Deciding on Future Allocation to Physical Gold

[stuper1]

I'm running a fairly pure 4x25 PP, spread across my 401k, Roth IRA, and non-retirement accounts.  I'm 47, and my current total portfolio is about 4 times my annual salary.  One thing that concerns me is that my 25% gold is only about 2% physical and 23% paper.  I hold paper gold in both the 401k and in the Roth IRA.  I would like to increase the physical gold percentage.

Going forward, to buy more physical gold, I would need to reduce my 401k or Roth IRA contributions.  I currently contribute quite a bit more to my 401k than what my employer matches.  I would definitely make sure to contribute enough 401k money to get the full employer match.

How should I prioritize buying physical gold versus socking away more 401k and Roth IRA money?

[Pointedstick]

Increase your savings rate and start a taxable PP with gold in it.

If you're in a high tax bracket, dodging taxes now is such a huge plus; I wouldn't reduce 401k contributions. As painful as it may be, if you can't spare any more cash in your budget for a separate taxable PP, I'd probably decrease the Roth contributions before the 401k.

Of course, the calculus may be different if you're in the 15% tax bracket or something.

[stuper1]

I'm already saving over 25% of my gross income, and supporting a family of four on my own.  I'll have to doublecheck on my marginal tax rate.  I can't recall offhand, but I think we may still be in the 15% bracket after all the deductions.

I won't be able to increase my savings rate, which I think is pretty high already, and I'm not looking to start a separate taxable PP.  I've already made the decision to spread my PP over my various accounts, which do include a taxable portion (that's where my current physical gold is kept).

So, with those further clarifications, what do the esteemed members of this convocation recommend?  I guess what I'm asking is what physical gold percentage should I be shooting for?  And if the tradeoff is to reduce 401k or Roth contributions, is it worth it to make that reduction in order to get my hands on more physical gold?

[Austen Heller]

And if the tradeoff is to reduce 401k or Roth contributions, is it worth it to make that reduction in order to get my hands on more physical gold?

I am not sure of what absolute % I would have in physical gold in your circumstance, but it would be pretty far down the list of available investment options.  The tax-free (Roth IRA) or tax-deferred (401k) nature of those accounts is just too good to pass up; definitely max those out first.  Based on your current 23% gold ETF / 2% physical ratio, it seems that you are comfortable with the risks in gold ETFs.  I would do:

1) Roth IRAs
2) 401k
3) I-bonds (tax-free withdrawals for kid's education)
4) EE-bonds (these double in 20 years = 3.5% per year return tax-deferred)
5) physical gold

529s are probably also in there somewhere (I don't have kids, so I'm not familiar).

I'm sure others will weigh in with their preferences.

[Ad Orientem]

I'm already saving over 25% of my gross income, and supporting a family of four on my own.  I'll have to doublecheck on my marginal tax rate.  I can't recall offhand, but I think we may still be in the 15% bracket after all the deductions.

I won't be able to increase my savings rate, which I think is pretty high already, and I'm not looking to start a separate taxable PP.  I've already made the decision to spread my PP over my various accounts, which do include a taxable portion (that's where my current physical gold is kept).

So, with those further clarifications, what do the esteemed members of this convocation recommend?  I guess what I'm asking is what physical gold percentage should I be shooting for?  And if the tradeoff is to reduce 401k or Roth contributions, is it worth it to make that reduction in order to get my hands on more physical gold?

I wouldn't lose sleep over numbers and percentages. In an ideal world you would have all of your gold as physical. But we have to live in the real world, with all kinds of inconvenient obstacles to perfection. My advice FWIW is to keep things as simple as possible. In my experience the more complicated something is, the more aggravating it is and the more likely that something will go wrong. In the Navy we used to call this the KISS rule (keep it simple s%&*head).

With that out of the way here's my very generic 2 cents...

If you are salting away 25% of your pay you are doing extremely well. But you don't need to become a monk, so if increased savings would impose a hardship then just go with the 25%.

First max out your 401K contributions until your employer stops contributing. Free money always comes first. Then max out the IRA and go back to the 401K if you still have money to put away.

Most 401Ks are a pain in the @$$ when it comes to the PP. If you can make yours work as a stand alone PP or make it work with minimal trouble, great. If not then don't sweat it. Just turn your 401K into a Jack Bogle special (standard stock bond portfolio indexed) and call it a day. It's usually not worth the trouble to try and jam the round PP peg into the square 401K hole. I suggest using your IRA (if it's a ROTH) as a stand alone PP and then if you have other investments that are taxable keep those separate. The separate accounts just makes things so much easier for keeping track of everything and rebalance.

As for physical gold, I would suggest trying to keep as much of your taxable PP's gold in physical as you can conveniently work out. If your IRA has a means of acquiring physical gold you can just buy it as you add to your IRA/PP. If not, then IAU works.

As Craig is wont to observe, don't let the perfect become the enemy of the good. In the meantime take a deep breath and relax. You are already better protected than 99% of investors.

[Tortoise]

How should I prioritize buying physical gold versus socking away more 401k and Roth IRA money?

It's a personal choice, but remember there is a cost associated with diverting funds away from tax-advantaged accounts and into physical gold. (Effective rate of return in a taxable account is lower than the effective rate of return in a tax-advantaged account, all other things being equal.) Lower risk is always a good thing, but at what cost?

One of the most useful insights I got from Craig and MT's recent PP book was the idea of Level 1 through Level 4 PPs, with Level 1 focusing on the most basic, important priorities ("must-haves") and Level 4 dealing with lower priorities ("nice to haves"). The idea is that you generally want to know your investing priorities and keep them straight and don't let the notion of perfection steer your towards a lower priority at the expense of a higher one.

Although there is some subjectivity, here is how I personally rank my investment priorities:

1. Maximize total savings rate
2. Diversify across asset classes (4x25% if possible)
3. Maximize tax-advantaged portion of savings
4. Maximize safety and minimize cost within each asset class
5. Choose safest institution for my assets, and ideally diversify across two or more institutions
6. Maximize proportion of gold in form of physical coins
7. Maximize proportion of bonds in form of directly held bonds
...etc.

I always try to satisfy the higher priorities first if my constraints allow me to. In your case, maybe physical gold for SHTF scenarios is a higher priority than tax considerations. If that's the case, then it's a no-brainer; put more money into physical gold in your taxable account and less into gold ETFs in your tax-advantaged accounts. If, however, you're like me and effective rate of return is more important to you than preparing for a Mad Max world, it probably makes more sense to put as much as possible in your tax-advantaged accounts and consider physical gold a "nice to have."

Best of luck in ranking your own priorities and making the most appropriate decision based on them.

[ns2]

I definitely agree with maxing out the 401k/IRA's first which is what me and my wife both do.

I've been using my companies ESPP stock plan to finance my purchases of gold. We are allowed to contribute up to 15 percent of our salary and we get a match of 25%. We can sell the stock at any time so twice a year I sell what is accumulated and buy gold.

My wife and I are socking away about 50% right now as I'm getting close to retirement (not her unfortunately) so we even have some cash left over beyond our budget after using all the other company investment vehicles available. That has been going into gold lately also.

Like you, I don't like the ETF gold very much.

[stuper1]

Thanks to all of you for your input.  It has helped me think through this more clearly.

One thing it did was get me to check my tax rate, which is 15% based on child/home deductions, etc.  I can only expect that rate to go up in the future, so I think maxing out my Roth IRA, and my wife's Roth IRA, is a good idea for now.  Of course, there is no guarantee that Roth earnings will stay tax free, but I'm hopeful that if that changes, they may only tax those people who have very high Roth balances.

One thing I can take comfort in, I think, is that my paper gold is spread across three institutions:  IAU in the 401k, GTU in my Roth, and PHYS in my wife's Roth.  That gives us some diversification in case of financial shenanigans.

I think going forward, I'm going to try to buy an ounce or two of physical gold each year, and leave it at that.

[Ad Orientem]

Thanks to all of you for your input.  It has helped me think through this more clearly.

One thing it did was get me to check my tax rate, which is 15% based on child/home deductions, etc.  I can only expect that rate to go up in the future, so I think maxing out my Roth IRA, and my wife's Roth IRA, is a good idea for now.  Of course, there is no guarantee that Roth earnings will stay tax free, but I'm hopeful that if that changes, they may only tax those people who have very high Roth balances.

One thing I can take comfort in, I think, is that my paper gold is spread across three institutions:  IAU in the 401k, GTU in my Roth, and PHYS in my wife's Roth.  That gives us some diversification in case of financial shenanigans.

I think going forward, I'm going to try to buy an ounce or two of physical gold each year, and leave it at that.

I think you are in very good shape and your plan sounds eminently reasonable.

[ns2]

I think going forward, I'm going to try to buy an ounce or two of physical gold each year, and leave it at that.

Well, if you buy two ounces for the next 18 years you'll have 36 gold coins but I suspect after you get some you'll figure out a way to get more. That was the way it worked for me. I only wish I had started buying two coins a year a long time ago.