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Re: Investment advice
Old 06-19-2003, 07:15 AM   #21
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Re: Investment advice

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I will have to look around at some Tax Free funds. *I was considering going with Vanguard as an investment house. *I was with Schwab once but hi costs were expensive unless you chose his preferred funds.

Ian
Unless a person is in the 31% or higher federal tax bracket (and most retirees are not) then the return on tax-free municipal bonds is less than the after-tax return on corporate bonds of equivalent maturity. *Regardless of the category of bonds, about the only company that is competitive with Vanguard for low expenses is TIAA-CREF, but Vanguard has a larger selection of funds.

Given the low interest rates on short-term bonds (especially tax-free municipals) and the prospect of negative returns on long-term bonds if and when interest rates rise, a good compromise is TIPs or a mutual fund that holds them. *The interest is free of state income tax, but more importantly, the return will increase if inflation increases, and that protects against a large drop in market value if interest rates rise. *TIPs can temporarily drop in value, but probably won't do so to nearly the same extent as conventional bonds of equal maturity, when inflation increases and long-term interest rates rise.

As a "cash equivalent" investment (other than a checking account), I find it hard to think of a reason to own CD's or money market funds as opposed to a low-cost short-term corporate bond fund like Vanguard's.
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Re: Investment advice
Old 06-19-2003, 07:43 AM   #22
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Re: Investment advice

Good insight Ted. The Bulk of my CDs mature next month and all I can get is 2% there depending on FOMC next Thursday of course. I will also have the house equity cash when I sell it. So I will have to make some decisions sooner than later. I do not need the return money YET. But will do when MY wife quits this or next year. My calculation is a follows:

I can live like a king on 8% on my assets. I can live like a Prince on 5 - 6% Like a Knave at 3 - 4% but like a pauper at 1 - 2%.

The advantage about a local credit union is that all the funds can be structured so they are all insured (Up to about $2m anyways), and the service is good with no cost.

Ian
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Re: Investment advice
Old 06-20-2003, 07:35 AM   #23
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Re: Investment advice

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I can live like a king on 8% on my assets. I can live like a Prince on 5 - 6% *Like a Knave at 3 - 4% but like a pauper at 1 - 2%.

The advantage about a local credit union is that all the *funds can be structured so they are all insured (Up to about $2m anyways), and the service is good with no cost.

Ian
What I'd be inclined to do is to invest about half of my assets in TIPs to guarantee that I could live like a pauper rather than a corpse, and then invest the rest in a diversified selection of stocks, REITs, and high yield bonds to make it likely that I could live like at least a prince.

Generally, you won't get much of a return from assets like CDs that are "guaranteed." But TIPs are a notable exception, and unlike other assets (except possibly a person's Social Security account) their "guarantee" includes an adjustment for inflation.

Credit Unions, like all other financial institutions, necessarily have administrative costs -- it's just that these are "hidden" in the low interest rates that their financial offerings pay.
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Re: Investment advice
Old 06-20-2003, 08:03 AM   #24
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Re: Investment advice

Ted:

I just looked all over the Treasury Direct Site and read about TIPS. But cannot find anywhere on the site that lets you buy them. I Bonds yes, EE Bonds Yes, you can buy them. TIPS are purchasable in April, July and August if memory serves. Do you have to get them from a broker? Plus it looks as if TIPS are fetching 3% I Bonds 4.66 but you can only get 30k per year of the I's.

Also I cannot find anything about TIP cashing options.

Regards,

Ian
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Re: Investment advice
Old 06-20-2003, 12:04 PM   #25
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Re: Investment advice

Ian, *

This relates to the comments that I made in April in the "I-Bonds vs. TIPs" discussion in this forum.

I-Bonds superficially appear to have a higher return than TIPs, but actually have a significantly lower return in exchange for their income being tax-deferred.

In brief, with I-Bonds, the total rate of return for the following six months is declared twice each year. *It consists of (a) the "base" interest rate (which is now about 1.6%*) plus (b) the inflation rate measured during the previous six months.

With TIPs, the interest rate is the rate that is applied to the par value of the bonds each year. *It is determined by market conditions and varies with the maturity of the bonds. *For longer term TIPs, it is currently about 2.2%. *But the par value is "bumped up" every year by the amount of the inflation during that year. *So the total return on TIPs (at least those of longer maturity) tends to be higher than on I-Bonds, but is federally taxable each year (unless held in a qualified account). *

I-Bonds are best for people with high current taxable incomes who expect to be in a lower tax bracket when they redeem the bonds.

TIPs can be purchased in the secondary market through brokers (for relatively low commissions that make brokers reluctant to recommend them) or they can be owned through no-load, low cost mutual funds like Vanguard's or TIAA-CREF's. *I'm not completely familiar with the Treasury's direct purchase program, but it helps to keep brokerage commissions low since brokers have to compete with it.

*Correction -- for I-Bonds issued after May 1, 2003, this rate actually dropped to 1.1%, which tends to make them even less attractive relative to TIPs.
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Re: Investment advice
Old 07-16-2003, 05:03 PM   #26
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Re: Investment advice

Great discussion and appreciated to the point that I'd thought I'd get some advice from y'all. I'm currently fully retired with a wife and 2 young (and I mean young...under 5 yrs) children. We live WWOM on a $2500 monthly pension and I draw on a $150K cash account to pay a 1000/month mortgage. The mortgage balance is apprx $132K and my question is should I liquidate my cash savings and pay off the mortgage or continue to hold the cash as a safety net. If I payed the mortgage off that would leave about $17-20K for emergencies...roof, car repairs, etc.

This has been bugging me for months now and would appreciate any sane advice.

Info: Mortgage is 15 yr @ 5.875%...1.5 years into it.
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Re: Investment advice
Old 07-17-2003, 07:32 AM   #27
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Re: Investment advice

If you are paying 5.875% on your mortgage (perhaps 4.5% after taking a deduction for the interest) and making perhaps 1% (0.8% after-tax) on "cash," then you are making a negative 3.7% on your "investment."

At the very least, (1) refinance the mortgage and (2) put most of your "cash" into a short term corporate bond fund (especially Vanguard's) and/or TIPs.

If you think that you will move or pay off your mortgage within the next few years, consider getting a "hybrid" mortgage, which provides a particular interest rate for 3,5, or 7 years, after which time it can be adjusted (increased). But in the meantime, the rate will be substantially lower. You can get quotes on these at Amerisave.com.

You can also reduce the amount of your mortgage, and may get a little better interest rate for doing that.
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Re: Investment advice
Old 07-17-2003, 07:45 AM   #28
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Re: Investment advice

What I did as my wife would be working for a few more months (to maintain our healthcare) is get a HELOC (Home Equity Line of Credit) at 3.75 just for $100k (Home value is $750k) thus giving me a small write off against her salary and a cash buffer as all our other cash is in 3 month CDs. If the rates go above 4% simply pay it off. It costs nothing to set up and no interest if it is at Zero balance. And No payoff costs.

Ian
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Re: Investment advice
Old 07-18-2003, 07:34 AM   #29
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Re: Investment advice

Yes! Pay off the mortgage. What could you possibly need a quick $130k for? The $20k you will have left seems like plenty. If you want more cash available you might try to get a no-fee HELOC.

I wouldn't re-finance. The fees will probably be too high to make it worthwhile.

The only reason I can see to keep the mortgage is if you want to put the $150 in the stock market and gamble that you will do better than 6%. That's quite a gamble.

What does WWOM mean?
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Re: Investment advice
Old 07-18-2003, 08:24 AM   #30
 
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Re: Investment advice

I HAVE JUST REFINANCED MY HOME FOR 15-YEARS AT 5.25% FIXED. I AM PLANNING TO RETIRE WITHIN THE YEAR, AND AM NOT PAYING OFF MY MORTGAGE IN THE HOPES THAT (WITHIN THE NEXT FEW YEARS) FIXED RATE INVESTMENT RATES WILL BE HIGHER THAN THE 4% NET MORTGAGE COST. THIS MAY NOT HAPPEN FOR SEVERAL YEARS, BUT I WANT THE FLEXIBILITY TO INVEST AND NOT HAVE MY $$$ TIED UP IN A HOUSE...MANY PEOPLE ARE SAYING HOMES ARE TRENDING DOWN IN VALUE AND COULD RESULT IN A NEGATIVE RETURN ON THIS INCREMENTAL HOME INVESTMENT. AM I WAY OFF?

ADVICESEEKER
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Re: Investment advice
Old 07-18-2003, 09:00 AM   #31
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Re: Investment advice

Bongo, I think "WWOM" = Well Within Our Means.

I agree with Ted on the mortgage being in effect "a negative investment". One that as long as its carried, would require that money that could have been used to pay it off has to return a pretty high interest rate just to break even. As it would be starting in a hole of ~ -3.7%

Many years ago, when I paid off my one and only mortgage early, I found very very few people who understood the concept. They usually would spout "but its a tax deduction that you are going to lose" and things like that. Negative interest, and deductions, do not "make" money!

Barnstormer, I hope that you have another source of income that you haven't listed, or are near to starting Social Security. As I don't think a 30k a year fixed pension is going to cut it over the years, not with 2 small and ever-growing children! Please pardon my bringing this up, but I couldn't help but notice it.

Isn't the official poverty line for a family of 4 above $30K now?
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Re: Investment advice
Old 07-18-2003, 01:44 PM   #32
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Re: Investment advice

Thanks for the replies...WWOM is "Well Within Our Means".

Well after talking to several bankers and investment adviser types, I'm about 95% towards paying off the home and using a HELOC if needed in the future. All lenders noted that if you own a descent property outright you'll have no trouble getting money at a good rate relative to the market.

Telly is very astute is noticing what appears to be a low income. From my perspective, since I make my home payment from sources outside the 2500 it would be added to the 2500 to come up with an equivalent working income. This is around 4000 net per month and 48,000 in my neck of the woods is pretty good for a family of 4. Median income about 28K. We'll never drive a new Benz, but we're very comfortable. Of course, if I never go back to the work-a-day world, the kids will have to get themselve thru college, i.e. military just like dad....lol.

I'm only 39 and about 10 months into ER. I'm enjoying being with the family and feel very furtunate to have this time...if it ends up being just a sabbatical, that's great, maybe we will get a benz...who knows.

Another good thing is the 2500 pension is adjusted annually by the CPI so it should stay up with inflationary costs over time.

Thanks again
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Re: Investment advice
Old 07-20-2003, 01:38 PM   #33
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Re: Investment advice

adviceseeker,

A number of people on this site have commented on paying of mortgage or keeping one.

each person needs to due what is "right" for them.

Some thoughts to consider:
1) do you want to borrow money (i.e. mortgage) to invest in stocks?

2) if stocks go down, your expenses (mortgage) stays the same, i.e. less cash for the same expenses
3) if stocks go up, more than interest rate on mortgage, also figuring in taxes, then it may be OK
4) if we have another 3 year bear market, will you be able to sleep well?

When you retire I think the mind set has to change to reflect the new scenario you are in. Ideally, you want steady or increasing cash flow and stable/low expenses.
I retired this year and plan on paying mortgage off next year, when we move. Yes i would rather have the money invested, but by paying off mortgage you get a "guaranteed" return of what ever the mortgage interest rate is, and you have lower living expenses.
This is not the common thinking of financial types, but it takes the uncommon to retire early.
Best wishes

earlyout
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