The government issued a $2 trillion stimulus. How will that affect the economy? Could we endure massive inflation or hyperinflation?
Bradley kicks off today’s Ask Paula episode with this timely question. What inflation rate will we see in 2020, and how can we prepare? How should we hedge against hyperinflation?
Anonymous Retiree (whom we call Sequencing Sally) is 64 and retired last year. She lives off of monthly withdrawals from a Vanguard portfolio. Given the bear market, should she leave her portfolio alone and spend from an emergency fund?
Additionally, her target allocation is off-kilter. Should she rebalance now or later?
Jay wants to reach financial independence in five years, but she’s in a job that will pay her $270,000 student loan balance if she stays there for another 17 years. Should she stay, or quit and face the balance?
Jan has $500,000 in a managed fund with a three percent annual fee. He wants to move his funds into his Vanguard personal brokerage account, without incurring a ton of taxes from the sales of his holdings. How can he accomplish this?
My friend and former financial planner Joe Saul-Sehy and I answer these questions in today’s episode. Enjoy!
Bradley asks (at 02:52 minutes):
What do you think about the potential impact of quantitative easing, record-high unemployment claims, and disruptions in global supply chains? These are complex issues on a massive scale that aren’t easily understood or predicted. Given these issues, how valid is the risk of hyperinflation or mass inflation, and how can you effectively hedge against that risk?
I’d also like to know how much physical cash-on-hand you’d advise keeping for emergencies? Is there a framework we can use to come to this decision, since it will vary on an individual basis? While I know that no one has lost a penny from an FDIC insured bank account since its founding in 1933, I have seen reporting on panicked people withdrawing their cash, which could lead to capital controls if it gets out of hand. What risk, if any, are there, and how does cash on hand factor into hedging against those risks?
How do we make educated decisions to hedge risk without participating in fear-induced decisions that become a self-fulfilling prophecy like bank runs of past economic downturns?
Sequencing Sally asks (at 31:56 minutes):
I retired last year at age 64. I live off of a monthly withdrawal from my Vanguard portfolio, which requires selling bonds. I also have an emergency fund set aside that I could live off of for a couple of years. Given the bear market, is it better to continue living off of my portfolio? Or should I leave my portfolio alone and spend from my emergency savings?
My target allocation at Vanguard is 45 percent stocks and 55 percent bonds. Today my allocation is 36/64. Vanguard assesses allocations on a quarterly basis and if you’re more than five percent out, they will rebalance. Should I rebalance sooner, or wait for their quarterly review at the end of May?
Lastly, with my 45/55 target allocation and my 36/64 current allocation, Vanguard says I have a nine-point variance (the 45 target minus the 36 current). They’ll rebalance if there’s more than a five-point variance. I think that the nine-point variance is really 20 percent of the 45 target allocation, so my allocation seems to be off 20 percent. How do you calculate how far off you are from your target allocation?
Jan asks (at 45:37 minutes):
I have a question about delaying tax burdens when selling investments.
I’m 36 with a regular job that I’d like to leave within the next four years. I have $750,000 in investments – $250,000 in Vanguard indexes that are within my 401k and Roth IRAs, and $500,000 in a managed fund with a three percent annual fee, consisting of various stocks and mutual funds. I also have two houses: one with a 15-year fixed-rate mortgage with a $90,000 balance, and the other with a 30-year fixed-rate mortgage with a $130,000 balance. Both properties are rented out; I live with my wife in her condo that has a mortgage of $230,000. I also have $360,000 in cash that I’m holding.
I make around $130,000 annually and my wife doesn’t work. How should I transition my managed fund into my Vanguard personal brokerage without incurring a ton of taxes from the sales of all the holdings in it? I want to get away from the managed fund fees and the average performance, but I want to time it so that I don’t get kicked in the pants by the IRS. I think I still get taxed on the gains at sale even if I put it back directly on the market. How can I decrease this tax burden? Should I stay with my fund manager until I quit so that it counts as my only income for the year? Should I put my salary in the deferred compensation plan for the year and then sell all of the holdings?
Jay asks (at 55:35 minutes):
I’m 40 years old and I live in Thailand. I have my sights set on financial independence within the next five years.
I have student loans that I have to repay by working a certain number of years at the institute that granted the loan. I won’t owe anything if I stay at my current workplace until 2037. However, if I quit my job, I’m on the hook for $270,000. For every year that I stay at this institution, the payback sum is $22,000 less.
I don’t hate my job, but I want the option to quit and explore something else, especially after I reach financial independence. I’ll have $520,000 saved by 2025, and my annual expenses are $12,500. I could pay the $270,000 loan amount in cash with my savings, or I can choose an installment payment with seven percent interest. What should I do?
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