After more than a decade of the Fed’s reckless monetary policies — in particular, persistent near-zero interest rates and their relentless de facto currency-printing campaign better known as “quantitative easing” — the financial system has been so badly distorted that conventional wisdom regarding strategic management of personal finances has been officially turned on its head.
In fact, the entire monetary system is wobbling like a punch-drunk boxer who doesn’t appear to have the stamina to survive the current round, let along finish the contest.
Judging from my current email, more and more of you agree and, as a result, are becoming interested in protecting your wealth.
I’m happy to see it!
In particular, reader Jen asked:
Should I focus on contributing as much to my 401(k) retirement plan as possible, or allocate some of it to buy precious metals — and if so, how much?
Unfortunately, there’s no one-size-fits-all answer; how you allocate your retirement savings is entirely up to you and nobody else.
In my case, after faithfully contributing the maximum amount to my 401(k) retirement plan for many years, I eventually found the courage to limit my 401(k) contributions to only take advantage of the full company match and use the residual cash to purchase wealth insurance in the form of physical gold and silver. There was even a period where I went a step further and stopped contributing to my 401(k) altogether — although that didn’t last long.
I then continued to limit my 401(k) contributions to only my employer match until I reached my targeted allocation of physical gold and silver.
Buying Wealth Insurance
So … how much physical gold and silver is required to protect the hard-earned wealth that’s locked-up in your 401(k) retirement plan?
In his book The Death of Money, author James Rickards notes that:
A useful way to think about (precious metal’s) insurance function is that a 500% return on 20% of a portfolio provides a 100% portfolio hedge.
I know what you’re thinking: What the heck does that mean?
If James is correct — and I believe he is — it means that you can fully protect the wealth that’s currently locked in your 401(k) plan by keeping precious metals in your possession equivalent to 20% of your total nest egg. Here’s a slightly over-simplified example:
Let’s say you have a $50,000 nest egg: $40,000 in your 401(k) and $10,000 in physical gold and/or silver. In this case, $10,000 in precious metals represents 20% of your total savings.
Now let’s say the dollar collapses and its value essentially falls to zero. If that happens, worst-case, the $40,000 in your 401(k) would be:
$40,000 x 0 = $0
Rickards (and many others) estimate that if the dollar tanks, the value of precious metals in your possession will increase five times (500%). I think that’s extremely conservative — but let’s stick with the conventional wisdom of five times. If that’s true, then the $10,000 held in precious metals would now be worth:
$10,000 x 5 = $50,000
Do you see what happened? Although your 401(k) was completely wiped out, the post-collapse value of your physical gold (and/or silver) soared to $50,000! In other words, the dollar became worthless, but the purchasing power of your nest egg remained unchanged — and that is how a portfolio protected with precious metals acts as wealth insurance.
Protection Strategies
If you’re considering a little wealth insurance to protect the retirement nest egg you’ve currently got locked up in your 401(k), there are multiple options to consider, depending upon: 1) your tolerance for early withdrawal penalties; 2) your confidence in the on-going viability US dollar and, most importantly; 3) how much of your nest egg you want to insure.
Keep in mind that while a 20% allocation in precious metals should provide 100% protection, most people typically choose to hedge their nest eggs with a 10% allocation — or even less. That being said, assuming your goal is to fully hedge your nest egg with a 20% portfolio allocation in precious metals, here are five potential ways to get there:
1. If you’re certain collapse is imminent, you could pull 20% from your 401(k) immediately, take the tax and penalty hit for early withdrawal, and then buy precious metals with the remaining proceeds. Then again, if you were that certain of collapse, you’d probably want to pull all your money out of your 401(k) and just replace it with physical precious metals.
2. If you believe a collapse is probable, but not imminent, you could temporarily stop your 401(k) contributions until you acquire enough precious metals to make up 20% of your portfolio. Then, resume allocating 80% of your savings to the 401(k) and 20% to physical precious metals.
3. If you believe a collapse is possible, but more than several years away, you could contribute only enough to your 401(k) to get the company match — and use additional funds to buy precious metals a bit more gradually, until 20% of your nest egg consists of precious metals.
4. If you think collapse is a long shot, but still want insurance — just in case — you could continue maximizing your 401(k) contributions and only purchase precious metals whenever you find a little extra spending money.
5. You could borrow from your 401(k) and use the proceeds to buy physical precious metals — if possible, equivalent to 20% of your total retirement nest egg. Yes, if you lose your job you’d have to pay back the loan within a short time frame in order to avoid withdrawal penalties and taxes. However, since the proceeds are only being used to exchange fiat dollars for real money, paying back the loan shouldn’t be difficult.
Of course, you could also pass on wealth insurance altogether — essentially betting on a strong US dollar, healthy world financial system, and the ability of the powers-that-be to continue holding things together far into the future. But that’s for you to decide.
How will you know which path is the right one for you? The only sure way to tell is by observing how well you sleep at night after making your decision.
As for me … I sleep like a baby.
Photo Credit: Athena Lao
Are you still pimping metals? how did the recent drop make you feel? when the market lost 30% hung in and it came back stronger. Love your insight but figure you for a negative thinker gold,food ect.
You need to adjust your thinking, Joe. I don’t know about you, but I like to buy things on sale when the prices are as low as possible. I hope the price of gold and silver continue to drop until the system collapses.
Remember, precious metals aren’t an investment — they’re insurance. If you are buying gold as insurance, wouldn’t you want to pay the lowest price possible?
Any price drop is a gift to all of us buyers who understand the real role of gold and silver — more so for those who have yet to buy any wealth insurance. However, I understand that mindset is difficult to grasp for most folks.
No matter what price gold is selling at, the number of ounces in my possession remain the same. When you understand why that’s important, then you’ll be further along than most folks.
I’m sorry but I would have to disagree with you on this. First of all you are counting on a complete collapse of the dollar, which even if it happens I don’t believe it will be worth zero. Second, you are not investing in the dollar or the U.S.A. you are investing in companies. Companies that will still generate returns for its investors, be it in Dollar, Euro, Pesos, gold, silver, etc.
When you invest in a company, you own part of a business that produces goods and services and which in turn generates a profit – if it’s a good business.
Gold isn’t a productive asset. Its value fluctuates wildly based on speculations and people who are gambling on the collapse of governments and/or its currency.
I’m not saying that the dollar will never collapse, all I’m saying is that thinking the dollar is the only currency in the world or the only thing that matters is a very narrow way of looking at how the world works.
Fair enough, Aldo. I knew this piece would see a lot of resistance. That being said, it doesn’t advocate a 100% allocation to precious metals — rather, only 20%.
I bet you don’t consider it gambling if I buy a home owner’s insurance policy. If so, then why would you consider people who buy precious metals to be gambling?
If you want to avoid wealth insurance altogether, keep in mind that not all stocks are created equally. If the dollar collapses, stocks of companies that deal in tangible assets (e.g. Union Pacific railroad, Exxon, ConAgra, etc.) will come out better than stocks that don’t — especially financial company stocks like VISA, Bank of America, etc.
As for gold’s value “fluctuating” — that is wrong. It is the price of the dollar that fluctuates relative to gold. An ounce of gold buys essentially the same amount of oil today that it did in 1964. It also buys about the same amount of wheat that it did 2000 years ago. You can’t say that for any fiat currency.
True, gold isn’t a productive asset. It’s wealth insurance.
And the dollar is the only currency that matters, absent the gold standard. It is the world’s reserve currency — although not for much longer. When it finally fails, it will drag down all of the world’s other currencies (with the possible exception of the euro, for reasons I won’t get into here) because it is the standard that all other currencies are currently valued against.
Only then will gold’s true purchasing power become apparent to everyone.
Thanks for the excellent comments!
Thank you for pointing out that the _value_ of gold is not changing, merely the price of the dollar relative to to gold. That is a key concept that I have only recently started to understand.
I have only been in the workforce for one year now as a mechanical engineer at a defense contractor. Seeing as I don’t have a lot of cash built up yet and hardly anything to call a nest egg, but understanding that the collapse of the dollar is literally inevitable at this point, I have started dumping my income into tangible assets that will come in handy during a collapse. This is how I insure my wealth as opposed to buying precious metals. At what point does buying precious metal make more sense than other tangible assets?
That’s a smart question, Ben, but one you’ll need to answer for yourself. In my case, I made sure I had enough food and water to cover my family of four for six months before I started buying precious metals. I also made sure I had store of sanitary and other living supplies, as well as firearms and ammunition on hand too.
There is going to be a complete collapse! What are you looking at to argue against this? Sound fiscal policy? Free money to Wall St has created this Mother of All Bubbles.
The speculation of the collapse of the government is a sure bet. This is not all by accident.
Stupid question – how do you actually buy gold/silver? Do you store it?
Aside from some minor coin collections, I’ve never thought of it. I suppose I will inherit my stepfather’s coin collection some day too.
Marcia: You can buy gold and silver online or from local coin shops. I trust APMEX, but there are plenty of other sites that sell online too.
Len–let’s say you’re living in the post-dollar collapse world. Do you anticipate using a few shavings from your bullion to buy groceries ? I’ve never understood clearly the mechanics of using precious metals to pay living expenses post-calamity. How do you envision the economy post-dollar collapse?
Kurt, I shared my thoughts on what a post-collapse world would look like here:
http://lenpenzo.com/blog/id17707-economic-collapse-101-what-will-it-look-like-and-how-it-may-start.html
Bottom line: I believe there will be no zombie apocalypse. Unless the powers-that-be completely mismanage the situation, there is no reason for the world to end as we know it — although life will be more difficult and society will become a bit more dangerous because the standard of living for America’s middle- and lower-classes is going to drop a couple of significant notches.
I’m sure people living during the height of the Roman Empire never thought it would fall either.
What if you’re wrong?
*I ask as a thought experiment.*
Mike
The way I see it, if he’s wrong he still has 20% metals, which probably won’t be valued at zero either.
Well … Because gold and silver is wealth insurance, I’ll argue that the question is irrelevant. People who buy car and home owner’s insurance aren’t “wrong” if they go through the year without ever making a claim.
But I’ll be a good sport and play along … As Rezdent noted, if the dollar doesn’t blow up, then I’ve still got my gold and silver. No harm, no foul — in the mean time I bought a lot of peace of mind!
Now I’ll turn the question back to you: What if I’m right — and you have no wealth insurance?
Who says I don’t have wealth insurance? But I’ll play along, as this is just a thought puzzle.
What do you suppose is the endgame?
Total Societal Collapse?
Years of massive hyperinflation?
In the event of a US only event, I suppose that foreign securities and/or currency would be a hedge.
In the event of a World event, I’m concerned that the level of damage to the economic engine would cause such massive shortages that having money/gold/commodities would be irrelevant. Better to have land and guns and water and be friendly with the people at thunderdome.
I believe we’re officially in the end game now, Mike. Our debt-based money system, which requires an ever-growing amount of debt to remain viable, is in its final death throes; the proof is in the math.
The damage will be complete devastation. Food, water, protection barterable items and gold and silver will be needed. The world is not ending. The Elites are simply crashing it so they can reset not only the financial system, but the societies of the world. The financial aspect is to ensure that nobody can afford NOT to go along with oppressive measures they are going to unleash.
There are strategies that hold up to 25% in Gold that have a ~9% CAGR with less volatility and with a 30 year track record. With a portfolio like this you don’t have to be right or wrong.
http://www.crawlingroad.com/blog/2008/12/22/permanent-portfolio-historical-returns/
If we do purchase precious metals, where do you recommend storing them?
Some place where nobody will find them. Lucky for us, we live in a very big world with lots of really good hiding places. Remember that stash of $10 million in gold coins that a couple found in Northern California? It was buried undiscovered for more than 100 years before they finally stumbled upon the partially unearthed stash.
I’ll admit that a few months ago I would have said what you are writing is hokum, but then I read Michael Lewis’ book “The big short, inside the doomsday machine.” It is about the collapse of the sub-prime mortgage financial market. How the entire financial system allowed that terribly calamity to happen, and essentially didn’t care. The fed certainly dropped the ball in that situation and it could happen again. Protecting your wealth isn’t a bad thing, and the value of the dollar just doesn’t feel tangible. It isn’t really backed by anything.
Playing devil’s advocate:
In the post-dollar world, who’s to say gold and silver would be valued? What if people started paying for goods and services with seeds, something that is renewable?
I guess anything is possible, Jared. But I believe gold and silver’s status for more than 5000 years of human history as the premier stores of wealth ensures that they will always be coveted.
“I believe the probability a dollar collapse before the end of this decade is now closer to 95%.” I haven’t even considered that possibility.
You’re not alone, Stefanie. Outside of food, housing and oil prices, most people do not pay attention to the machinations and health of the world’s financial system and overall macro-economy.
Len, I agree with you on the precious metals idea. But we’ve been working to pay off our mortgage ASAP so we at least have a roof over our heads if (when) inflation, etc. hits. Should we should continue to do that or should we divert some of our extra mtg. payments to more precious metals? THANKS!
Lauren: Your question is an excellent one, but to answer it properly, I need to address it in a blog post. I promise to do that within the next two weeks.
I used to be a HUGE proponent of paying the mortgage down early. In fact, it was one of the first topics I ever discussed on my blog:
http://lenpenzo.com/blog/id477-paying-off-your-mortgage-is-a-no-brainer.html
By late spring of 2009, I finally started wavering on the wisdom of that philosophy, and I wrote about that too:
http://lenpenzo.com/blog/id617-paying-off-the-mortgage-early-not-so-fast.html
For now, I will just say that, as I noted in this post, by 2010 my about-face became official: I was certain that paying off my home loan was no longer in my best interest — after more than 10 years of faithfully making extra mortgage principle payments.
Again, you need to make your own decision.
I promise I’ll discuss the present and possible future ramifications of my decision to stop paying down my mortgage early (both pro and con), and take a historical look at how existing mortgages were handled in other nations that suffered from a currency collapse in the coming article.
Thanks in advance for a new post on this! I’ve read the other posts, and they don’t address my situation; 7 yr. ARM at 2.75% gives us low enough pmts. that we can double principal pmts., paying home off by the end of the 7 yrs. (when the rates rise.) I look forward to reading your new posts!
I totally agree with you. It’s sad how the system is going down. People are having to scrape and either do two or three jobs. Kids aren’t being raised by their parents anymore as both of them have to work just to survive.
In 1930s Gold was at about $32 and Ounce and you could buy a lot for $32, including 2 piece Mens Suit, 1 month of Groceries and more.
In today’s day, you cannot buy a men’s suit for $32 and barely any groceries for that matter. But! the value of Gold isn’t $32 for 1 ounce today. It’s more than $1750 which CAN buy you that suit and groceries…
Some food for thought. If you can’t buy 1 ounce of gold, buy 1 gram and start making that your savings account. It doesn’t matter where you start, but start somewhere. I’m happy to help where to get the lowest cost gold around.
Thanks for the great article!
I am a middle aged male, but have very little in my retirement because I never really see myself retiring in today’s America. I have around $7500 in my 401k. Should I pay the penalty, which would give me about $4500 afterwards and put this money toward gold and silver. Once the reset has occurred I should be looking much better for my later years. I’m thinking the reset has to happen within the next five years. This would put me in my early to mid 40s after its over.
Jarod: Only you can decide what is best for you. If you are certain that there will be a reset within the next five years that will devalue the cash in your 401k plan by 40% or more (based upon the numbers you gave me), then the 401k withdrawal penalty and taxes you pay now would be worth it.
Another option: Consider rolling over the funds in your 401k to a precious metals IRA (but only one that allows you to keep the physical metal in your possession; all other precious metals IRAs carry the same counterparty risks as other paper-based instruments). You can read more about that here:
http://lenpenzo.com/blog/id29335-the-pros-and-cons-of-precious-metals-iras-and-third-party-storage.html
Although it’s sad to know that a collapse is possible, I would like to be prepared when that happens. And I just so happened to like gold anyhow. I’m 24 and would like to purchase my first gold bar.
I went to apmex and honestly, i’m confused. There’s Heraeus, Credit Suisse, Valcambi, Perth Mint. Does it matter?
Thank you for your time.
Hi, Kriz. Yes, it can be overwhelming for first-time precious metals buyers. The good news is, when it comes right down to it, as long as you buy from a reputable dealer — and APMEX is very reputable — gold is gold is gold. I do all of my precious metals buying from APMEX. For more tips on buying precious metals, read this post (although it focuses on coins and rounds instead of bars … but the gist is the same):
http://lenpenzo.com/blog/id33261-a-first-time-buyers-guide-for-gold-and-silver.html
If you have more questions, drop me an email: len@lenpenzo.com
Len,
Question for ya. When the dollar collapses and goes to zero (worst case), what will happen to our credit card balances, and the mortgage balances? Will they go down with the dollar to converted into the next reserve currency or what? And how would be buy things (ie: groceries, pay bills, mortgage, auto, etc.). And if we manage to actually keep our jobs, how would we get paid?
And is it wise to buy more silver since it is more affordable right now?
I some what understand that gold and silver stay together with a 15 to 1 ratio or something like that, so I’m sure it will go up expodentially.
Thanks in advance.
Kim
It’s hard to say what will happen if the dollar completely collapses and becomes worthless, Kim, because the government can change the rules at any time.
Obviously, they will need to issue a new currency. Usually how it works is they will issue, say, 1 unit of the new currency for every 10 of the old currency. So let’s say you had $10,000 in a bank account on Friday evening (in old US dollars). On Monday morning you would wake up but the same account would have only 1000 units of the new currency. Now here’s the rub: the purchasing power wouldn’t change — so essentially, in that example, you’ve lost $9000 of purchasing power! This is why people hold precious metals as insurance — because it would still take 10,000 units of the new currency (but probably much more!) to buy the same ounces of gold or silver, thereby protecting your wealth.
For credit cards, please check out this article written by one of my readers about her experience during Brazil’s hyperinflation event in the 1990s; in it, she mentions how the credit card companies reacted to the plunging Brazilian currency …
https://lenpenzo.com/blog/id24347-brazilian-hyperinflation-a-reader-explains-what-life-was-like-2.html
With respect to mortgages, I suspect they will follow something similar to what Germany did during their Weimar hyperinflation event. In the book When Money Dies by Adam Fergusson (which I recommend highly to anyone who is interested in learning more about life during hyperinflationary times), he notes that Germany passed a law that revalued existing mortgages to the new currency based on the value of the original mortgage (in the old currency) in equivalent ounces of gold at the time the loan was issued.
Of course, the trick for mortgage holders is to recognize the dying dollar beforehand and pay off the mortgage with the worthless dollars before the law could be put into effect. I fully intend to do that; I will be telling my readers when that day comes.
Regarding employment: Companies typically do not go out of business during hyperinflationary events — unless the hyperinflation destroys the supply chain to the point that the company is unable to operate. One of your best protections from the ravages of hyperinflation is being employed, because employers are forced to continually raise your pay to at least a point that allows you to survive (pay rent, utilities and food).
Regarding gold vs silver, in March 2020, silver was at its cheapest price relative to gold in all of human history. Before 1900, the gold-silver ratio averaged 15 or so. But during the last 100 years, the gold-silver ratio has generally run between 30 and 50.
Again, if you’re interested in what life was like during hyperinflationary events, I highly recommend Leasi’s article which I linked to above, and the book When Money Dies. They are both excellent and informative reads.
You may also want to read my weekly Black Coffee columns (there’s a new one every Saturday), where I keep my readers informed on the latest status of the monetary system.
Len,
Thanks so much for the explanation on the mortgage scenario. I read what Leasi had to say as well regarding the credit card debt. So if the credit cards have an APR I can understand why the payments would double each time, but what if you have an unsecured personal loan at a fixed rate/term? Would that be treated the same as the mortgage scenario? so if I were to consolidate all my credit cards into that type of loan, I may have been able to safe guard myself a bit? I mean I have a mortgage and credit card debt that I am no way gonna be able to pay off anytime soon, so just want to know if this strategy will help? And again how would you pay for groceries? Would there be physical coins (ie: Gold or Silver) to use or do you think we will be digital (not to be confused with electronic which we have today) where each digital coin has a serial number (like bitcoin) and can be fully traced on what you buy. Further, unable to by bullets for example? I know back in 2016 I tested this when I bought over $100’s in groceries in Walmart. I included one box of ammo in that purchase and paid the bill with my BofA credit card. It was declined. However, when I had the cashier back out the box of ammo, the card went right through! I know that the dems are trying to grab our guns and have been unacceptable, but what better way to do it, by making it to where you can’t get ammo, so guns will be worthless? I will keep following you as we go through this. I am a mortgage underwriter working a large bank and we have been seeing loans that are in forebearance status since around Mayish and the interest rates really can’t go any lower, so I know the time is near!!
Thanks again,
Kimberly
I’m not sure what would happen to the credit card debt. I don’t see why it couldn’t be revalued based on gold as well. Unless there is an extended period where both of these are in effect: 1) nobody is willing to accept the dying US dollar; and 2) a new currency hasn’t been issued … then transactions for groceries and other goods and services would have to be conducted either by paying with precious metals or via barter; I find such a scenario to be highly unlikely though. That being said, if it does happen, those who have so-called “junk silver” will be in a superior position because they are known quantities of silver. As such, everyone will know you can buy, for example, a loaf of bread for a pre-1965 dime and a gallon of gasoline or a pound of chicken for a pre-1965 quarter.
Thanks again for your reply. This gives me a better idea of what to expect and what to better prepare for. These are very scary times for sure.
All we can do is pray that the it will be a quick and easy transition into the new currency, if applicable, and that our world will recover as quickly as possible thereafter.
I am truly concerned of losing my home, and of course extremely saddened that my 401K will be wiped out.
Anyway, it is what it is!
Take care. I will keep following your blogs and so forth.
Thanks again,
LEN,
Love your financial advice!
With so much financial uncertainties in the US economy, endless stimulus checks issue, feds out of money printing, I felt the strong need to financially educate myself.
I am currently purchasing gold and silver for a while now. And felt better now that I at least have some of it for future needs, if there comes a time of the US dollar fiat completely losses its value.
Thank you, Eddie — and good for you!
Len,
I have stopped contributing to my current employer sponsor 401k and decided to instead invest in gold with the money that was going into my 401k every pay check. But I still have two concerns which I have been trying to find a logical answer to them and finally come to my own conclusion that will fit my situation.
1. I am unable to rollover my current 401k employer sponsor retirement investment amount due to their rules. The denial of having the ability to rollover my retirement now is because I am still employed with the company I work for. Therefore, now I changed to 0% contribution.
My question is: Would it be a good approach to change my current retirement amount to a Money Market 401k to minimize the loss when it comes? I do not see another solution than paying for fines and taxes if I take out my retirement.
2. The gold I buy, can this be used for an IRA form of retirement account when it comes to tax reporting in order to avoid paying extra taxes?
Thank you,
I am not a financial advisor, so take the following discussion with a grain of salt.
Regarding question 1: You have to decide whether you believe the purchasing power of the dollar is going to fall faster than value of the stocks in your retirement account. If you believe the dollar will completely disintegrate down the road, then the obvious answer would be to keep the majority of your 401k portfolio in stocks. Keep in mind that in a highly inflationary environment, the stock market can rise in nominal terms, but fall in real (inflation-adjusted) terms.
Until 2021, I think the stock market gains were at least keeping pace with inflation; I think that is now changing. In a lose-lose situation where either choice results in lost purchasing power, it makes sense to make an educated forecast regarding how much you’d expect to lose if you maintained your 401k holdings during a meltdown (regardless of whether they were in cash or stocks). You may (or may not) decide the taxes and penalties of prematurely cashing out your 401k early (and moving some or all of them into gold and/or silver) would still be better than the ultimate impacts to your 401k after riding out the coming storm.
Regarding question 2: Yes; there are precious metals IRAs out there where you can buy physical precious metals and hold them in your possession.