what to do for income after cd's

[frank]

basically all of my assets are in cd's. in the next year they will be coming to an end. I know nothing about investing in the market, mutual funds, or stocks. Any idea where you would invest if you were in my situation? or where to learn how in such a short time span?

 

[travelover]

Read here: Investment Books My favorite is Bogleheads Guide to Investing

and here: Bogleheads


Hint: check your library or buy used online

 

[rescueme]

Frank,

Without going back to the archives, could you give us your current situation, such as age, spouse, spousal income, dependent childern, non-CD income sources (such as pension, SS, etc.)

A lot of times, depending on your situation (such as a pension/SS covering most of your required income) and your ability to accept risk will result in better suggestions...

 

[wolf]

basically all of my assets are in cd's. in the next year they will be coming to an end. I know nothing about investing in the market, mutual funds, or stocks. Any idea where you would invest if you were in my situation? or where to learn how in such a short time span?

I'm going to make a few assumptions, so please excuse me if I'm wrong:

1. You only own CD's. (You are a very conservative investor). (Risk adverse).

2. You know nothing about stocks, market, mutual funds. (again Risk adverse).

3. #2. You say you know nothing. (Be careful ! ! ! ).

First of all, one can not learn in a very short time span, what to do.
Second, when your CD's mature, be careful. If you ask the "Teller", what to
do, they will refer you to their "bank investment adviser". There, they will
recommend, loaded mutual funds, annuities, etc.....run away.....

In today's economy, anything that pays more interest than a CD, comes with
more RISK. THERE IS NO FREE LUNCH...Be careful of promises and guarranted
returns.

Just my opinion, but maybe you should just stick to CD's and accept the lower rates. Search the internet for the best rates. Consider a CD ladder. Check out the penalties if you close a CD early. Sometimes, it more beneficial to open a longer term CD, ie 5+ years. If rates rise, cancel the CD, and re-invest. Note. Penalties for early CD redemption vary by institution. So you have do to your homework.

Hope these suggestion help....

 

[obgyn65]

Hello Frank - like you I am also risk adverse. In your case I would look at municipal bonds.

Any idea where you would invest if you were in my situation? or where to learn how in such a short time span?

 

[TN_INVEST]

You will need to educate yourself, for sure. Lots of good books out there (I'm sure your library has several).

Having said all that, I'm not afraid to put something out there about what you ought to do.

With some of your money, I'd buy some dividend paying stocks and learn to deal with the volatility. Yes...I prefer to deal with this the way a personal trainer or psychologist might. Here's what you need to do and I'll be there with you to hold your hand and fight through it. I'm not going to throw anything at you that isn't good for you and that you can't handle it (you might not think you can handle it, but you can).

Something tells me that once you start investing some of your money in some of these, you'll like your results.

Just don't go hog wild and buy them all with all your money next week (you will hurt yourself).

Here are a few of my favorites:

Dividend Yield

			3 Year Annualized Div. Growth
		Dividend Yield
Altria Group Inc.	MO	6.10%	8.00%
AT&T Inc.	T	6.10%	2.40%
Reynolds American Inc.	RAI	5.70%	7.60%
Verizon Communications	VZ	5.60%	2.80%
Duke Energy Corp.	DUK	5.30%	2.80%
American Electric Power Co.	AEP	4.80%	3.90%
Southern Company	SO	4.60%	4.00%
Bristol-Myers Squibb Co.	BMY	4.55%	2.00%
PG & E Corp.	PCG	4.40%	5.20%
Intel Corporation	INTC	4.20%	4.40%
Kimberly-Clark Corp.	KMB	4.10%	6.40%
Coca Cola	KO	2.70%	10.00%
Procter & Gamble	PG	3.30%	10.00%
Exxon Mobile	XOM	2.50%	5.00%
AVERAGE		4.57%

 

[frank]

tn_invest. what is the difference in dividend yield and growth in value. do some stocks pay dividends plus grow in value? I will have to check that out. thanks for the info.

obgyn65: where do you find municipal bonds? website, etc.?

 

[kaneohe]

tn_invest. what is the difference in dividend yield and growth in value. do some stocks pay dividends plus grow in value? I will have to check that out. thanks for the info.

Not tn_ but I'm guessing that div yld means current div/current stock price;
div growth in value means growth rate of dividend over stated period.
They're not directly related so no direct comparison is warranted.

You may also want to consider funds that specialize in investing in these stocks (dividend growth or so other similar name; value) that would give you instant diversification and minimize specific stock(and industry) risk.

 

[TN_INVEST]

tn_invest. what is the difference in dividend yield and growth in value. do some stocks pay dividends plus grow in value? I will have to check that out. thanks for the info.

obgyn65: where do you find municipal bonds? website, etc.?

The 3 year growth rate is how much those dividends have grown over the past 3 years. Sorta like a COLA or % payrate increase. Unlike a CD, where the rate is fixed until maturity, some stocks will actually increase their % payouts over time. Think of it as an annual pay raise to the owners of the company.

Example (this is hypothetical, but this sort of thing happens a lot so it makes for a pretty good example of what might happen)
Stock price = $30
annual dividend = $1 per share (that's a 3.3% dividend yield). For every share you own, you will receive $1 per year.
The 2nd year you own it, the board of directors decides to increase their dividend payout from $1 per share to $1.05 per share. That extra nickel per share represents a 5% dividend growth.
In the 3rd year, they increase the dividend payout to $1.11 per share per year. That would be a 5.7% increase.
In the 4th year, they increase the dividend again to $1.20 per share, per year. That would be an 8% increase.

Those 3 increases averaged about 6.2% (average 5%, 5.7%, 8% = 6.2%).

Your income would now essentially be $1.20 per share. Based on your original $30 per share price, that represents a yield of 4% (dividing your $1.20 income by your $30 purchase price = 4%). That's a pretty nice income increase.

A lot of CDs would simply be paying you $1 per year with no increases, whereas a lot of stocks increase their dividend payouts over time.

It's not a true apples to apples comparison, because a couple HUGE things to remember: 1. Dividends are not guaranteed and some companies have been known to stop paying them (happened a lot with bank stocks over the past few years), 2. The stock price ($30 in our example) will fluctuate, and can go down whereas a CD is insured.

In my gut, I think it is still a good idea for conservative investors to buy dividend paying stocks.

I bought Procter & Gamble back in the late 90s for about $4,000. They paid me $57 that year in dividends (that's about 1.4%). Today, they pay me $210. Compared to what I paid, that's about 5.1%. Sure, my $4,000 investment has fluctuated through the years (at one point with the dot.com crash, it was only worth about $2,800). However, they never stopped paying that dividend so I kept it. I didn't reinvest my dividend and buy more shares, but if I had let them compound, I'm sure I would have a lot more shares and a lot more income (the dividend is based on the # of shares you own). By the way...today my $4,000 is worth about $6,000. That's not too shabby considering we've had a dot.com crash, a housing market crash, and whatever else you might want to call these past few years.

Investigate some dividend stocks.

 

[Bestwifeever]

I'm going to make a few assumptions, so please excuse me if I'm wrong:

1. You only own CD's. (You are a very conservative investor). (Risk adverse).

2. You know nothing about stocks, market, mutual funds. (again Risk adverse).

3. #2. You say you know nothing. (Be careful ! ! ! ).

...In today's economy, anything that pays more interest than a CD, comes with more RISK....
Just my opinion, but maybe you should just stick to CD's and accept the lower rates. Search the internet for the best rates. Consider a CD ladder. Check out the penalties if you close a CD early. Sometimes, it more beneficial to open a longer term CD, ie 5+ years. If rates rise, cancel the CD, and re-invest. Note. Penalties for early CD redemption vary by institution. So you have do to your homework.

Hope these suggestion help....

+1. It would be very very hard for someone who has all their nest eggs in CDs to see the market fall as it is doing today. Even if intellectually one might reassure oneself that it would be okay, it would still be unbelievably stressful.

 

[calmloki]

You might consider doing a hard money loan with some of your stash - only loan on a property that you would not mind owning in the worst case (non-performance by borrower). Think making loans at 50-65% of the property value. Risk is that you might have to foreclose, which can take 6 months or so and cost you $6-7000 out of pocket - then you end up with a property to sell and/or maintain. 10-12% interest though, so it might juice up safer investments..

 

[Koolau]

This is a scary situation - I've been there, but that's another story.

My suggestion would be to FIRST see how much return you actually need to make your plan work. You may need to run the numbers through FIRECALC a few times to figure this out.

Let me give you a couple of extreme examples. Let's say you saved so much money that you have 5 million in CDs. Your retirement budget is $50,000/year. So return is not an issue to you. You could just stay with CDs. Why take on any more risk?

The other extreme is where you have a nest egg of $250,000 and need $50,000 per year to live on for the next 35 years. In this case, you must find something which pays an incredible return or else return to the w*rk force.

My point is to determine what return will make your plan work and then put together a portfolio which comes close to matching the need. Obviously, there are no guarantees, but at least you can manage to the risk level you need. The starting point is to know what that need is.

Who knows, you may find out that you don't need to take on a lot more risk to make your plan work. If you find out that you need to take on more risk than you are comfortable with, consider amending your retirement budget downward. Never forget: YMMV.

 

[oldtrig]

I am facing the same thing. I have all my money in five year Cd's that are yielding 5%. That all stops next year. I will need some of that money for retirement income. I will watch this topic close. oldtrig

 

[frank]

You might consider doing a hard money loan with some of your stash - only loan on a property that you would not mind owning in the worst case (non-performance by borrower). Think making loans at 50-65% of the property value. Risk is that you might have to foreclose, which can take 6 months or so and cost you $6-7000 out of pocket - then you end up with a property to sell and/or maintain. 10-12% interest though, so it might juice up safer investments..

I have done this three times and it has worked out well for me. Have not had to foreclose on anyone.

 

[TN_INVEST]

I am facing the same thing. I have all my money in five year Cd's that are yielding 5%. That all stops next year. I will need some of that money for retirement income. I will watch this topic close. oldtrig

I'd look in to the bucket sorta thing.

Ladder out some CDs to provide you with some income for a few years (rule of thumb is somewhere around 5 years worth).

Take what's left and put it in longer term stuff. You can even split this portion in to 1. long, and 2. real long (10 years)

The idea is that you will spend the first 5 laddered CDs, then the middle bucket will be ready and will be spent for the 2nd 5 years. Finally, in 10 years the super long term stuff will be available.

This approach gives you the ability to truly put some money away for 10+ years because it's being used to generate current income, even though you might need your portfolio to generate current income (you'll be using buckets 1 & 2 for the first 10 years).

There are a few books and lots of chatter on the websites about how to do this stuff.

In the end, I think you'll find that dividend paying stocks can play a role in generating income...even for a CD kind of person.

 

[JOHNNIE36]

I am facing the same thing. I have all my money in five year Cd's that are yielding 5%. That all stops next year. I will need some of that money for retirement income. I will watch this topic close. oldtrig

This is the same boat I'll find myself in come the end of 2013. All the CD's mature at the same time. So, I have 2012 and 2013 to figure out my next step. Got to use TN_INVEST's idea of reading up on and studying the CD ladder method. I'm hoping but not beliving that rates will go up much in the next couple years.

 

[kaneohe]

I have done this three times and it has worked out well for me. Have not had to foreclose on anyone.

Don't forget the old idea that rate of return (or potential for return) and risk are inversely correlated. There's probably a good reason the returns are that high. You should ask yourself how confident you are that the stated property value is correct (or will be correct when/if you have to sell)....are you a trained appraiser? Can you see the future? You should also ask yourself how well you will sleep if the worst case becomes reality . Will you be a principal in the transaction or will there be a third party intermediary? How well do you know/trust them?

I also have done this a number of times in the olden days and it worked out well (18-26%) and did not have to foreclose on anyone. However, when
you send a demand letter for repayment when loan is due and it comes back marked "moved/address unknown", you will find out whether you really believe all the theories in the books and all the appraisals in your files. Tread with caution

 

[TN_INVEST]

This is the same boat I'll find myself in come the end of 2013. All the CD's mature at the same time. So, I have 2012 and 2013 to figure out my next step. Got to use TN_INVEST's idea of reading up on and studying the CD ladder method. I'm hoping but not beliving that rates will go up much in the next couple years.

I'd go slow and load the truck up with stuff. I might even throw in some real estate investments and some bonds. You can find lots of them that yield >3%.

The housing bubble sorta scared a lot of folks. That's why I bought in to the Public Storage stuff (PSA) and healthcare. I figured even if folks lose their house, they're going to store their stuff.

Even with the healthcare reform stuff, there'll be plenty of old folks pumping money into the healthcare system so that ought to keep doing well. Plenty of names in that sector that are profitable and pay fat dividends (you can even invest in the healthcare real estate if you want).

There are oil and gas pipeline companies that sort act like toll roads. KMP is a big one and it yield >6.6%. Something tells me that they'll be collecting "tolls" for a long, long time.

I like tobacco companies. It's not hard to find some of those that pay >4%.

What about the "shovel ready" stuff? You could get some of that with Brookfield Infrastructure Partners (BIP). They have all sorts of global infrastructure stuff going on (timber, utilities, toll roads, cell phone towers, rail, etc.). They're dividend is >5%.

If you wanted to get real "risky" you could put your money in to something like Johnson & Johnson or Kraft or a utility company like the Southern Company. Each of these pay more than those bank CDs (and all of these have increased their dividends over the past few years).

Your best bet is simply to go slow. Don't buy everything all at once.

 

[nun]

Psst Wellesley

 

[freebird5825]

+1. It would be very very hard for someone who has all their nest eggs in CDs to see the market fall as it is doing today. Even if intellectually one might reassure oneself that it would be okay, it would still be unbelievably stressful.

+2

The emotional rule of thumb I use for my equity exposure is as follows...
In an extremely bad market, how much of my entire retirement portfolio could I afford (and/or be able to sleep at night) to see go to the worst case scenario ? I define "worst case" being a decrease of 50% or more in value.

In my case, with my own personal risk aversion level, my answer is less than 1/3 equities. Your answer will be different, depending on your other income streams. I have 2 current solid income sources to cover my annual living expenses with some left over.

CDs...I do not own any CDs. Nothing against them, but I don't like the idea of being "locked in" for multiple years at rates determined by a bank or credit union. I prefer nationally diversified muni bond funds of various average durations for my medium to long term income investing. Short term dollars stay in cash or TE money market (NY in my case) funds. I also have the immediate check writing option enabled on all of the muni bond funds for a REAL dire financial emergency.

YMMV