Place to park after-tax cash

[Rich_by_the_Bay]

I hope to gradually accumulate 5-7 yrs expenses as near-cash over the next 5 years by saving and sweeping some equities over. I need essentially no-risk options - this is my cash income bucket under construction.

Florida has no state income tax, so munis seem less attractive. Where would you park after-tax money earmarked for this kind of holding? It's rather long term, but I don't want volatility risk here, and I am still working and in a higher bracket.

Just stick with CDs, MMF, and short-term bonds (treasuries)?

 

[mickeyd]

Hey Rich,

What I do is to split my after-tax cash into two places. The part that I anticipate tapping during the next year or so I put into the Vanguard Prime MMF.  This amounts to about 50% of this part of my asset allocation. The other part (more long trem) goes into the Vanguard Short-Term bond index. I have never had to tap the ST bond part yet.

The ST bond part should give me a little better long-term return than the MMF since it has a duration of about 2.5. But even if I had it all in the MMF, I doubt that I'd see much difference at all.

 

[treypar]

Vanguard Limited Term Tax Exempt Admiral has a current yield of 3.67%. It you are in the 33% bracket, that equates to 5.47% taxable.

 

[uncledrz]

Rich
I'm still working too (only PT though, whew, much better).
We keep 1-2 years expenses in MMF readily available and fund our daily living expenses from those funds. We have a CD ladder of 5 years, which we renew each year with a new 5 year CD. Each CD is one year's expenses. That's quite a bit of funds to not be invested, but it allows us to disregard market swings which we feel is important.
Uncledrz

 

[GTM]

We have a CD ladder of 5 years, which we renew each year with a new 5 year CD.  Each CD is one year's expenses.   
Uncledrz

Why CD ladders? if funds were invested 2 years ago with the last maturity in 2009 is that really benefical when we knew interest rates were headed upward.

Wouldn't rolling over short term T bills get you the best rate every 3 months.
When the Fed is finished raising rates we should know, then lock in longer maturities or now a CD ladder. Treasuries are also state tax exempt.

I just cannot see giving a bank money for 5 years at a fixed rate when interest is rising.

 

[d]

you can get 6% on a 5 yr CD ... not at all bad.

 

[brewer12345]

Rich, I would probably open a treasury direct account, and build a ladder there if you really want no risk. I would consider TIPS for anything 5 years out or over.

 

[uncledrz]

Why CD ladders?

my experience has been that this provides a sufficient cushion from the ups and downs.

 

[Rich_by_the_Bay]

Rich, I would probably open a treasury direct account, and build a ladder there if you really want no risk. I would consider TIPS for anything 5 years out or over.

Thanks, Brewer. I have been thinking about that; one problem is that I don't have the full amount I will be saving available to me all at once, so I would have to keep re-shuffling the maturities each time I accumulated another year's worth of savings. Do-able, but with some hassle, no?

Maybe the best thing is to use a short-term fed mutual fund til I have the full amount, then use that to ladder all 6 years' worth in treasuries. Sound reasonable?

 

[AltaRed]

my experience has been that this provides a sufficient cushion from the ups and downs.

Agreed. This is a strategy that emulates Short Term Bond Fund (average maturity is 2.5 years) without the risk of capital loss (CDs held to maturity) and without fees. It does not permit one to succumb to market timing which is what Gerald upthread was really advocating. How do you know where interest rates are headed? Even the best bond managers don't know.

I have read articles (can't find the links) that show such a strategy can outperform ST Bond fund over a period of many years. The only downside is that the CDs are tied up for an average of 2.5 years (not as liquid as a ST Bond fund.

 

[Yipee-Ki-O]

Like brewer, Scott Burn's suggests a 5-year treasury ladder. You say you want to accumulate the cash over 5 to 7 years. Why not just purchase a 5-year treasury note yearly for 5 years? At the end of 5 years, you'll have your ladder established and could then just roll over the notes as they come due. Or you could use 2 to 3 year treasuries to gradually work up to a 5-year ladder to keep your funds more readily available and to avoid the interest rate risk.

And along the way you could also accumulate 1 to 2 year's worth of expenses in a money market fund as a ready cash reserve.

 

[brewer12345]

Thanks, Brewer. I have been thinking about that; one problem is that I don't have the full amount I will be saving available to me all at once, so I would have to keep re-shuffling the maturities each time I accumulated another year's worth of savings. Do-able, but with some hassle, no?

Maybe the best thing is to use a short-term fed mutual fund til I have the full amount, then use that to ladder all 6 years' worth in treasuries. Sound reasonable?

I think you'd get less risk by DCAing rates/building a ladder over time. If you need to park smaller amounts for a while you can use a MMF or just buy 90 day t-bills in treasury direct.