the rest in stocks and feel pretty comfortable, but I wouldn't go any lower than that. That would be enough to let you rebalance, pull money out of an existing Roth, and utilize the Roth conversion for any PP money in a 401k/traditional IRA. And you wouldn't freak out if the stock market crashed.
So, three more questions:

3. How do you calculate projected future expenses?
I kinda figure I'll keep my current lifestyle/spending, and add a skosh of medical expenses when I get older.
4. How do you take Social Security income into account?
I don't count on it.
5. Is a 4% withdrawal rate safe? I'm comfortable with it given that the PP is much safer than a typical stock/bond portfolio at a 4% SWR.
I'm not an expert but I figure it is. If I start drawing down too much I'll see it coming a ways off and change something up. I'm gonna get back into the workforce to drop my WR a little more anyways, but I'm a bet hedger.
3, 4, and 5 obviously depends on how close you are to official retirement age - if I were contemplating a true early retirement (< age 40), I'd probably ignore SS and go for a 3% SWR.
I agree.
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Re: How much is "enough" in the Permanent Portfolio?

Post by pugchief » Sun Dec 10, 2017 5:52 pm

All good answers so far. I think the wild card is health expenses, particularly as you get older. If you need an around the clock live-in caregiver or an extended stay in an assisted living facility, that can wipe you out really quick. Had several uncles deplete their healthy savings this way and leave an unexpectedly small inheritance to their heirs.
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Re: How much is "enough" in the Permanent Portfolio?

Post by technovelist » Sun Dec 10, 2017 10:30 pm

pugchief wrote:All good answers so far. I think the wild card is health expenses, particularly as you get older. If you need an around the clock live-in caregiver or an extended stay in an assisted living facility, that can wipe you out really quick. Had several uncles deplete their healthy savings this way and leave an unexpectedly small inheritance to their heirs.
A number of life insurance policies now allow you to tap the face amount (at a discount, of course) for end-of-life expenses so you don't have to run down your savings as much.
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Re: How much is "enough" in the Permanent Portfolio?

Post by sophie » Mon Dec 11, 2017 7:35 am

Tyler wrote: 1) What do y'all think of the idea of using the PP as a base portfolio, then switching to 100% stocks once the PP is big enough?

It's funny -- I have a completely different reaction to finally accumulating "enough". The idea of gambling more on stocks to maybe earn more money that I really don't need just doesn't click for me. The incentives just aren't there anymore. But I understand that others may think about this a lot differently than I do, and I have no problem with taking more risk with money you can afford to lose. And I also fully admit to having small caps in my VP (to make a Golden Butterfly overall), so maybe I just have mentally compartmentalized the same idea a little differently.
Tyler I was hoping you'd chime in!

The 100% stock idea isn't for a variable portfolio, as it's still a form of passive investing. The purpose of the PP is to protect assets and partake of stock market gains safely - while sacrificing a bit of return over long time periods (> 15 years) in order to gain this protection. If you don't need the insurance, you don't have to buy it. Interestingly, I see the Golden Butterfly as a way to do something like this. Just a bit different approach.

Interestingly, the 25% extra expenses you're proposing to bake into the "enough" calculation is effectively the same as a 3% SWR applied to basic expenses. I like that approach - nice and simple. As far as the possibility of outsize medical expenses at the end of life, I figure my home equity and core investments provide the best insurance for that. Long term care insurance isn't helpful - the policies I looked at cap benefits at an amount that I can easily self-insure for. Life insurance that lets you use it in advance to cover medical expenses is probably a better solution.

About all you can do to protect money for your heirs is to start gifting it ahead of time, and make sure you have enough advance directives in place and known to your family that you don't end up as a 90 year old pretzel in a nursing home on full code/full care. I personally think that anyone requiring a high level of care in a nursing home should be on comfort care only by default. Medicine doesn't really accomplish much when things are too broken to fix. As a friend likes to say, people should come with the label "No user-serviceable parts inside."
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Re: How much is "enough" in the Permanent Portfolio?

Post by gizmo_rat » Mon Dec 11, 2017 9:30 am

1. What do y'all think of the idea of using the PP as a base portfolio, then switching to 100% stocks once the PP is big enough?

Been mulling that one over since Tyler added UK data to his site. The ‘portfolio finder’ spits out a PP + 20% EM mix for a .6% CAGR lift thats quite tempting… but ya know EMs. At the moment I’m in a PP + 15% of Global STKS and BNDS (50/50). Where PP is core FI expenses and the VP was a bit of a rush job to diversify out of £ . I need a better plan but I'm in no rush.

2 How much is "enough"?

a) Best case, Where I am now, perhaps with a bit more travel when children are older.
b) Worst case, Enough for us both to live separately without working, assuming a 50/50 split in assets.

3 How do you calculate projected future expenses?

Spending has been the same for last 5 years and pretty consistent for the last 10 years (factoring out mortgage and work costs) seems like a reasonable guide to future spending. As a sanity check there's also a pretty thorough research project that calculates the cost of living a life that a social concensus regards as acceptable (it’s quite spendy, imo).

4 How do you take Social Security income into account?

I think the state pension is the UK equivalent but its lower at £8K pa and government is always fiddling around with it. I should get it in 17 years, it’ll be a nice top up I hope but I’m not counting on it atm.

5 Is a 4% withdrawal rate safe?

Historically it is :). I currently live at <2% with two children. The previously mentioned research projects says I should be living at 4% reducing to 2% when the children fly the nest.
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Re: How much is "enough" in the Permanent Portfolio?

Post by Xan » Mon Dec 11, 2017 10:13 am

I believe this has been discussed before (that's not a negative; many of these discussions come up with new wrinkles for new discussion), but so has its inverse. Yes, you can argue that you should put everything in stocks if even a huge drawdown leaves you with enough.

But if T-bills would kick off enough for you to live on, then why take any risks at all?

I don't see any particular reason for stocks to be the post-"enough" option rather than T-bills. And so I plan to split the difference and stick with the PP.
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Re: How much is "enough" in the Permanent Portfolio?

Post by Kriegsspiel » Mon Dec 11, 2017 10:25 am

Oh, I misunderstood that SWITCHING to 100% stocks part. I'm going to continue maintaining separate PP and VP areas, but the % split between them might get tilted more towards stocks as time goes on.
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Re: How much is "enough" in the Permanent Portfolio?

Post by jason » Mon Dec 11, 2017 10:42 am

I agree that based on the historical PP data, a 4% SWR is safe for retirement. But if it's in a taxable account, the taxes will come out of the 4%. For example, if someone has a PP with $6 million in it, they can safely take out $240,000 per year, but taxes will apply to that $240,000. So, how does one calculate a spending budget that takes the taxes into account? Seems like it would be hard to predict what the taxes will be and therefore difficult to set up an annual spending budget.
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Re: How much is "enough" in the Permanent Portfolio?

Post by sophie » Mon Dec 11, 2017 11:02 am

I add 15% to expenses to cover state/local/federal income taxes. Since those are nearly all incurred by withdrawing from tax-deferred accounts, I multiply this by the percentage of my portfolio that's in tax-deferred (70% currently). Note that my annual expenses alone would not take me above the 15% bracket.

I figure that if my taxes are higher than this, that means I'm getting enough income that the extra taxes aren't a concern.
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