How much is "enough" in the Permanent Portfolio?

[jason]

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.

This really makes no sense. If the $ has to be taken from a 401k or IRA, you have to pay taxes on the withdrawal as ordinary income. If the $ is taken from a taxable account, you pay nothing on the withdrawal. Any taxes on interest, dividends and capital gains will be due regardless of whether you withdraw any $ from the taxable account or not.

The issue is that if you are taking 4% out of your PP each year, you are going to have to re-balance often due to cash steadily dropping. So having to re-balance often is going to have tax consequences. By the way, does a 4% SWR only work in a non-taxable account? A taxable account is going to have a lower CAGR than a non-taxable account due to taxes, right?

[Libertarian666]

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.

You are actually going to stay in New York when you retire? Good lord.

[ochotona]

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.

You are actually going to stay in New York when you retire? Good lord.

The only place in the Northeast I'd bother with is New Hampshire.

[barrett]

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?

Sophie, just to be clear, you are not really asking about cashing in your PP and going 100% equities, right? You seem too sensible for that. Aren't you really asking about keeping a core PP up to the point where you feel you are FI, and then putting any NEW money into equities at that point?

That approach would be a sort of rising equity glide path that Michael Kitces and others have written about.

[sophie]

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.

You are actually going to stay in New York when you retire? Good lord.

Depends on how crazy I am! I figure if I budget for New York, it'll cover me no matter what I decide to do. And, this is not actually a bad place to retire: no dependence on cars, easy to get help, wonderfully walkable neighborhood, lots to do, etc.

Barrett: yes, I'm talking about having two retirement portfolios. The PP is your cash management system and is enough to cover living expenses under a reasonable set of assumptions. This means 25x expenses, which will give you a minimum of 3.75 years expenses in cash. Additional savings goes into the second portfolio which is 100% stocks. Not actively managed, just something simple like an S&P 500 index fund. "Rising equity glide path" is a good description..the idea is that unlike most advice that says to increase risk when savings are low (a monumentally stupid idea IMHO), you increase risk only when you can afford to do so.

[ochotona]

Barrett: yes, I'm talking about having two retirement portfolios...Additional savings goes into the second portfolio which is 100% stocks. Not actively managed, just something simple like an S&P 500 index fund.

Do look into "timing" (O the horror) the S&P500 sidecar portfolio using a simple monthly metric like momentum. I think in years to come you will appreciate it, especially if we're going to have an "event" at the end of this bull market. Security shown below was just the Schwab S&P500 mutual fund, SWPPX, subjected to 1-year time series momentum test. Only one look per month, about 2 trades per annum, on average.

[Ugly_Bird]

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,
3

Assuming SS goes bust, and one has to rely only on PP savings, then 4% withdrawal rate would be a good reference for the guesstimate.
For $80k of yearly expenses (including medical), $2M should be "enough".

Andrei

[ochotona]

Ocho, Using a site like stockcharts.com, what signal would you use for momentum?

Replied over here:

viewtopic.php?f=10&t=8992&p=166369#p166369

[barrett]

Sophie,

Here is a link to a piece by Michael Kitces on a rising equity glide path:

https://www.kitces.com/blog/should-equi ... ly-better/

This was written back in 2013 and it looks like he's revisited the topic a few time since then.

[sophie]

Interesting article! This does have some similarity with my suggestion, but not quite. What I'm proposing is to use the Permanent Portfolio as a drop-in replacement for the cash & bond bucket, which is intended in the article to forestall having to sell equities when they're down. The core premise in the article is that bonds alone can't fund retirement expenses. The PP, of course, doesn't have that problem.

The rising glidepath in the article is about making up for a key weakness in stock/bond portfolios, which is inability to avoid selling stocks when they're down, which kills needed returns later on. The PP doesn't have that problem, either. I wasn't suggesting the 100% stock portion for safety, but rather to juice returns over the long haul (15+ years) and also to simplify management as it means you can cap the amount of gold you'll have to deal with, for example. Note that it helps with long stock bull markets, which are hell on the PP. So I guess it does provide a bit extra insurance and user-friendliness. Plus, the income from the stock funds can be collected in the PP's cash bucket, so it provides a bit of protection even if the market itself is doing poorly.

[blue_ruin17]

If I ever felt that I had "enough" in the PP (i.e. SWR achieved, plus a little cushion on top), my dream alternative asset would be local farmland which I would rent out to local farmers, with the objective being the creation of trust and partnership with said farmers, rather than focusing solely on cash-flow. As well, I would look into buying property in Singapore.

That's all dream level, though. For my foreseeable future, the PP is really the only rational investment vehicle out there.

I've often wondered how much I would put into the PP if I suddenly had a $100 million to invest. I actually would seriously consider just dumping the entire lump sum into the PP, minus a property or two, just for the peace-of-mind, even though it would be justified in mind to place a very large allocation into equities. Whenever I start to wander into any allocation that puts me sub-20% gold, though, that triggers anxiety for me. Even if I were a billionaire, I would keep at least 20% in gold, regardless of what the rest of the allocation looked like.

[tarentola]

Good questions, Sophie.

Q1 .The PP as a « base » portfolio could be complemented (or even replaced) by a stock portfolio. There are dividend share diehards on seekingalpha.com for example who seem to live exclusively off dividends and never sell a share unless forced to by a merger or similar event. I have a core PP (75%) and a satellite dividend share portfolio (25%), but I can think of other candidates for the satellite (see PS below).

2. and 3. How much is enough ? How do you calculate projected future expenses ?
I did the calculations when I retired a few years ago, but have found that a certain amount of trial and error was required. I set up a standing order from my investment account to my current account, but ended up with too much in the current account (a good problem) so had to put it back into the PP. Now I try to withdraw a smaller amount each month, and review the situation every few months.

4.How do you take Social Security income into account ?
In Europe I have a small state pension which I think is reliable, or as reliable as anything else!

5. Is a 4 % withdrawal rate safe ?
I think Tyler has satisfactorily shown that the answer is yes – in the USA. In Europe or at least Germany it is more like 3.5 % according to portfoliocharts.com. I am in Europe and withdraw 3 % from the PP. The yield on my share portfolio is about 3.5 %.

PS It seems to me that there are relatively few sane investing strategies that can be considered by a retired or retiring person - a non-gambler. The following come to mind:

• The PP and variants - unbeatable in its historic low drawdown, and as good as many other portfolios in terms of return
• Stocks and bonds 60/40 or similarly simple as championed by the Bogleheads
• Stocks and bonds with other additions such as REITs (but little or no gold), such as Ivy, Larry and so on
• Multiasset portfolios such as Merriman and 7-Twelve
• Dividend stocks such as the Dividend Aristocrats, living off income from dividends, ignoring capital value, popular on Seeking Alpha.

The above could be managed actively or simply rebalanced.

I am considering multiassets for a complementary portfolio along with my dividend stocks. The other strategies in my view do not provide enough return or variation to make the increased drawdown risk worthwhile: they are not different enough from a PP. With dividend stocks, the drawdown is less important: dividend payouts hold up pretty well even during stock price crashes, and dividend-paying large-cap prices do recover eventually, as shown by the recovery since 2008-9.

[farjean2]

I retired last year (involuntarily) at the age of 67 and after I got my last paycheck I had almost exactly 1 million dollars in the PP. Fortunately I'm not having to draw from it yet because my wife is still working and also this year turned out to be a very nice start as far as sequence of returns goes. It is now 1.1 million already.

At this point in time I have to consider the entire nest egg as money I can't afford to lose and maybe not even "enough". If it grows to 1.5 million I figure that will give me close to a 6 figure pre-tax income when combined with my SS (which I'm delaying for the max). I might consider that "enough" if/when I get there.

[frugal]

Good questions, Sophie.

Q1 .The PP as a « base » portfolio could be complemented (or even replaced) by a stock portfolio. There are dividend share diehards on seekingalpha.com for example who seem to live exclusively off dividends and never sell a share unless forced to by a merger or similar event. I have a core PP (75%) and a satellite dividend share portfolio (25%), but I can think of other candidates for the satellite (see PS below).

2. and 3. How much is enough ? How do you calculate projected future expenses ?
I did the calculations when I retired a few years ago, but have found that a certain amount of trial and error was required. I set up a standing order from my investment account to my current account, but ended up with too much in the current account (a good problem) so had to put it back into the PP. Now I try to withdraw a smaller amount each month, and review the situation every few months.

4.How do you take Social Security income into account ?
In Europe I have a small state pension which I think is reliable, or as reliable as anything else!

5. Is a 4 % withdrawal rate safe ?
I think Tyler has satisfactorily shown that the answer is yes – in the USA. In Europe or at least Germany it is more like 3.5 % according to portfoliocharts.com. I am in Europe and withdraw 3 % from the PP. The yield on my share portfolio is about 3.5 %.

PS It seems to me that there are relatively few sane investing strategies that can be considered by a retired or retiring person - a non-gambler. The following come to mind:

• The PP and variants - unbeatable in its historic low drawdown, and as good as many other portfolios in terms of return
• Stocks and bonds 60/40 or similarly simple as championed by the Bogleheads
• Stocks and bonds with other additions such as REITs (but little or no gold), such as Ivy, Larry and so on
• Multiasset portfolios such as Merriman and 7-Twelve
• Dividend stocks such as the Dividend Aristocrats, living off income from dividends, ignoring capital value, popular on Seeking Alpha.

The above could be managed actively or simply rebalanced.

I am considering multiassets for a complementary portfolio along with my dividend stocks. The other strategies in my view do not provide enough return or variation to make the increased drawdown risk worthwhile: they are not different enough from a PP. With dividend stocks, the drawdown is less important: dividend payouts hold up pretty well even during stock price crashes, and dividend-paying large-cap prices do recover eventually, as shown by the recovery since 2008-9.

Good post!

Hi

for someone living in Europe, the EUPP is still the best option?

Never a USPP?

I am very courious about the alternatives you wrote.

Can you please explain more in detail.

All the best!

[tarentola]

Frugal
I already have exposure to US shares in my VP so I have none in the PP. Otherwise I would probably have about 50% US in the PP, or a global share ETF. There is currency risk though: the dollar has lost about 11% against the Euro this calendar year, so my mostly US VP is only breaking even for 2017 in spite of a good year for US shares.

For the alternatives, see portfoliocharts.com, where their performance is described in detail. For the dividend stocks, seekingalpha.com.

[I Shrugged]

I (we) have Enough x 2 or 3. It’s a great feeling. I recall reading maybe Bill Bernstein saying that Bill Gates could afford to be 100% stocks. It was probably in his booklet “Deep Risk”. I tend to agree with Tyler.

OTOH when you get to a big number, you start thinking about kids, grandkids, charity. Like, gee, if we can really grow this, it can be very useful for a long time. On the other, other hand, it might just as likely ruin the kids or grandkids. “Shirtsleeves to shirtsleeves in three generations.” I really believe that. The whole thing of what to do going forward is the 900 pound gorilla in the room that we have been trying to ignore.

Some people would go crazy spending, but that’s not us. So back to the question, I’ve stuck with the PP for the whole thing. It’s very comforting. I want very conservative growth.

[frugal]

Frugal
I already have exposure to US shares in my VP so I have none in the PP. Otherwise I would probably have about 50% US in the PP, or a global share ETF. There is currency risk though: the dollar has lost about 11% against the Euro this calendar year, so my mostly US VP is only breaking even for 2017 in spite of a good year for US shares.

For the alternatives, see portfoliocharts.com, where their performance is described in detail. For the dividend stocks, seekingalpha.com.

hi

I couldn't find the explanation and a model of that DIVIDEND portfolio .


Please help.

[Libertarian666]

I (we) have Enough x 2 or 3. It’s a great feeling. I recall reading maybe Bill Bernstein saying that Bill Gates could afford to be 100% stocks. It was probably in his booklet “Deep Risk”. I tend to agree with Tyler.

OTOH when you get to a big number, you start thinking about kids, grandkids, charity. Like, gee, if we can really grow this, it can be very useful for a long time. On the other, other hand, it might just as likely ruin the kids or grandkids. “Shirtsleeves to shirtsleeves in three generations.” I really believe that. The whole thing of what to do going forward is the 900 pound gorilla in the room that we have been trying to ignore.

Some people would go crazy spending, but that’s not us. So back to the question, I’ve stuck with the PP for the whole thing. It’s very comforting. I want very conservative growth.

I would NOT leave a large sum of money outright to heirs who haven't already demonstrated sensible behavior, as I believe it tends to be destructive.

A trust with a good trustee who has a lot of discretion is best in such cases, if you can find someone you can trust.

[tarentola]

hi

I couldn't find the explanation and a model of that DIVIDEND portfolio .


Please help.

There is no official dividend portfolion on Seeking Alpha, look for articles by David Van Knapp, David Crosetti, Chuck Carnevale. A good introduction here: https://seekingalpha.com/article/254416 ... -portfolio

[sophie]

Dividend portfolios have been way too popular for the past almost 10 years, because dividend rates have been greater than intermediate-term interest rates. I'd be really hesitant to bet the farm on one of these. Just wait until 5 year bond yields hit 2%, and watch the stampede away from these stocks.

EDIT: they're at 2%! Well, we'll soon see if my theory is correct. BTW...holy flattening yield curve on bonds...only a 0.05% difference in yield between 5 year and 30 year treasuries???

[dualstow]

The yield on 2-year notes briefly matched that of the S & P the other day. I think they (CNBC) said it was the first time in a very long time.

[tarentola]

To continue from my post earlier in this thread:

It seems to me that there are relatively few sane investing strategies that can be considered by a retired or retiring person - a non-gambler. The following come to mind:
The PP and variants - unbeatable in its historic low drawdown, and as good as many other portfolios in terms of return
Stocks and bonds 60/40 or similarly simple as championed by the Bogleheads
Stocks and bonds with other additions such as REITs (but little or no gold), such as Ivy, Larry and so on
Multiasset portfolios such as Merriman and 7-Twelve
Dividend stocks such as the Dividend Aristocrats, living off income from dividends, ignoring capital value, popular on Seeking Alpha.
The above could be managed actively or simply rebalanced.

I am considering multiassets for a complementary portfolio along with my dividend stocks. The other strategies in my view do not provide enough return or variation to make the increased drawdown risk worthwhile: they are not different enough from a PP. With dividend stocks, the drawdown is less important: dividend payouts hold up pretty well even during stock price crashes, and dividend-paying large-cap prices do recover eventually, as shown by the recovery since 2008-9.

I have set up a multiasset portfolio to complement my PP. See viewtopic.php?f=10&t=9317