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Old 04-02-2012, 03:26 PM   #21
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When I enter ER, I want to have about 2-3 yrs of living expenses in CASH, meaning CD and other easily accessible instruments. I perceive our annual
budget for living expenses are lower compared to others, but would like to have the convinience of easy access without the hassle of trying to time the market or getting out of the wrong time.
While living with the budget, then we are free to do our AA adjustment and then again, slowly pour more money out to have another 2- 3 years.

Having a little cushion helps in terms of emergency expenses, health problems, and other unforseen big expenses.
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Old 04-02-2012, 04:02 PM   #22
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If frequently sell shares to meet your short term needs, be aware that you may run afoul of wash-sale rules if you have your fund set for automatic dividend re-investment.

Eg. you sell a chunk of shares at a loss today (4/2) and then your reinvestment buys shares on 4/30.

Keep careful records and don't reinvest dividends in a fund used to fund short term, frequent needs.
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Old 04-02-2012, 04:11 PM   #23
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If frequently sell shares to meet your short term needs, be aware that you may run afoul of wash-sale rules if you have your fund set for automatic dividend re-investment.

Eg. you sell a chunk of shares at a loss today (4/2) and then your reinvestment buys shares on 4/30.

Keep careful records and don't reinvest dividends in a fund used to fund short term, frequent needs.
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Old 04-02-2012, 05:42 PM   #24
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Originally Posted by walkinwood View Post
If frequently sell shares to meet your short term needs, be aware that you may run afoul of wash-sale rules if you have your fund set for automatic dividend re-investment.

Eg. you sell a chunk of shares at a loss today (4/2) and then your reinvestment buys shares on 4/30.

Keep careful records and don't reinvest dividends in a fund used to fund short term, frequent needs.
Just remember that this refers to taxable (not tax-deferred) situations.

Since our investments used for retirement income are all tax deferred, taxes are at our normal FIT rate and long/short tax techniques do not apply. The rest of our holdings are in Roth IRA's that we probably will not tap for the forseeable future - if ever.
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Old 04-02-2012, 06:10 PM   #25
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I keep almost 10 percent of my portfolio in cash, CDs and I bonds. Bond funds are not the same thing.
So, other than the potential ~ 10% drop in NAV or so (Which might not really apply except for a short period of time and to a limited portion of the ST fund portfolio - I would only sell as needed for core expenses over many months) what are the other got ya's for ST bond funds aka Vanguard Short term Investment fund?

As I see it, cash pays nothing, CD's lock you in to low rates and there are penalties for early withdrawal, I bonds are a no-no in taxable accounts ( my ST bond fund is in a taxable account)
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Old 04-02-2012, 06:30 PM   #26
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Re: wash sale ...

We do not have dividends in our taxable accounts automatically re-invested. Instead we take them in cash and either spend them or use them to rebalance.

As already mentioned, our short-term bond funds are held in tax-advantaged accounts, so no wash sale possible there.

However, one should not sell something like VTI at a loss in taxable and immediately buy VTI in tax-advantaged (after selling short-term bond shares to get the money for VTI) as that would prevent one from the deducting the loss on one's taxes. That's what walkingwood was writing about. One could buy something like SPY or VV instead of VTI in tax-advantaged after selling VTI for a loss in taxable.

So a wash sale is trivial to avoid if you are paying attention. I do realize that some people are not paying attention.
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Old 04-02-2012, 07:04 PM   #27
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For many years I had about 2-4 years of living expenses in Vanguard's MM fund. I knew that I was missing on some return but it was psychologically comforting to know that if things really turned upside down that safety net was still there. Of course, with the current war on savers having significant funds in MM funds is painful and about a year ago I switched those funds to Vanguards short term bond fund for at least some return (actually per Quicken, not to bad - 3.1% over the last 12 months). So at this point, ST funds look Ok. I'm aware that 10% drops in NAV are not unusual (March 2009) for ST funds but this was short lived. BUT I don't know what I don't know. What are the negatives of this approach?
I think if you want to have a large chunk of safe money than in it should be investments that are stable so money markets or CD or a stable value.

The problem with short term bond funds is they can go down in value and they aren't all the same as I found out the hard way. I (and my mom) had a significant investment in the Schwab Yield Plus which was advertised as ultrashort term bond fund. During the crisis it had a large amount of money in sub prime paper, which got hammered in 2008 and 2009 and the fund lost 41% I bailed out before the bottom but not much before and lost more than $25K. Now I don't have a huge problem losing $25,000 (I am never happy but..) as long as the upside potential is also large. In the case of short term bond fund at the time I invest in the around 2004 YieldPlus was
earning roughly 1-1.5% more than money market. Now days ultrashort funds offer what an additional .5-1%. Now hopefully Vanguard is more prudent than Schwab but even so risking a 5-10% lost in NAV for additional .5% return doesn't appeal to me.
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Old 04-02-2012, 07:11 PM   #28
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In various threads on subjects like this, I have described what I do with regard to emergency and other shortish-term funds as layering or tiers.

I am ERed but I have a steady source of income from a bond fund so I transfer its monthly dividends to my bank's checking account to pay the bills. I leave an extra $1,500 in the bank's checking account to not only meet any minimum balance requirements but to act as a buffer or cushion in case I have any relatively small, unforeseen expenses. This money earns no interest but that is okay, as I am getting all the services I want from my local bank at no charge.

My next layer of money is comparable to the short-term bond fund being discussed here. I don't want to have any more money earning nothing or next to nothing, so I put it into an intermediate-term muni bond fund. Yes, its value goes up and down but I have rarely had to access it. Only if I have some expense I can't cover with my cushion do I tap into this. And that happens rarely. If I have to sell at a loss, it is not much. Might have a gain, too. It is a risk I can withstand because the ~3.5% tax-free interest makes up for it. But I could see using a short-term bond fund instead.
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Old 04-02-2012, 07:23 PM   #29
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I bonds are a no-no in taxable accounts ( my ST bond fund is in a taxable account)
Why are I-Bonds not suitable for taxable accounts? They have served us well since the interest is tax-deferred. We bought plenty I-Bonds while we were both working, and in a much higher tax bracket than we are now in.
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Old 04-02-2012, 07:24 PM   #30
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In various threads on subjects like this, I have described what I do with regard to emergency and other shortish-term funds as layering or tiers.

I am ERed but I have a steady source of income from a bond fund so I transfer its monthly dividends to my bank's checking account to pay the bills. I leave an extra $1,500 in the bank's checking account to not only meet any minimum balance requirements but to act as a buffer or cushion in case I have any relatively small, unforeseen expenses. This money earns no interest but that is okay, as I am getting all the services I want from my local bank at no charge.

My next layer of money is comparable to the short-term bond fund being discussed here. I don't want to have any more money earning nothing or next to nothing, so I put it into an intermediate-term muni bond fund. Yes, its value goes up and down but I have rarely had to access it. Only if I have some expense I can't cover with my cushion do I tap into this. And that happens rarely. If I have to sell at a loss, it is not much. Might have a gain, too. It is a risk I can withstand because the ~3.5% tax-free interest makes up for it. But I could see using a short-term bond fund instead.
Yes, I understand your viewpoint. I also have about $15K or so in my local bank's MM fund earning next to nothing so I can have the local bank freebies and also take care of unforeseen small emergencies. The money I currently have in the Vanguards ST fund is meant to be the prescription for the next layer of sleep well at night. Money that might be needed if things in the world go upside down for a few months or maybe a little longer aka 1929 again or without meaning any political innuendo 2008 but Bernake is nowhere to be found.
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Old 04-02-2012, 07:29 PM   #31
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I bonds are a no-no in taxable accounts ( my ST bond fund is in a taxable account)
I'm not even sure you can buy I-bonds in an IRA. When I bought my first ones recently there was no way to do that that I could find. I had to buy them in a taxable account.
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Old 04-02-2012, 07:30 PM   #32
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I think if you want to have a large chunk of safe money than in it should be investments that are stable so money markets or CD or a stable value.

The problem with short term bond funds is they can go down in value and they aren't all the same as I found out the hard way. I (and my mom) had a significant investment in the Schwab Yield Plus which was advertised as ultrashort term bond fund. During the crisis it had a large amount of money in sub prime paper, which got hammered in 2008 and 2009 and the fund lost 41% I bailed out before the bottom but not much before and lost more than $25K. Now I don't have a huge problem losing $25,000 (I am never happy but..) as long as the upside potential is also large. In the case of short term bond fund at the time I invest in the around 2004 YieldPlus was
earning roughly 1-1.5% more than money market. Now days ultrashort funds offer what an additional .5-1%. Now hopefully Vanguard is more prudent than Schwab but even so risking a 5-10% lost in NAV for additional .5% return doesn't appeal to me.

Wow, 41% loss would certainly not do much for the sleep well at night department. Food for thought here. I don't think the current Vanguard management would bet the farm for a slight increase in return but how do I know for sure?
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Old 04-02-2012, 07:38 PM   #33
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Why are I-Bonds not suitable for taxable accounts? They have served us well since the interest is tax-deferred. We bought plenty I-Bonds while we were both working, and in a much higher tax bracket than we are now in.
Well, I obviously need to be edumacated. I thought that I-bonds did not actually pay the interest until the bond is cashed so that I end up paying taxes on a phantom income that I don't receive until I actually cash the bond no? I currently take the monthly dividend from my taxable bond funds as a distribution directly into my bank account whereupon I write checks and carry on with my daily life. I was under the impression I-bonds wouldn't quite work that way.
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Old 04-02-2012, 07:55 PM   #34
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Well, I obviously need to be edumacated. I thought that I-bonds did not actually pay the interest until the bond is cashed so that I end up paying taxes on a phantom income that I don't receive until I actually cash the bond no? I currently take the monthly dividend from my taxable bond funds as a distribution directly into my bank account whereupon I write checks and carry on with my daily life. I was under the impression I-bonds wouldn't quite work that way.
Perhaps you are confusing I-bonds with TIPS. The general rule is to hold I-bonds in taxable accounts, TIPS in tax deferred. I-bonds do not throw off monthly coupons, rather they accumulate the interest until sold.
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Old 04-02-2012, 08:10 PM   #35
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Perhaps you are confusing I-bonds with TIPS. The general rule is to hold I-bonds in taxable accounts, TIPS in tax deferred. I-bonds do not throw off monthly coupons, rather they accumulate the interest until sold.
Maybe so. I thought that if I wanted monthly income from my bonds (remember I'm retired and my monthly income is primarily my dividend distributions) ,as I get from my Vanguard regular bond funds then I bonds were not the best route because the interest is not payable until they mature. Did I miss something?
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Old 04-02-2012, 08:25 PM   #36
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When I enter ER, I want to have about 2-3 yrs of living expenses in CASH, meaning CD and other easily accessible instruments. I perceive our annual
budget for living expenses are lower compared to others, but would like to have the convinience of easy access without the hassle of trying to time the market or getting out of the wrong time.
While living with the budget, then we are free to do our AA adjustment and then again, slowly pour more money out to have another 2- 3 years.

Having a little cushion helps in terms of emergency expenses, health problems, and other unforseen big expenses.
+1

I also intend to hold at least two years of living expenses in cash or near cash. The risk of being forced to sell in a down market (or doing some panic selling) worries me more than the lower return on the money that could have been invested elsewhere. I treat short term bonds as "near cash" for these purposes - the opportunity cost is lower than money market funds etc and the risk to capital if I sell early is relatively small.

If I had a COLA'd pension or similar that met at least my basic living expenses, I might feel comfortable being more aggressive.
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Old 04-02-2012, 08:55 PM   #37
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Maybe so. I thought that if I wanted monthly income from my bonds (remember I'm retired and my monthly income is primarily my dividend distributions) ,as I get from my Vanguard regular bond funds then I bonds were not the best route because the interest is not payable until they mature. Did I miss something?
I think you missed the question posed by the OP at the start of the thread.

He was asking if ST bond funds were a good place to hold cash, not generate an income. Since MM funds and CD's are paying a pittance and I-Bonds are currently paying 3.06% then they are an alternative, provided you are prepared to wait at least 12 months. (3 months penalty if cashed in before 5 years).
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Old 04-02-2012, 08:56 PM   #38
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So, other than the potential ~ 10% drop in NAV or so (Which might not really apply except for a short period of time and to a limited portion of the ST fund portfolio - I would only sell as needed for core expenses over many months) what are the other got ya's for ST bond funds aka Vanguard Short term Investment fund?

As I see it, cash pays nothing, CD's lock you in to low rates and there are penalties for early withdrawal, I bonds are a no-no in taxable accounts ( my ST bond fund is in a taxable account)
Simply, there is nothing better than a US government guaranteed cash or CD account when the commode hits the windmill. Nothing. Lots of people got nasty surprises in the crash when what they thought were super-safe investments turned out to be very volatile and risky in an extreme environment. We should all take lessons from the crash, and I think this is one of them.

In my safe money subportfolio the goal is to get what return I can and (in current market conditions) try to manage the bleeding. More than half is in longer term CDs that don't mature for a couple more years. When the Pen Fed 5% CD deal came up I jumped on it. Now that rates are crap I am moving some of the liquid cash to I bonds because they are yielding 3%. But fundamentally, if it isn't an FDIC-guaranteed account or a direct obligation of the US gubmint, I am not buying within this subportfolio.

Now in the rest of my portfolio, I take lots of risk. Individual junk bonds, anyone?
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Old 04-02-2012, 09:05 PM   #39
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I think you missed the question posed by the OP at the start of the thread.

He was asking if ST bond funds were a good place to hold cash, not generate an income. Since MM funds and CD's are paying a pittance and I-Bonds are currently paying 3.06% then they are an alternative, provided you are prepared to wait at least 12 months. (3 months penalty if cashed in before 5 years).
Well, I'm the original OP and you are quite right I frequently miss not only my own questions but even my own answers... I guess I did not state the question clearly enough but I was wondering if the ST bond fund was a good place to park cash being that MM were such a lousy current option. I neglected to ad that I used the income from the MM for daily living expenses just as I'm currently using the income from the ST bond fund. When I bonds pay 3.06% that is not REALLY current monthly income or is it?
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Old 04-02-2012, 09:08 PM   #40
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I think you missed the question posed by the OP at the start of the thread.

He was asking if ST bond funds were a good place to hold cash, not generate an income. Since MM funds and CD's are paying a pittance and I-Bonds are currently paying 3.06% then they are an alternative, provided you are prepared to wait at least 12 months. (3 months penalty if cashed in before 5 years).
The fixed rate on I-bonds is 0.0% now. So wouldn't it be better to think of I-bonds as currently paying the inflation rate going forward? We may know the current inflation rate I-bond adjustment, but who knows how the inflation picture will look going forward a few months. I guess all we can say is that I-bonds will lock in a 0.0% real rate (excluding taxes for the moment).

Personally I don't consider new I-bonds as all our FI is in tax deferred accounts.
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