Some edge questions for calculating / thinking about my PP

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joypog
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Some edge questions for calculating / thinking about my PP

Post by joypog » Thu Apr 28, 2022 12:42 am

My wife and I had built up a big cash postion because we were hoping to buy a house but we've given up on that given this ridiculous market. So we're finally doing something about investing more systematically beyond the random stock indexes we've picked up here and thereover the years. I'm completely smitten with PP after reading Craig and JM's book - it fits perfectly with my cautious personality - I don't have any confidence in guessing the future, I love having options, and I'm perfectly happy with slow and steady for a low volitility shot at pretty decent.

For context, I think we're going to enter into this world slowly with monthly purchases of Tbonds and gold. When it's over I think we'll have of 30x our monthly epxenditures in the PP.

Outside of the the classic PP portfolio that we're building, I had been calculating the following items seperately. I split these items outside of our main investment portfolio when my knowledge was limited to the stock aggressive allocations (popular on Bogleheads), but once I finally groked the theory behind PP, I'm thinking these moves might be unnecessarily cautious (even for us!). Any thoughts?

1) One year's emergency fund. From what I gather, most folks would consider that part of the PP-Cash portion?
2) My kids' college funds (in about 10 years). I'm thinking about buying some TIPS right now...its a negative real return, I was drawn to the inflation protection for this expense.
3) Early TIPS purchases to supplement a (slightly) early retirement - if things goes as planned (ha!) I'll most likely retire in twenty years with a decent (but not extravagant) government pension. I'm thinking about buying some TIPS right now to help cover the cost of health care between retirement and Medicare and to fill in a little extra income before SSN at 70. Is it way too premature to be going into such a conservative purchase...would I be better served keeping these funds as part of the main PP?
4) HSA cash. I'm quite averse to taking any risks with this "special" money...but inflation is going to kill the cash in my account here as well. I've got more than the annual out of pocket max in the HSA, so I'm thinking about buying the Vanguard Bond fund (limited options in the account). Does that make sense? Also, would you count the cash in the HSA as part of the PP cash?

Thanks!

ps one more question: Do you keep the Gold in the Tax or Tax deferred account? I know that they don't pay interest, but the 28% collectible tax rate is kind of scary....
1/n weirdo. US-TSM, US-SCV, Intl-SCV, LTT, STT, GLD (+ a little in MF)
barrett
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Re: Some edge questions for calculating / thinking about my PP

Post by barrett » Thu Apr 28, 2022 3:44 am

joypog wrote:
Thu Apr 28, 2022 12:42 am
ps one more question: Do you keep the Gold in the Tax or Tax deferred account? I know that they don't pay interest, but the 28% collectible tax rate is kind of scary....
You're not understanding the way gold is taxed, at least not completely. Check out Tyler's article on Portfolio Charts here:

https://portfoliocharts.com/2020/08/21/ ... old/#taxes

Everything that Tyler writes is worth reading in full but here is a paragraph from the linked article:

"It’s true that gold (including bullion-backed ETFs) is taxed as a collectible and does not benefit from preferential long-term capital gains tax rates like stocks and bonds. And it’s also true that the maximum collectibles tax rate is 28%. But that’s the maximum rate. Gold profits are actually taxed as ordinary income with a cap of 28%. So your capital gains taxes on gold will fall between 10% and 28% depending on your tax bracket."

Don't know enough about TIPS to comment on those but have you looked into I-Bonds to fund your kids' higher education? I am actually using both EE and I-Bonds as a partial bridge from retirement to Medicare. I would personally avoid buying EE-Bonds now that inflation is so high.

I-Bonds are exempt from state & municipal taxes and can also be used tax-free for certain higher education costs.

Lastly I would say that the PP is not a magic bullet. Most of the active posters on here seem to pick and choose which parts of the portfolio they like. Remember that while over time the three volatile assets tend to smooth one another out, in the short run they can all get clobbered at the same time. People seem to do great with the portfolio if they only check their balances once or twice a year. But I think that most people who are interested in personal finance enough to explore this asset mix also tend to be obsessive balance checkers!

Anyway, just a few thoughts. Best of luck to you whatever you decide.
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Re: Some edge questions for calculating / thinking about my PP

Post by joypog » Thu Apr 28, 2022 8:17 am

OK thanks for the clarification! I'll start with gold half and half in taxable and Roth and I'll have the flexibility to rebalance for regular fluxuations. If we suddenly have to sell off the taxable portion (such as if we suddenly find the perfect hosue), then so be it...but its not as onerous as it might seem.

As for I-bonds, we just found out about them this year and maxed it out. Maybe I'll just think of our (moving forward) annual deposits to I-bonds as the contribution to our kid's educations in lieu of the vagaries of the TIPS market.

And thank you for the fair warning. I suspect the financial world is going to get ugly in the near future...which was partly why we ended up with a 60 cash /30 stock/10 bond postion. That felt "safe" until we realized that inflation was going to slaughter us this year. The main appeal of PP is that one is given a sense of control by specifically giving up control (very Taoist). And if all four asset values go down...well that's the cost riding that tiger we call "civilization".
1/n weirdo. US-TSM, US-SCV, Intl-SCV, LTT, STT, GLD (+ a little in MF)
whatchamacallit
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Re: Some edge questions for calculating / thinking about my PP

Post by whatchamacallit » Thu Apr 28, 2022 3:22 pm

If you are potentially buying a house you might still keep larger chunk in cash outside of retirement account.

https://m.investing.com/rates-bonds/u.s ... bond-yield

2 year Treasury paying 2.65 right now sure looks juicy.

Hard to stomach buying a 30 year only paying 2.90. Doesn't seem worth the risk there.
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Re: Some edge questions for calculating / thinking about my PP

Post by joypog » Thu Apr 28, 2022 5:17 pm

whatchamacallit wrote:
Thu Apr 28, 2022 3:22 pm
If you are potentially buying a house you might still keep larger chunk in cash outside of retirement account.
Makes sense. I'm thinking that we'll just slowly move the cash in our retirement accounts into Gold and Bonds which would result in an overall AA of 55 (cash)-15-15-15 by the end of the year.

The "15x4" would still give us a decent sized PP. The "extra 40% cash" would basically be our VP as a bet on an incoming recession (or to buy a house...or an Aston Martin >:D ).
Last edited by joypog on Thu Apr 28, 2022 8:55 pm, edited 1 time in total.
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Hal
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Re: Some edge questions for calculating / thinking about my PP

Post by Hal » Thu Apr 28, 2022 7:02 pm

Well, this is what I did years ago. About 1/2 the funds were in a retirement account where you had two choices - actively managed or cash.
Went for 50% Cash,25% Shares, 25% Gold. Once I hit 55, could take the funds out and implement a proper PP.

Based on Whatcha's comment, how about 25% Shares, 25% Gold in a self directed retirement account and 50% STT outside. Once you have decided on the house/car ;) then implement a full PP?
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joypog
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Re: Some edge questions for calculating / thinking about my PP

Post by joypog » Thu Apr 28, 2022 8:54 pm

Based on Whatcha's comment, how about 25% Shares, 25% Gold in a self directed retirement account and 50% STT outside. Once you have decided on the house/car ;) then implement a full PP?
That would make sense...except I have zero confidence we will be buying a house (or car) anytime soon.

If we're not going to actually use the cash and it's getting killed by inflation, then might as well buy a bit of the deflationary protection from a 30 year T bond.

With interest rates going up, I'm not rushing all-in buy up our full quota of treasuries in May, but by the end of the year I'd like to have the allocation, just in case if rates actually slide down for god knows what reason.

Fun times!
1/n weirdo. US-TSM, US-SCV, Intl-SCV, LTT, STT, GLD (+ a little in MF)
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