Gyroscopic Investing

Okay, so I've finally started my PP! The balance is pretty small right now, so I opted to go with ETFs for the time being until I can afford to directly own a decent quantity of actual bonds and physical gold.

So far I've gone for the standard 25% mix with TLT, IAU, and SHY (I feel like I understand the risks with SHY, but I'd be willing for someone to tell me I'm crazy) in an Ameritrade account and VTI in a Vanguard account. So far so good… I think.

Here's my dilemma: I also have a Roth IRA that's 100% in stocks (VTSMX) and a 401K that's 75% stocks (VITSX) and 25% bonds (VBMPX). I set them up before I learned about the PP, and now I'm not sure what I should do with them. I'd be tempted to consider 'em part of my PP, but the thing is, these silly retirement accounts are inaccessible until I'm 60, and my intention is to use the PP as an income stream waaaay before that (I'm 25).

I feel like my taxable PP that I intend to receive income from should be a separate thing from my tax-sheltered retirement accounts that I won't be able to touch for another 35 years. Does this sound reasonable? And if so, what should I do with the retirement accounts? Since I can't touch them for 35 years, I feel very comfortable taking more risks with the assets they're invested in, so I'm considering staying very stock-heavy and increasing the percentage in bonds every year or two. Thoughts?

Pointedstick wrote: Since I can't touch them for 35 years...

You can touch them, there will just a penalty.  Ultimately, I don't think this penalty turns out to be any worse than paying taxes in the first place (although I've never tried to do it, so maybe someone who has can chime in here). 

You might consider something like this:

VTSMX (stocks) Roth
VFISX (cash, although not ideal) 401K
TLT  taxable
IAU  taxable

Pointedstick wrote: I feel very comfortable taking more risks with the assets they're invested in, so I'm considering staying very stock-heavy and increasing the percentage in bonds every year or two. Thoughts?

It's not a bad idea, but I don't think there's any guarantee that the return on stocks going forward will be what it was from 1980-2000.

Personally, I'd try to make it all into one PP if you can. 

Pointedstick wrote:
Here's my dilemma: I also have a Roth IRA that's 100% in stocks (VTSMX) and a 401K that's 75% stocks (VITSX) and 25% bonds (VBMPX). I set them up before I learned about the PP, and now I'm not sure what I should do with them. I'd be tempted to consider 'em part of my PP, but the thing is, these silly retirement accounts are inaccessible until I'm 60, and my intention is to use the PP as an income stream waaaay before that (I'm 25).

I feel like my taxable PP that I intend to receive income from should be a separate thing from my tax-sheltered retirement accounts that I won't be able to touch for another 35 years. Does this sound reasonable? And if so, what should I do with the retirement accounts? Since I can't touch them for 35 years, I feel very comfortable taking more risks with the assets they're invested in, so I'm considering staying very stock-heavy and increasing the percentage in bonds every year or two. Thoughts?

I used to think the same way.  I'm 26.  The reality, as some folks pointed out to me on this forum, is that the accounts are not inaccessible.  There is just a penalty to access some of them.  Roth IRA contributions can be withdrawn tax and penalty free.  401k withdrawals will have a 10% penalty plus your tax rate, but even if you stay in the same tax bracket upon retirement, the tax free gains will probably be worth it.  The fact that you're considering early retirement means that you're probably saving a large portion of your income.  So if you only need say 50% of your current income to live off of now, that will likely stay the same in retirement.  What tax bracket would that put you in vs. the one you're in now?  Add 10% to that, assuming you make all of your withdrawals from accounts that are subject to the penalty.  Then consider the present day tax deduction you get plus tax free gains until you withdraw from the fund.

The big caveat I see is if you need to make a large withdrawal during one tax year.  For this, I would recommend keeping a substantial emergency fund in taxable, so that you're not required to make a large withdrawal that throws you into a much higher tax bracket than you want to be in.

I haven't done a thorough analysis using numbers, etc., but I think that the basic premise is sound.  I hope that helps a bit.