Starting the Perm Port Soon

[dlauth]

Im very intrigued by the idea of the portfolio and would like to implement a large portion of my roth to it.

ETFS:
ITOT
GLD
SHY
TLT

The ETFs are commission free trades except for GLD which is $8 each trade.

Questions:
1. What is the best way of putting contributions into the portfolio? Same percent into each, re balance or put into cash? If I re balance, it would save money on doing smaller trades on the GLD fund.

2. Im only 23 so I can tolerate a little bit more volatility, so I was thinking of doing a 30 split on everything and 10 on cash. This shouldnt change the returns much and would give me better exposure.

3. Reinvest dividends or put them to the SHY fund until re balance time.

Ideas?

Thank you!

[Ad Orientem]

Welcome to forum!

I am fine with your proposed funds, though once you become more comfortable with the PP I would suggest buying some physical gold. Normally my suggestion is to make contributions and dividends payable to your cash portion. But if your only keeping 10% in cash I'd reinvest the dividends and spread the contributions around proportionally. On a side note, I'm not convinced of any great advantage to going 30-30-30-10 over 4x25% when factoring in the added volatility.

[rhymenocerous]

1. I can understand the temptation to want to juice returns, but I would not mess with the 4x25% split of the PP.  What I would do instead is create a PP with 40% of my money (so 10/10/10/10), and then allocate the remaining 60% to stocks, LTTs, gold, whatever you wish, etc.  You should follow the rules though about never taking money from your core PP to fund your VP.

2. I would choose IAU over GLD purely because it has a lower expense ratio.

3. It's up to you how you want to allocate new money.  If you have free trades for the ETFs, then add money as it becomes available.  If you want to save up some money in cash and buy gold more infrequently to save on commission fees, then that's fine too.

4. Since this is all in a Roth, I would just reinvest dividends.  Having them all go to cash is a strategy for taxable accounts so that you can effectively harvest any losses without triggering the wash sale rule.

[Khisanth]

I agree with the 30/30/30/10 split. Here's why.

You are young (23) and therefore I will assume (yes I know) that what you have in your IRA/401k is tiny compared to what you will be earning. Also, your yearly IRA contributions in cash will still be a significant portion of your whole IRA.

You should decide at what point your contributions become less significant overall, and then slowly transition toward 4x25% as you grow older.

I am not a financial advisor, but I did stay at a Holiday Inn Express last year.

[dlauth]

4. Since this is all in a Roth, I would just reinvest dividends.  Having them all go to cash is a strategy for taxable accounts so that you can effectively harvest any losses without triggering the wash sale rule.

please explain.

Points:
1. I currently have more in my Roth due to starting way before I got a job that gave a 401k.

2. Its free trades for all the above funds except for the gold fund.

3. Currently I am talking specifically about my Roth, but after contributions are maxed, I was thinking about trying a PP in a taxable account. Thoughts?

4. I will change out GLD for IAU then.

5. Not going to argue gld vs slv but I have a large portion of phyzz slv already

6. More than likely, I will do the max contributions to my Roth at one time to save fees.

[rhymenocerous]

Let's say you invest in a Total Stock Market index fund in a taxable account and have a $3k loss.  Let's also assume you are in the 25% tax bracket.  What you can do is sell your entire position in TSM to recognize your $3k loss and then invest in another fund that is similar, but not identical, like an S&P 500 fund. 

You haven't really changed your asset allocation, but now you can deduct the $3k loss from your income, which saves you $3k * 0.25 = $750 in taxes.  If you want to claim the loss, you are not allowed to reinvest in a TSM fund for 30 days.  If you do, it's known as a wash sale.  If you have dividends automatically reinvested in the TSM fund instead of going to cash, you might accidentally trigger a wash sale, which would not allow you to deduct the loss from your income.

See here for more info: http://www.bogleheads.org/wiki/Tax_loss_harvesting

[MediumTex]

I don't try to sell books to people here as a rule (other than the ad at the top of the page), but based upon your posts and your questions, if you haven't read the PP book that came out last year, you might check it out.  I think you might get a lot out of it.  You are exactly the kind of person it was written for.

[dlauth]

I will have to check it out! Thanks for the help!

Another proposition.

I currently roughly a year emergency fund in a "extreme checking account". 2%APY as long as you have 15 transactions and can have a max of $15k in the account.

The issue is now I have a bunch of credit cards in order to take advantage of the cash back. I now think the checking account is useless due to having to force myself to buy $1 transactions in order to get the return, dont think its worth it.

1. Advice on maybe keeping 3mths in the checking for CC payments, etc.. Then putting the rest into a taxable account with the 4 x 25 allocation. Thoughts?

2. Seems like the way to go in nontaxable accounts is dividends reinvested and not reinvested in the taxable account if I want to TLH

3. When I need to put money into the PP in either account, I should buy the lagging asset in order to keep taxation lower and transaction fees in IAU cheaper

4. Thoughts on the extreme checking? These dividends are taxed at regular income, which is 25% and the taxation from the PP in the taxable account would only be %15 if I held it for a year and 25% if I needed it sooner

5. Any way to pay the credit cards in the taxable PP account easily? Im going to be using Fidelity.


Thanks everyone for all the help!

[Pointedstick]

One of my favorite parts of the PP is how the cash allocation can serve as your emergency fund. If it's in a money market fund it's basically as liquid as a bank account, and an ETF or even directly-held T-bills can be almost as easy to liquidate (due to the extreme liquidity of the U.S. government debt market, in the case of the T-bills). So you barely even need to have a second emergency fund. I don't; I just dumped it all into the cash portion! It simplifies thing a lot.

[Bean]

One of my favorite parts of the PP is how the cash allocation can serve as your emergency fund. If it's in a money market fund it's basically as liquid as a bank account, and an ETF or even directly-held T-bills can be almost as easy to liquidate (due to the extreme liquidity of the U.S. government debt market, in the case of the T-bills). So you barely even need to have a second emergency fund. I don't; I just dumped it all into the cash portion! It simplifies thing a lot.

Wise words here.  This is exactly what drew me to the PP in the first place. It places structure between you cash/emergency fund and investment.

[dlauth]

Still have these questions:

1. Advice on maybe keeping 3mths in the checking for CC payments, quick access to funds etc.. Then putting the rest into a taxable account with the 4 x 25 allocation. Thoughts?

2. Any way to pay the credit cards in the taxable PP account easily? Im going to be using Fidelity, or should I just use the 3mths checking to do any bill pay, credit card, etc. and only sell the SHY and transfer to the 3mth when the 3mth gets low.

3. Still dont know what would be better for dividends in either taxable and non tax accounts.

Tax questions:
4. When I need to put money into the PP in either account, I should buy the lagging asset in order to keep taxation lower and transaction fees in IAU cheaper, correct?

5. Thoughts on the extreme checking? These dividends are taxed at regular income, which is 25% and the taxation from the PP in the taxable account would only be %15 if I held it for a year and 25% if I needed it sooner. Does skipping the 15 transactions/mth and just using the credit cards for everything sound better?

6. Vanguard or Fidelity?
Fidelity: (ROTH is already setup here, $7.95 trades, .19% expense for below)
IAU
ITOT
SHY
TLT
Vanguard: (Will have to transfer Roth over, $7 trades for first 20 on non-vanguard(IAU), .14% expense for below)
IAU
VTI
VGSH
EDV

[Khisanth]

1. I consider savings/checking as part of my taxable permanent portfolio cash allocation. I keep a larger allocation (30%) as a result.
2. I don't know how you wish to put a credit card in your account? See #1
3. If you are able to balance your portfolio fairly equally across taxable and sheltered accounts, keeping dividends in the sheltered area can be good. As always it depends. At some point I stopped trying and set up separate PPs for each.

4. Anything to pay less taxes I believe is a good thing.
5. my time is more valuable than having to look for ways to reach up to the 15 debit card transactions. It's also more times your debit card can be skimmed and used for fraud.

[dlauth]

So your saying to have all my accounts act like a giant PP. Use my savings as my cash, put the fixed income and gold into the roth and stocks into the taxable? I could also keep physical gold, but would be hard to rebalance with that. I could also use my 401k and put that all into stocks.

It would look like this:
Cash- savings
Bonds(TLT)- Roth
Stock Fund- 401k
Gold- Physical

or am I making this way too complicated? I just want to have all my accounts be part of a PP, weather I set them up to each be PP or a PP as a whole.

Also I said pay, not put my CC, with my taxable brokerage account.

[rhymenocerous]

I personally think of all my money as one big portfolio.  I don't try to create separate PPs within each type of account (although some do).  I'll try to describe my thought process, since I started working not too long ago and the size of my accounts relative to each other is probably similar to yours.

The first step is to start with your 401k, since it is the most restrictive.  Typically, this is only suitable for stocks and cash, although some 401ks have a brokerage option that allows you to buy whatever ETF or mutual fund you want.  I put all 25% of my stock allocation in here.  I used to keep a lot of cash in a bank account, but since my 401k is getting the bulk of my new contributions each year, I also put my 25% cash in here.  I technically cheat a little and use a Total Bond Market fund as my "cash."  Since my 401k is growing so much faster than my Roth and taxable account, I decided to just try to keep these 2 components about equal in my 401k (so it's effectively it's own 50/50 TSM/TBM portfolio).  I then just make sure my gold and LTT allocation equals each other across my Roth and taxable account.  Sometimes you can't get everything to be perfect, so you have to do the best you can with the options you have available.

The next step is to choose funds for your Roth.  I put my LTTs here since they throw off interest payments that I don't want taxed.  I purchase 30 yr treasuries directly instead of investing in a fund.  Most brokerages, like Vanguard and Fidelity, allow you to do this for free.  There's a tutorial in the LTT section of the forum, which is very easy to follow.  I also have a small amount in gold in here, since there's still some room left.

The remainder of my taxable account is in gold, which has no tax drag, except when you choose to realize capital gains.

I don't keep much money in a bank except enough to cover the bills each month.  I can get away with this because I could just sell the funds in my taxable account and rebalance in my Roth if I ever had an emergency.  It's a little "dangerous," but I'm okay with the way things are set up for now.

If you tell us the size of your 401k, Roth, and taxable account, as well as the options available in your 401k (including expense ratios), we could make more specific recommendations.  Also let us know how much you are contributing to each account each year.

[Kshartle]

If you tell you the size of your 401k, Roth, and taxable account, as well as the options available in your 401k, we could make more specific recommendations.

Being just 23, there's nothing wrong at all with these numbers being small if they are.

Starting to become an informed and dedicated saver/investor is awesome and I'm sure many of us would love to go back to that age with your attitude and understanding.

[dlauth]

The only issue I can see with your strategy is rebalancing....


The options in my 401k right now are pretty limited:
Vanguard Prime Money Mkt Fund Inst VMRXX
Vanguard S-T Bond Idx Inst Plus VBIPX
Vanguard Total Bond Mkt Ix Ist Pls VBMPX
Target Retire Income Tr P
Target Retire 2010 Tr P —5 yr increments till—  Target Retire 2060 Tr P —
Vanguard Ext Mkt Index Inst Plus VEMPX
Vanguard Inst Index Fund Inst Plus VIIIX
Vanguard PRIMECAP Fund Admiral VPMAX
Vanguard FTSE A-W ex-US Ix Inst Pl VFWPX
Vanguard International Growth Adm VWILX
Supplemental Investments
PIMCO Total Return Instl PTTRX
Wellington Trust TIPS —
Dodge & Cox Stock DODGX
Longleaf Partners Small-Cap LLSCX
T. Rowe Price Instl Mid-Cap Equity Gr PMEGX
TRP US Md Cp Val Eq Tr D —
Wllngtn Tst Sm Cap 2000 —
DFA Emerging Markets Core Equity I DFCEX


Balances are as follows:
Roth - $8300 Contribute max per year
401k - $5550($3900 vested) Contribute $6300 per year which includes match.
Cash- $11000, clear about $12900 per year after contrabutions and bills
Taxable- nothing currently

[rhymenocerous]

Is there a reason you are saving so much cash in taxable?  Do you want to buy a house or car?  Since you are able to, I'd max out your 401k at $17.5k per year.  Recognize that the $12.9k cash you save is after-tax, so at a 25% tax rate, it's really $17.2k pre-tax.  I'm suggesting you contribute $11.2k more to your 401k, so you will still have $6k * 0.25 = $4.5k left in taxable each year.  This represents an immediate $2.8k tax savings for you.

Rebalancing can be an issue, which I discussed earlier.  Right now, I'd just put your entire 401k into the following stock funds:

60% Vanguard Inst Index Fund Inst Plus
20% Vanguard Ext Mkt Index Inst Plus
20% Vanguard FTSE A-W ex-US Ix Inst Pl

Recognize that ~75-80% Vanguard Inst Index Fund Inst Plus + ~20-25% Vanguard Ext Mkt Index Inst Plus = Total Stock Market Index.  If you ever need to add cash/bonds, I'd probably choose to add the TBM fund, but any of the options below would work:

Vanguard Prime Money Mkt Fund Inst
Vanguard S-T Bond Idx Inst Plus
Vanguard Total Bond Mkt Ix Ist Pls

You have really good options in your 401k, by the way.  Many people aren't so lucky.

I'd probably just split your Roth evenly between LTTs and gold for now.  If you have some of your $11k cash you don't mind using for investing, then you can purchase gold in a taxable account and put more LTTs in your Roth.  If you buy LTTs directly, note that you usually buy and sell in ~$1k increments.

[Kshartle]

Would the entire 17.5k be in the 25% tax bracket? You really have to making a lot for that considering your standard deduction and personal expemption as worse case scenario to get your taxes down. If not, the tax savings might not be as much as you think, or very much at all. Remember you will get hit with ordinary income rates in retirement, which will likely be much, much higher than 25% or whatever the percentage of tax you will save now (likely less than 25%)

My point is at your age you probably want to contribute to the 401k as much as possible to get 100% of any company match, then max out Roth contributions and turn to the 401k after that.

Does your company have a roth 401k option? Many do and this is often the best for younger workers in lower current tax brackets.

[rhymenocerous]

Yes, I was assuming that the entire $17.5k would be in the 25% bracket, but if contributing to a 401k drops you into the 15% bracket, then the tax savings wouldn't be as much.  I think in general, you need to be earning at least $75k as a single individual not to be dropped into the 15% bracket by maxing out your 401k and traditional IRA.

[Kshartle]

Yes, I was assuming that the entire $17.5k would be in the 25% bracket, but if contributing to a 401k drops you into the 15% bracket, then the tax savings wouldn't be as much.  I think in general, you need to be earning at least $75k as a single individual not to be dropped into the 15% bracket by maxing out your 401k and traditional IRA.

Exactly so you definately want to figure that out and while you might want to put enough in to save 25%....you definately want to fully fund a Roth before trying to save money from being taxed at 15%.

I don't know what your rate will be in retirement.....but if you're in a 15% bracket in 40 years we probably won't have a government to tax you at all.

[Pointedstick]

Yes, I was assuming that the entire $17.5k would be in the 25% bracket, but if contributing to a 401k drops you into the 15% bracket

…Then your taxable investments have a 0% interest and long-term capital gains tax! If you want to think strategically, don't forget about that.

[dlauth]

Thats a lot of information to take!

I currently earn $52500 a year if that helps.

I have all that money in cash for emergency/ potential house downpayment(currently renting on the cheap), but am willing to invest it.

I have my 401k right now in the retirement 2060, due to it having the lowest fees and it has a mix of stocks and bonds.

I can only contribute to my 401k through my paycheck deductions correct? I cant just have money on the sides and decide to put it in a 401k, but can do this with a Roth or a traditional IRA.

I max out my 6% company match 401k first, max out roth second, what comes after this? Bump the paycheck deductions for my 401k or just contribute to the 17.5 max in a traditional ira.

I still have $2k I can contribute to my Roth for this year.

Should I do the following:
Roth - all LT treasuries($8300 currently, growing $5500 a year.)
401k- all stocks($5550, growing $6600 a year)
Savings- cash(Currently $11k)
brokerage- IAU

This would give me the following
LT $8300
Stocks $5500
IAU $5000
Cash $6000

$24800 total, 33.5/22/20/24

Could someone please summarize what is the best way of going about this?

[rhymenocerous]

There's no reason not to just move $2k in cash from your bank to your Roth tomorrow.  I usually just max it out all at once at the beginning of the year.  Remember also that you can always withdraw contributions from your Roth, but not your earnings (though this really should be a last resort because the Roth space is so valuable).

You are correct that you should first contribute 6% to your 401k (free money), then max out your Roth, then increase your paycheck deductions to max out your 401k.  While you can only contribute to a 401k through paycheck deductions, if you choose to max it out, you can then use the money in your bank account for regular expenses if your paycheck is too small.  This "effectively" transfers the money from your bank to your 401k.

After this, you would usually start a taxable account, although I'm gonna explain some tricky 401k rules and hope it's not too confusing.  The 2013 max 401k contribution is $51k.  This consists of $17.5k in elective deferrals + employer contribution + after-tax employee contribution.  Note that the $17.5k can be after-tax also if your employer offers the option for a Roth 401k.  I'm specifically talking about the after-tax employee contribution, however, which is different. 

Let's say for example that your employer match is $3.5k.  This means that you have $51k - $17.5k - $3.5k = $30k in remaining after-tax contributions available.  Even though this is allowed by law, not all employers allow you to make these contributions, so you have to investigate.  Instead of investing in a taxable account, what you do is make the $30k in after-tax contributions to the 401k.  Depending on your plan rules, there are a certain number of times per year you are allowed to withdraw this portion of your account (not the $17.5k portion) into a traditional IRA.  You can then "immediately" convert the traditional IRA into a Roth IRA.  You only pay tax on any gains you have, not on the contributions (since they are already after-tax).

The benefit of all this is that you can now contribute $30k + $5.5k = $35.5k to a Roth IRA each year, where your money will grow tax-free forever.  This is preferable to a taxable account.  So the order goes:

1. 401k up to employer match
2. Max out Roth IRA
3. Max out $17.5k 401k
4. Max out $51k 401k if available
5. Taxable investing

Side note: there is nothing wrong with the Vanguard Target Retirement funds.  They are very good all-in-one funds if you want to use that as your entire portfolio.  Since I'm implementing the PP, however, I prefer to have more control over what % of my portfolio is in stocks, bonds, gold, etc.  For this reason, I don't want to be in a fund with a glide path.  What if I eventually want to sell the stocks, but not the bonds?  You can't do that in those Target Date funds, so I choose to break them into their component parts.

Side note 2: Gold is taxed as a collectible, meaning you pay the lower of your marginal tax bracket and 28%.  By comparison, the long term capital gains rate for stocks is 15%.  This doesn't matter if you are already in the 15% bracket, but it does matter if you are in a higher tax bracket.  If you still want to hold a fund for your gold, you should research GTU, which is a closed-end fund.  If you fill out a special tax form, then this fund qualifies for the 15% long term capital gains rate.  Again, this only matters if you are in a higher tax bracket, but you should plan for the future and not just today, because it's always costly to sell holdings in a taxable account to undo mistakes.

[dlauth]

Im getting pretty confused...

So,

I make $52500 with a 6% match in my 401k
$5k into the Roth
$3150 match and $3150 from my paycheck to my 401k
Then, up the from paycheck to $17.5K(33%) plus the $3150 from my match?
Someone said to try and not get into the lower tax bracket from the 401k, why is that? Wouldnt it be better to be taxed at a lower rate? Also, with the $17.5k max, this would still put me at $35k which is still 25% tax bracket.

My plan offers a roth option as well but wouldnt be usable since Im already contributing $5k correct?

Why would it be beneficial to max the 401k then roll it into a trad ira then roth, instead of just going from a traditional to a roth?

The best option would be to store the phys gold, cash in a savings account, stocks in 401k and bonds in roth correct? Doesnt this make re balancing hard, especially with the phys gold?

Sorry if im not understanding some of these concepts, my young brain is trying its best ;p

[rhymenocerous]

1. In 2013, the max contribution for a Roth (or traditional) IRA is $5.5k.  I suggest taking cash from your bank account and maxing out the Roth for 2013 as soon as possible.

2. I would increase your 401k paycheck deductions to whatever will allow you to hit $17.5k by the end of the year.  Sometimes there's a limit though.  For example, my employer won't let me contribute more than 50% of my salary.  If you can't get to $17.5k in 2013, just contribute the max % you are allowed and live off your cash savings.  In 2014, set your paycheck deductions to 34%.

3. The Roth 401k option is different from the regular Roth IRA limits of $5.5k.  You can contribute $17.5k to a Roth or Traditional 401k.  There are pros and cons for each option that mostly involve predictions about future tax rates when you retire.  Keep in mind that people don't know what the tax rates will be next year, let alone 40 years from now.  You can think of money in the two accounts like this:

Traditional 401k = (Return) * (1 - Tax_Rate_in_Retirement)
Roth 401k = (1 - Current_Tax_Rate) * (Return)

As you can see, in a traditional 401k you defer the taxes until you are in retirement, and with the roth 401k, you pay the taxes now.  You can see that if your current tax rate equals your tax rate in retirement, then it is a wash.

Some people feel like 15% is a very low tax rate, and that it will be much higher in the future, so you should contribute enough to a Roth IRA and Roth 401k so that you stay in the 15% bracket.  This involves running dummy tax returns to figure out when to switch to traditional 401k contributions.

I'm gonna quote from a post here: http://www.bogleheads.org/forum/viewtopic.php?t=75619

"Proponents of a traditional 401k typically say that you're more likely to pay higher taxes on current income than future income, because when you're retired you won't be making as much money and will be able to withdraw 401k contributions to fill in the lower brackets.

For example, imagine these are your tax brackets:

10% bracket 0-$17,000
15% bracket $17,000 to $69,000
25% bracket $69,000+

If you're making $75,000, you're getting taxed at 25% on every dollar you make above $69,000. If you put $5,000 into a Traditional 401(k), you'll pay 25% less per dollar you put in.

Now imagine you face the same tax brackets when you're retired, and have no income. If you withdraw the $5,000, you'll be taxed at 10%, not 25%, because you had no income this year and you'll be filling in the lower tax brackets first. If you had already made $69,000 from other sources (2nd job, [pension, social security,] etc), then you'd still get taxed at 25% and it wouldn't have mattered which style you chose. If instead, taxes have risen to 30% in the lowest tier, you would have been better off choosing a Roth 401k."

If what I've said is confusing, that's because it's not easy to predict future tax rates.  Personally, I opt for "tax diversification" meaning having Roth IRA and Traditional 401k contributions.  I'm basically saying, I don't know which option will be better so I'll just do a bit of both.

If you want the quick notes without reading all of the above: continue maxing out your Roth IRA and contribute to a traditional 401k (not a Roth 401k).

Side note: employer contributions are always traditional, or pre-tax, even if you contribute to a Roth 401k.