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The $50,000 question
Old 01-24-2011, 09:43 PM   #1
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The $50,000 question

Wanted input on how to maximize yield on $50,000. Here is the background.
1. I live off my monthly pension and thats it.
2. I have $65,000 and that's it. I will keep $12K in savings account (pays 0.05%, nothing basically) for my emergencies, house expeditures, etc.
3. I am monthly cash flow positive about $700 a month on my pension, so I plan on putting 3K in an index fund to start it, then dollar cost average $300 out of my monthly pension to build that up. That is as far as I'm willing to go with equities.
4. This leaves 50K, which I only want to maximize yield, yet dont want to get ambushed in a bond fund if rates jump.
5. Currently 20K of that 50K is in that savings account, and the other 30K is in a CD earning 5.12% that will expire this September.
6. What would you do to maximize yield on this money? Long CD? Ladder them? Would TIPS be of any value? Other options?
7. As you can tell I am risk averse, but I know I can do better than 1/10th of a percent in my savings account. I complained about the 5% CD I got 3 years ago, now I would be in heaven if I had it. I have gotten tired of waiting for rates to go up. Any suggestions would be appreciated.
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Old 01-24-2011, 10:15 PM   #2
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Quote:
Originally Posted by Mulligan View Post
Wanted input on how to maximize yield on $50,000. Here is the background.
1. I live off my monthly pension and thats it.
2. I have $65,000 and that's it. I will keep $12K in savings account (pays 0.05%, nothing basically) for my emergencies, house expeditures, etc.
3. I am monthly cash flow positive about $700 a month on my pension, so I plan on putting 3K in an index fund to start it, then dollar cost average $300 out of my monthly pension to build that up. That is as far as I'm willing to go with equities.
4. This leaves 50K, which I only want to maximize yield, yet dont want to get ambushed in a bond fund if rates jump.
5. Currently 20K of that 50K is in that savings account, and the other 30K is in a CD earning 5.12% that will expire this September.
6. What would you do to maximize yield on this money? Long CD? Ladder them? Would TIPS be of any value? Other options?
7. As you can tell I am risk averse, but I know I can do better than 1/10th of a percent in my savings account. I complained about the 5% CD I got 3 years ago, now I would be in heaven if I had it. I have gotten tired of waiting for rates to go up. Any suggestions would be appreciated.
A very simple and risk free move that woujld improve your income is to switch all your savings to Discoverbank, which is an FDIC insured savings account from which you can withdraw funds at any time, and which can be set up with a link to your bank account.

I believe their current rate is about 1.25%. Not great, but meaningfully better than 0.05%.

Ha
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Old 01-24-2011, 11:17 PM   #3
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Another suggestion: some small banks/credit unions will give you (relatively) sky-high yields on your MM or checking account on balances up to 25k to 50k.....like yields of 3% or possibly more.

The catches are that you have to use your debit card a minimum number of times each month (around 12, +/-), and sometimes you have to have a check direct deposited into the account (if this req't exists, your pension check may qualify).
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Old 01-25-2011, 07:13 AM   #4
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Risk aversion is fundamentally at odds with yield chasing. I think you know this, but it should be stated baldly.

I think that the lowest risk way to maximize yield is to buy a 5 year CD with someone like Ally or Pen Fed. Yields in the 2.X% range and you can surrender early if rates rise for a penalty as small as 2 months worth of interest if rates rise. If you get much beyond that, we are talking about materially higher risks for higher yields.
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Old 01-25-2011, 07:40 AM   #5
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Risk aversion is fundamentally at odds with yield chasing. I think you know this, but it should be stated baldly.

I think that the lowest risk way to maximize yield is to buy a 5 year CD with someone like Ally or Pen Fed. Yields in the 2.X% range and you can surrender early if rates rise for a penalty as small as 2 months worth of interest if rates rise. If you get much beyond that, we are talking about materially higher risks for higher yields.
+1

Online savings for liquidity needs . . . .1.25%
5yr CDs for the balance . . . .2.4%

Everything else materially increases risk without adding much in the way of yield, IMHO.
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Old 01-25-2011, 10:49 AM   #6
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I will keep $12K in savings account (pays 0.05%, nothing basically) for my emergencies, house expeditures, etc.
3. I am monthly cash flow positive about $700 a month on my pension...
For starters you could move some of that $12K to a money-market account at a credit union or a bank. Money market accounts are not "insured" but if you're going to chase yield then it's a lot less risk to take than going after bond funds or smaller/online financial institutions.

I keep less than $1000 in my NFCU checking account, and should probably reduce that number to around $500. Spouse only keeps $300 in her checking account. We keep the rest in a NFCU money-market account earning 0.5%-0.7%. I can transfer funds from the MM account to the checking account within a day for "emergencies", but the reality is that I'd put an emergency expense on a credit card and pay it off when the bill comes. Monthly house expenses (mortgage, insurance, utility bills) are paid within a few days after the pension payment is deposited, so most of the checking-account action takes place within the first 10 days of the month.

The real advantage to keeping money in cash (or insured funds) isn't chasing yields. It's having cash readily available to purchase items at a discount or to not have to pay HELOC interest. Your "virtual yield" of the cash is the amount of the discount, probably at least 5%, or the HELOC (which may also be 3-4% interest).

If you're not keeping the cash around for purchasing at a discount and not expecting to do anything else with it then, as Brewer suggests, you could put it in 5-10-year PenFed CDs in $1000 increments. If you had to break into a CD then you'd only be penalized 6-12 months' interest and could only break the CDs that you needed for cash.
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Old 01-25-2011, 01:15 PM   #7
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For starters you could move some of that $12K to a money-market account at a credit union or a bank. Money market accounts are not "insured" but if you're going to chase yield then it's a lot less risk to take than going after bond funds or smaller/online financial institutions.

I keep less than $1000 in my NFCU checking account, and should probably reduce that number to around $500. Spouse only keeps $300 in her checking account. We keep the rest in a NFCU money-market account earning 0.5%-0.7%. I can transfer funds from the MM account to the checking account within a day for "emergencies", but the reality is that I'd put an emergency expense on a credit card and pay it off when the bill comes. Monthly house expenses (mortgage, insurance, utility bills) are paid within a few days after the pension payment is deposited, so most of the checking-account action takes place within the first 10 days of the month.

The real advantage to keeping money in cash (or insured funds) isn't chasing yields. It's having cash readily available to purchase items at a discount or to not have to pay HELOC interest. Your "virtual yield" of the cash is the amount of the discount, probably at least 5%, or the HELOC (which may also be 3-4% interest).

If you're not keeping the cash around for purchasing at a discount and not expecting to do anything else with it then, as Brewer suggests, you could put it in 5-10-year PenFed CDs in $1000 increments. If you had to break into a CD then you'd only be penalized 6-12 months' interest and could only break the CDs that you needed for cash.
Thanks for all the info. fellow posters. I will check into them all. I didnt realize the penalty for breaking the CD was so small that if you broke a long term CD, you could easily capture another higher yield if it ever comes.
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Old 01-26-2011, 12:24 AM   #8
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I didnt realize the penalty for breaking the CD was so small that if you broke a long term CD, you could easily capture another higher yield if it ever comes.
PenFed is darn near unique in this regard. Most banks/credit unions penalize early redemptions by a year or more.
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Old 01-26-2011, 04:33 AM   #9
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PenFed is darn near unique in this regard. Most banks/credit unions penalize early redemptions by a year or more.
Ally Bank is only 2 months. How much is PenFed?
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Old 01-26-2011, 04:38 AM   #10
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Another suggestion: some small banks/credit unions will give you (relatively) sky-high yields on your MM or checking account on balances up to 25k to 50k.....like yields of 3% or possibly more.

The catches are that you have to use your debit card a minimum number of times each month (around 12, +/-), and sometimes you have to have a check direct deposited into the account (if this req't exists, your pension check may qualify).
This is an excellent idea. I found one where I can get 4% on a maximum balance of 25K. Make sure they are FDIC insured! Check out these links to help you find one:

High Yield Reward Checking Accounts - Compare reward checking account rates
Highest rates and yields on bank checking accounts updated daily by Money-Rates.com
https://www.checkingfinder.com/
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Old 01-26-2011, 07:08 AM   #11
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Ally Bank is only 2 months. How much is PenFed?
Ally charges 2 months interest while PF charges 6 months on a 5 year CD. However, PF pays 11BP higher APY on the same CD. So there is a trade off of higher yield for a higher break fee.

I personally have been slowly adding to my CDs to increase my "ohsh!t" fund. I am done topping CDs up for the moment and will be adding to an internet savings account (prob ING since I already have an account there) to have more liquidity. Above a certain level of cash savings I will revert to buying CDs.

For Navy Fed members (heh), last I checked NFCU was offering a 30 month CD special for 2%. Will not blow the doors off, but better than any similar maturities I have seen offered.
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Old 01-26-2011, 07:34 AM   #12
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I didnt realize the penalty for breaking the CD was so small that if you broke a long term CD, you could easily capture another higher yield if it ever comes.
Some are, most aren't. Ally is the best I've seen in this regard. But be careful, not all CDs are created equal. Some banks charge a "market premium" as a break fee. The idea is that the bank will charge you a fee similar to what the market price discount would be if the CD were really a bond. There are two problems with this 1) The bank determines the discount at its sole discretion (unlike a bond which has a true market price) 2) You get hit with market prices only when yields rise, but get no price appreciation when yields fall. That's a bad deal.

Moral of the story is, read the fine print.
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Old 01-26-2011, 07:42 AM   #13
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Some are, most aren't. Ally is the best I've seen in this regard. But be careful, not all CDs are created equal. Some banks charge a "market premium" as a break fee. The idea is that the bank will charge you a fee similar to what the market price discount would be if the CD were really a bond. There are two problems with this 1) The bank determines the discount at its sole discretion (unlike a bond which has a true market price) 2) You get hit with market prices only when yields rise, but get no price appreciation when yields fall. That's a bad deal.

Moral of the story is, read the fine print.
Further to G4G's important point, lest you get too excited about the idea that you can stick it to the bank if rates rise, look at the fine print with a jaundiced eye. There is almost always a weaselly clause that allows the bank to stop you from pulling funds at their sole discretion. It is not clear that banks typically do this, but the presence of that language should give you pause.

As the bank told the new husband: don't withdraw early or she'll lose interest.
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