Cash, CDs, Short term bonds, I-Bonds and ER Income

[nun]

ER is coming closer and closer for me and eventually I'll be without that regular employment check. I've done something to replace it as I get a rental check of $1200/month form an apartment I own, but my portfolio is probably not well arranged for the new phase that I'm approaching.

I have a eighteen month's cash in my checking account and the rest of my AA is 50/50 between equities and high quality intermediate bonds.....lots of Wellesley, Total Stock Market, Total International, and Total Bond Market type funds spread across a couple of low cost providers. I do have a small deferred annuity as well, but I'm just wondering if I really need something in CDs or shorter term bonds given that I have almost 50% of my income needs covered by the rent I get.

 

[samclem]

Take a look at your equities and see what their dividend yield is, that will also be income you can probably count on (plus your rents and your annuity) if equities take a tumble or bond yields go up. Dividends might dip a bit, but you'll get most of them.
If such a situation were to occur, yes, having some cash equivalents might be handy. Those intermediate bonds will go down in price a bit, and it will take awhile before the portfolio managers cleanse their ranks of the old low-yielding bonds for the new higher-yielding ones (that's the risk you take in holding these). So, being able to bridge that time with some cash may help you avoid selling losers (equities and bonds) and give your portfolio a chance to recover.

As you know, that rental check isn't guaranteed either, so a vacancy there would be another thing you can insure against with a bit of cash.

To put a WAG number on it: In your boots I'd probably want enough cash to cover 4-5 years of the gap between your expenses and the rent+dividends+bond interest+annuity. That won't cover every possible calamity, but it's my guess at the best tradeoff for the lower interest you'll get for the funds put into cash. A CD ladder might work well for this money--every year you don't need it, just roll that maturing CD over.

 

[heeyy_joe]

Based on the information you've shared I do not think you are holding too much of a cash position. I agree that a cd ladder is not a bad way to go.

 

[nun]

To put a WAG number on it: In your boots I'd probably want enough cash to cover 4-5 years of the gap between your expenses and the rent+dividends+bond interest+annuity. That won't cover every possible calamity, but it's my guess at the best tradeoff for the lower interest you'll get for the funds put into cash. A CD ladder might work well for this money--every year you don't need it, just roll that maturing CD over.

I had a look at my distributions for last year and it was easy to find them over at Vanguard for my IRAs and ROTHs and along with my rental income they cover my expenses. I then went over to TIAA-CREF to see the distributions on my 403b funds.....interestingly I can't find any distributions at all or information on them. So I compared last year's total return of Vanguard Total Market Index (14.43%) and CREF Equity index (14.15%) and they are very close when the 0.43 expense ratio of CREF is taken into account. So maybe that's something about TIAA-CREF's deferred annuity funds, they don't do dividends, just roll it automatically into the total return...anyway although it looks like I have enough from dividends and interest at vanguard I'll probably take another year or two of expenses in cash and set up a 5 year CD ladder so I'll have 20% or 40% of my annual budget available in a maturing CD in case of emergencies.

 

[samclem]

I'll probably take another year or two of expenses in cash and set up a 5 year CD ladder so I'll have 20% or 40% of my annual budget available in a maturing CD in case of emergencies.

Regarding the CD ladder: As an alternative to 1,2,3,4,5 year CDs, take a look at the Ally Bank 4 year "Raise your Rate" CD. When I did this exercise a year ago their rates were very good and their early withdrawal penalty was just 90 days. If the rates go up and Ally continues to stay ahead of the game you have 2 opportunities to bump up the rate. If they don't remain competitive you can just take the (very small) interest penalty and buy a CD somewhere else that year with some/all of your money. Break up your stash into 4 or 5 CDs with Ally and you've got better flexibility than a conventional CD ladder and (when I last checked) better interest rates, too. Again, do your own investigation to be sure, but it was a clear winner when I checked last.

 

[clifp]

+1 on Ally

I am not really in the market for a CD, except for my mom. But I was pleasantly suprised to see that Ally's were significantly (well that is a relative term in todays interest rate environment) than either PenFed, local rates, or the cds offered via Schwab.

Also it appears that penalty is 60 days interest for most of their CDs which with today's interest rates means only $20 or $30 on $10,000 CD.

 

[obgyn65]

I agree with this. I do have quite a few CDs laddered over the next 10 years at least.

Based on the information you've shared I do not think you are holding too much of a cash position. I agree that a cd ladder is not a bad way to go.

 

[ronocnikral]

While I bank at Ally, and have 5 yr CD's with the idea of forfeiting the last 2 months' interest if need be, it isn't as cut and dry as it seems on the surface. If their rates were killer, I would do it again and take the risk of my money not being as liquid as it may seem. Of course, if they ever bring back and interest rate component for I-bonds, I'm all in.

http://www.early-retirement.org/forums/f28/ally-bank-63722.html#post1248693

 

[RobLJ]

To put a WAG number on it: In your boots I'd probably want enough cash to cover 4-5 years of the gap between your expenses and the rent+dividends+bond interest+annuity. That won't cover every possible calamity, but it's my guess at the best tradeoff for the lower interest you'll get for the funds put into cash. A CD ladder might work well for this money--every year you don't need it, just roll that maturing CD over.

An alternative to this would be to have one year in cash and a bond ladder for 2-3 years out of the Guggenheim Bulletshares ETFs, which hold a fixed amount of bonds that mature in a particular year. This could be a portion of your overall bond portfolio (I think you said that was 1/2 of your allocation). These will largely just draw the yield, since they are like holding an individual bond. As bonds in the ETF mature, they go into a MM equivalent, then the principle is returned at the end of the year of expiration.
I'm considering this for our taxable portfolio and for some holdings in the tax-advantaged side.

 

[FIREd]

Regarding the CD ladder: As an alternative to 1,2,3,4,5 year CDs, take a look at the Ally Bank 4 year "Raise your Rate" CD. When I did this exercise a year ago their rates were very good and their early withdrawal penalty was just 90 days. If the rates go up and Ally continues to stay ahead of the game you have 2 opportunities to bump up the rate. If they don't remain competitive you can just take the (very small) interest penalty and buy a CD somewhere else that year with some/all of your money. Break up your stash into 4 or 5 CDs with Ally and you've got better flexibility than a conventional CD ladder and (when I last checked) better interest rates, too. Again, do your own investigation to be sure, but it was a clear winner when I checked last.

Thanks for the info. I have never banked with Ally ands usually buy my CDs either from USAA or Penfed. But I had been looking for a CD for a while and Ally's "raise your rate" CDs seemed to be relatively attractive (paying more than "lock your rate" CDs elsewhere for the same maturity). I decided to go with the 4-yr maturity.