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Cash management strategies in ER - Advice needed
Old 12-21-2007, 05:04 PM   #1
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Cash management strategies in ER - Advice needed

Hello,
I am nearing ER, so am starting to get into the nitty gritty of how I'll manage my accounts.

Today, I keep my cash in a Vanguard NJ Muni money market fund, so pay no taxes. Due to my tax bracket, this is a good deal while I'm working.

Once I ER, I may get a better deal using taxable CDs since my fed tax rate is probably going to be 25% - or even 15 % in the first couple of years.

My dilemma:

Today, CDs are yielding approx 4.9-5%. Down from 5.25% not too long ago.
If I wait till ER at the end of April (I just can't say beginning of May!!), who knows where CD yields will be.

On the other hand, if I build a CD ladder today (3 years cash), I lock in the rate, but lose out in 2008 with higher taxes on the interest.

If you have already ER'd or have your plan set, I'm very interested in hearing how you're managing your cash to get most yield and pay the least taxes.

Regards,
ww.
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Old 12-21-2007, 05:14 PM   #2
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It's practically a hobby for me. I'm constantly adjusting the mix depending on current yields, estimated taxes, etc.

Currently, my portfolio is throwing off more income than I can spend, and it's pushing me into a higher tax bracket.

I buy CDs and bonds to fill out my ladder when they're good deals. Right now munis look like better deals, especially via discounted CEFs.
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Old 12-21-2007, 06:26 PM   #3
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Depends on your tax situation and how much is in taxable vs tax deferred. In our case we never have had more then 1 year's money in cash like accounts (Prime Money Market, Vanguard). Right now it's down to the smallest ever, 2 months worth. Early next year we'll sell some equity index funds to raise case. Will then buy more stock in tax deferred account to keep same equity %. Next year cap gain rates are zero in 15% and under brackets.
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Old 12-21-2007, 10:17 PM   #4
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I am keeping CDs and taxable money markets ONLY in tax-deferred accounts. I use a tax-exempt money market fund for my emergency fund.

If I need cash for expenses, I look at my tax-efficient stocks in my taxable accounts and sell some equity with a loss or with the least LongTerm cap gain. I then take the cash in my tax-deferred account and buy some similar (if a loss) or identical equity in my tax-deferred.

This is not a trick. But from a total portfolio standpoint, it gives me the same allocation to stocks before and after any sale, but keeps interest from cash tax-deferred while money for expenses is almost tax-free because it is return of capital (tax-free) with a little bit of LT cap gains (taxed at low rate).

Did you get that?

PS: Do you see how it doesn't matter how much is in tax-deferred and taxable?
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Old 12-21-2007, 10:20 PM   #5
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I Got It!

[quote=LOL!;592016]I am keeping CDs and taxable money markets ONLY in tax-deferred accounts. I use a tax-exempt money market fund for my emergency fund.

If I need cash for expenses, I look at my tax-efficient stocks in my taxable accounts and sell some equity with a loss or with the least LongTerm cap gain. I then take the cash in my tax-deferred account and buy some similar (if a loss) or identical equity in my tax-deferred.

This is not a trick. But from a total portfolio standpoint, it gives me the same allocation to stocks before and after any sale, but keeps interest from cash tax-deferred while money for expenses is almost tax-free because it is return of capital (tax-free) with a little bit of LT cap gains (taxed at low rate).

Did you get that?

quote]
Exactly my plan for next year. Glad to see you answered the question before I could ask it!

-- Rita
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Old 12-22-2007, 04:23 AM   #6
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Has anyone found a good book on the subject? One that lays out a variety of strategies and approaches.
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Old 12-22-2007, 07:03 AM   #7
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Originally Posted by chinaco View Post
Has anyone found a good book on the subject? One that lays out a variety of strategies and approaches.
I heard some good things about Income Investing Today-Safety and High Income Through Diversification by Richard Lehmann. I have just requested it from the library. His approach seems to be to diversify into a variety of income producing things like oil trusts, convertible funds, etc. Obviously, the risk is higher than laddered CDs but so is the return.
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Old 12-22-2007, 09:32 AM   #8
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Originally Posted by chinaco View Post
Has anyone found a good book on the subject? One that lays out a variety of strategies and approaches.
Did you read the related Vanguard white paper on income / withdrawal strategies? It was posted in a few other threads:
https://institutional.vanguard.com/i...P_TotalRet.pdf
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Old 12-22-2007, 11:22 AM   #9
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LOL, Thanks for the Vanguard link. This is right on target IMO. May be the best thing I've read on the subject.
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Old 12-22-2007, 01:36 PM   #10
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LOL, Thanks for the Vanguard link. This is right on target IMO. May be the best thing I've read on the subject.
You need to do more reading!

The Vanguard article is very basic about the need to balance your assets between fixed income and equities. It's a good start but you need to work yourself through some of the books on the FIRE reading list.
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Old 12-22-2007, 02:53 PM   #11
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LOL! Thanks for the link. Good reading.

GotaDimple - I plan to use your method in order to balance my asset allocation. The Vanguard paper also recommends it.

I guess I'm going to have to make a call on what will yield more income - a taxable CD now to preserve the approx 4.9% interest or a tax-deferred muni & hope that interest rates don't plummet.

Thanks all for the advice.
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Old 12-22-2007, 09:51 PM   #12
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Quote:
Originally Posted by 2B View Post
You need to do more reading!

The Vanguard article is very basic about the need to balance your assets between fixed income and equities. It's a good start but you need to work yourself through some of the books on the FIRE reading list.
That's probably true. But the FI vs Equity mix wasn't what I was talking about. What it said to me was equities historically provide more financial longevity (no surprise there), and equities have a better tax advantage over FI, as the examples showed. I have a pile of books next to my bed now I'm trying to digest. The trouble is exhaustion usually overtakes my reading time. But I keep at it.
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Old 12-23-2007, 09:55 AM   #13
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.... I have a pile of books next to my bed now I'm trying to digest. The trouble is exhaustion usually overtakes my reading time. But I keep at it.
The more I read and study investing, the more I believe in keeping it simple. One can create a portfolio that is well thought out with surprisingly little work. The hardest part, in my opinion, is understanding your risk tolerance and then selecting an AA you can go with even if we experience a major recession or a huge burst of inflation.

So it's good to read widely if that's what you really want to do but it's probably not necessary to construct a decent portfolio. Assessing your risk tolerance really requires you understand yourself first.

Now I'll get off my soap box .
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Old 12-23-2007, 10:04 AM   #14
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I prefer a simple money market fund (VG Prime gives 4.73% compounded) over a CD or CD ladder. If I keep 50,000 in cash, getting an extra .2 percent is going to get me $100 per year. That's not quite enough for me to justify the added complexity, work, and possible mistakes I might make.

-------------

I use that same principle, Rita, it's very smart.
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Old 12-23-2007, 10:49 AM   #15
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I prefer a simple money market fund (VG Prime gives 4.73% compounded) over a CD or CD ladder. If I keep 50,000 in cash, getting an extra .2 percent is going to get me $100 per year. That's not quite enough for me to justify the added complexity, work, and possible mistakes I might make.
Interesting philosophy from a guy who unplugs his microwave to reduce power consumption from the timer LCD.

Remember that old "this is your mind on drugs" ad?

This is the yield curve when the fed has stimulative monetary policy:



This is the yield from your money market during those times: -2% real.

This is the yield from your CD ladder during those times: +3% real.

It pays to plan ahead.
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