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Better Risk Free Return than a CD Ladder?
Old 01-30-2016, 08:23 PM   #1
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Better Risk Free Return than a CD Ladder?

Hi Everyone

I currently keep the cash portion of my portfolio in a 5 year CD ladder. Outside of a 1% +/- savings accounts (Ally, etc.), is there anything else out there I should be looking at?

I feel like the answer is no. But, I want to make sure I'm not missing something.

I am aware of Credit Unions that offer 3% +/-, but I look past them because of the deposit maximum (for the higher rate) and the transaction requirements (i.e. X number of debt card swipes).

I'm trying to understand the best course of action for the cash in my portfolio, so I don't have to sell assets in a down market or create a tax event at an inopportune time.

Meaning; I will need to use this cash to cover expenses when I am full FIRE and as I rotate from w*rk to w*rking at my leisure.

I don't want to chase yield, but I do want to make sure I am taking advantage of the best options available.

Does that make sense?
Thx.
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Old 01-30-2016, 08:34 PM   #2
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My only thought is that there are different kinds of risk. Your are rightly thinking about the risk of declining value in stocks and how to protect yourself by not having to sell equities to eat, when they are down. CDs are not subject to that risk. Unless the bank and the FDIC both go broke, you'll get your money back at maturity.


But CDs are subject to other risks. The biggest risk is inflation, right now you can barely keep up with inflation if you are careful about yield and we're not even looking at taxes or opportunity (lost) vs other investments.


But at age 70, DW and I do keep enough money in a 5 yr CD ladder that we wouldn't have to sell any stocks for a long time if the market goes south, presuming our PBGC pension and SS don't change.
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Old 01-30-2016, 10:05 PM   #3
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I'm guessing the lack of responses is an indication that no one here has any better risk free investment ideas than the one's you've already highlighted. I know I sure don't.
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Old 01-30-2016, 10:28 PM   #4
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I have invested in some of the target maturity bond funds as somewhat of a CD substitute. While the underlying portfolio is investment grade, they have credit risk similar to an investment grade corporate bond portfolio... so more than a CD, but they are more convenient for me as I can buy them in my IRA and not have to have multiple IRAs with different banks.

They have similar interest rate risk to a brokered CD. The underlying bonds mature in the target year and there is a terminal distribution at the end of the target year.

If I were doing a 5 year ladder I would probably use and online savings account for the first couple years and CDs or these for years 3 to 5. The 2020 iBond and Bulletshare return a tad over 2.5% based on their current market prices.
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Old 01-30-2016, 10:48 PM   #5
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I am in a similar position as the OP. It's amazing that this came up because I have spent the last two days researching rates for SPDAs <duck>. SPIA and SPDA are the only annuity products that I think I would ever consider. These have protection from the State Guaranty Association rather than FDIC so I plan to learn more about the associated risks before my next chunk of CDs mature next year. I really have to thank kimcdougc and MBSC for bringing this option to my attention. Two sources for rates are embedded in the quote below.

Quote:
Originally Posted by MBSC View Post
An SPDA is an annuity not a CD. One is FDIC insured, the other may be backed by your state guaranty association (SGA). Fidelity's "CD-type" annuities can be found here: Guaranteed Rates for Tax-Deferred Fixed Annuities (SPDAs) Available Through Fidelity

You can get a 3.10% 5 yr annuity outside Fidelity. MYGA Rates
The "CD-type" annuity rates on that page do usually get updated around the first of each month.
I hope others will contribute their thoughts on the pros and cons of an SPDA vs. a CD.
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Old 01-30-2016, 11:02 PM   #6
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Major con of a SPDA is surrender charges. If you want/need you money before maturity you can get it but at a significant cost whereas a CD typically costs 1/2 a year interest or say 1-2%.

Credit risk is only a smidgen more than a CD IMO. It has been a long time since a major insurer went into receivership and none did during the financial crisis.
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Old 01-31-2016, 08:44 AM   #7
Confused about dryer sheets
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Quote:
Originally Posted by pb4uski View Post
Major con of a SPDA is surrender charges. If you want/need you money before maturity you can get it but at a significant cost whereas a CD typically costs 1/2 a year interest or say 1-2%.

Credit risk is only a smidgen more than a CD IMO. It has been a long time since a major insurer went into receivership and none did during the financial crisis.
I have thought about SPDAs but your right the surrender charges would not be fun.

But, the real reason I have ruled them out at this point is because depending on market conditions I will need access to this cash. I feel like I would be putting myself in a situation where I'm would be asking myself if I want to, take a loss (sell stock), create a taxable event (sell stock) or pay a surrender charges. This takes me down another rabbit hole regarding divided reinvestment, that is better in its own post.
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Old 01-31-2016, 09:26 AM   #8
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I have thought about SPDAs but your right the surrender charges would not be fun.

But, the real reason I have ruled them out at this point is because depending on market conditions I will need access to this cash. I feel like I would be putting myself in a situation where I'm would be asking myself if I want to, take a loss (sell stock), create a taxable event (sell stock) or pay a surrender charges. This takes me down another rabbit hole regarding divided reinvestment, that is better in its own post.
Still looking into this, but I don't think the surrender charges would be an issue for me because my ladder is for annual spending. For a 5 yr ladder to cover expenses, 2%/yr for a total of 10%, I could probably find some ways to mitigate this concern(i.e split ladder between CD and SPDA, larger emergency fund, line of credit, etc.). Some/most of the products allow withdrawal of interest and 10% of account balance annually (not sure if this is cumulative, though).

I have more concern with buying a product indirectly from an obscure Insurance company. Buying through Fido or directly from Met Life for example may barely beat CDs rates
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Old 01-31-2016, 09:47 AM   #9
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What about buying a stable value fund in tax-deferred (and do an asset swap with taxable if you need to sell)?
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Old 01-31-2016, 09:55 AM   #10
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Unless you are expecting mortality credits or want the insurance aspect I would not think about SPIAs or SPDA.

Maybe look at IBonds, or high quality date specific bond funds or if you have a retirement account with a stable value fund that might give you a bit more very low risk return.
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Old 01-31-2016, 09:57 AM   #11
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We had some I-bonds when I retired. The surrender penalty in years 2-4 is only 3 months interest, no penalty after 5 years.
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Old 01-31-2016, 09:59 AM   #12
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I assume you have a paid off home. If not, your mortgage is a good risk-free place to put money.

You can get it back out with a HELOC, if you need it.
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Old 01-31-2016, 10:30 AM   #13
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Originally Posted by Senator View Post
I assume you have a paid off home. If not, your mortgage is a good risk-free place to put money.

You can get it back out with a HELOC, if you need it.
+1, of course paying down debt usually has a better return than a CD.
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Old 01-31-2016, 10:30 AM   #14
Confused about dryer sheets
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Quote:
Originally Posted by Senator View Post
I assume you have a paid off home. If not, your mortgage is a good risk-free place to put money.

You can get it back out with a HELOC, if you need it.
No debt... But this is good to point.
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Old 01-31-2016, 10:33 AM   #15
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Originally Posted by Independent View Post
We had some I-bonds when I retired. The surrender penalty in years 2-4 is only 3 months interest, no penalty after 5 years.
I am using I-Bonds but the 10K limit (per person) leaves me looking for more options. I do like the inflation protection.
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Old 01-31-2016, 11:47 PM   #16
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Quote:
Originally Posted by pb4uski View Post
I have invested in some of the target maturity bond funds as somewhat of a CD substitute. While the underlying portfolio is investment grade, they have credit risk similar to an investment grade corporate bond portfolio... so more than a CD, but they are more convenient for me as I can buy them in my IRA and not have to have multiple IRAs with different banks.

They have similar interest rate risk to a brokered CD. The underlying bonds mature in the target year and there is a terminal distribution at the end of the target year.

If I were doing a 5 year ladder I would probably use and online savings account for the first couple years and CDs or these for years 3 to 5. The 2020 iBond and Bulletshare return a tad over 2.5% based on their current market prices.

+1
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