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Where are you putting short term money?
Old 03-15-2012, 10:32 AM   #1
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Where are you putting short term money?

In the never ending preparation phase for retirement, early or not at this point, I'm thinking about starting out with at least 1 year's worth of cash on hand and replenishing it as need be from the various retirement accounts or retirement income.

Is there anywhere you can actually earn a little interest but still be really, really safe? I kind of cringe at the thought of having that much money sitting in a checking account or savings account, but what are the real options?

Thanks.
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Old 03-15-2012, 10:37 AM   #2
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I'm planning to retire next year, and I recently moved a small wad of money to an Ally Bank IRA. I have 2 accounts set up, one a 2 year CD (1.2% or so) and the other savings (.85%). Interest rate is minimal, but the comfort in knowing this will help me keep my plan on track even with a market downturn is worth a heckuva lot.
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Old 03-15-2012, 10:38 AM   #3
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I ran across a nice summary here: Life, Investments & Everything: Where to Invest "Safe" Money?

"If you have older instruments maturing, there are not many palatable choices. Investors really have two choices: accept lower returns and stay "safe," or accept more risk and hopefully generate higher returns. Before one decides which of these two paths to take, some soul searching is in order. Why have you kept these funds in "safe" instruments? What is your tolerance for loss? If you lose some of the principal of these funds, what will the impact be on your lifestyle and financial status? Do you have to earn a minimum amount of return on these funds that exceeds what "safe" instruments currently offer? The answers to these questions will ultimately drive the decision you make. If you simply cannot accept the low returns currently offered by "safe" instruments, you will have to take more risk in order to make your minimum return. Conversely, if you cannot accept any risk to the principal of these funds, it may be preferable to accept the very low returns offered by "safe" instruments even if you have to spend down some of the principal.

If you choose to stay "safe," your goal should be to minimize the damage from low rates and keep your options open should rates rise. "
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Old 03-15-2012, 11:05 AM   #4
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I use a 5-7 year CD ladder with maturities every 3-5 months. Current rates are paying 2.75%. (I always pick the highest %, which is usually the longest term) My current % range is 2.75% - 5.66% on the ladder. No need to have much money tied up at low rates with this method. If needed earlier, cash one in and take the penalty hit.
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Old 03-15-2012, 11:21 AM   #5
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Originally Posted by jayc View Post
Current rates are paying 2.75%. (I always pick the highest %, which is usually the longest term) My current % range is 2.75% - 5.66% on the ladder. No need to have much money tied up at low rates with this method. If needed earlier, cash one in and take the penalty hit.
Let me know where I can get that 2.75% 5 year CD. I'm not finding anything like that. If it's out there, does the withdrawal penalty involve the forfeiture of any limbs?
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Old 03-15-2012, 11:24 AM   #6
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Is there anywhere you can actually earn a little interest but still be really, really safe?
Short answer: No.
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Old 03-15-2012, 11:29 AM   #7
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If you choose to stay "safe," your goal should be to minimize the damage from low rates and keep your options open should rates rise. "
And in this environment, IMO, one option for this might be a longer term CD which has a relatively benign interest penalty (say no more than three months) for early withdrawal. Then, if rates rise considerably (or an emergency requires access to the cash), the penalty is probably more than offset by the higher yield you received while the CD was in force, especially if you held it for a year or more already.

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Originally Posted by mystang52 View Post
I'm planning to retire next year, and I recently moved a small wad of money to an Ally Bank IRA. I have 2 accounts set up, one a 2 year CD (1.2% or so) and the other savings (.85%). Interest rate is minimal, but the comfort in knowing this will help me keep my plan on track even with a market downturn is worth a heckuva lot.
Case in point to the above: A 5-year Ally Bank CD is currently yielding 1.73%. Their one-year CD yields 1.01%. The interest penalty for early withdrawal is 2 months interest. Let's say you make a $10,000 deposit in each, and withdraw each after a year.

For simplicity I will ignore the compounding of interest (monthly or quarterly), as they are trivial for this duration and at these low rates.

With the 1-year CD you'd have $10,101 with the assumption above at the end of the year. There is no penalty; the CD has matured. With the 5 year, the interest is $173, but you lose 1/6 of it (two months out of 12) so it is about $144 after the penalty. Hold for longer than one year, and the case for the 5-year is more compelling the longer you hold it.

With only a 2 month interest penalty it seems hard to justify not reaching for the 5-year if you feel confident you'll hold the CD for, say, 6 months or so. And even if rates spike before then, the current rate is so low that the lost of two months' interest is so trivial that it shouldn't be an impediment to cashing it out early, eating the penalty, and reupping at a higher rate.

And Ally, in fact, may be among the "best in show" for this strategy because not only do they have very competitive rates, but their early withdrawal penalty (2 months interest regardless of duration) is among the most benign I've seen anywhere.
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Old 03-15-2012, 11:53 AM   #8
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Let me know where I can get that 2.75% 5 year CD. I'm not finding anything like that. If it's out there, does the withdrawal penalty involve the forfeiture of any limbs?
The 2.75% was for 7 years and I got it on 2/22/2012. I just called for rates and they no longer have 7 yr, just 5 yr and the rate is 1.85%.
It is miami federal credit union in Oxford, Oh.
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Old 03-15-2012, 12:10 PM   #9
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The 2.75% was for 7 years and I got it on 2/22/2012. I just called for rates and they no longer have 7 yr, just 5 yr and the rate is 1.85%.
It is miami federal credit union in Oxford, Oh.
Thanks for the lead. I think you'll have trouble finding rates as good as you've got now when you need to reinvest funds from this ladder.
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Old 03-15-2012, 12:47 PM   #10
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Good insights. I would be looking at 3 to 4 years of living expenses of a bit over $100k a year, so cd's would be good. The penalty for early withdrawal isn't that big a deal if the other option is under the mattress or a non-interest bearing account.

Thanks.
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Old 03-15-2012, 12:50 PM   #11
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I worked for a non-profit and TIAA runs the retirement plan. In their supplemental portion of the plan it's possible to purchase the TIAA annuity which currently pays the minimum guaranteed rate of 3%. This is very safe as TIAA has the best possible ratings, and the cool thing is that it is liquid. One can withdraw the money with no penalty. Anyone with TIAA retirement funds (not mutual funds) should look into this option.
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Old 03-15-2012, 04:14 PM   #12
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You might be able to find a teaser rate at a credit union or ing direct. I'm getting 2.5% on my checking. It was 3.5 when I started, well over a year ago. You can only get the teaser on the first 50,000, but it's nice to tear into the statement each month and see that cash!
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Old 03-15-2012, 04:36 PM   #13
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I retired in December, 2007. I decided then to not keep a significant amount of cash. Since then, I typically have about 2 weeks of cash on hand. I do keep our bond funds at fairly short duration -- a mix of short-term and intermediate term investment grade (in deferred accounts) and Limited Term and intermediate term munis in taxable accounts.

I could take a reasonable hit on my bonds today and still be ahead of where I would have been holding cash.
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Old 03-16-2012, 08:12 AM   #14
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I retired in December, 2007. I decided then to not keep a significant amount of cash. Since then, I typically have about 2 weeks of cash on hand. I do keep our bond funds at fairly short duration -- a mix of short-term and intermediate term investment grade (in deferred accounts) and Limited Term and intermediate term munis in taxable accounts.

I could take a reasonable hit on my bonds today and still be ahead of where I would have been holding cash.
I'm pretty much there though keep several months as cash.
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Old 03-16-2012, 10:09 AM   #15
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I keep about a year's worth of expenses in Discover Bank. Earns ~1%.
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Old 03-16-2012, 11:40 AM   #16
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You might be able to find a teaser rate at a credit union or ing direct. I'm getting 2.5% on my checking. It was 3.5 when I started, well over a year ago. You can only get the teaser on the first 50,000, but it's nice to tear into the statement each month and see that cash!
We get 2.5% on the first $10k from our credit union reward checking account. Used to be on the first $25k until a few months ago. Eventually this situation will turn around a we will see cash get at least zero real returns. Right now it's unfortunately, real returns = the negative of the inflation rate.
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Old 03-16-2012, 11:53 AM   #17
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I also opened up multiple 5 year CD's at the same time. I have the last 60 days interest as a penalty, so if interest rates do rise I can do my calculations to see if it makes sense to cancel and get in at a higher rate. If I do run into an emergency, I don't have to take the penalty on the full amount, just in the increments I set it up at ($5000). There is no downside other than the time to set it up. and my online bank, ally, made it really simple.
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Old 03-16-2012, 11:56 AM   #18
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I keep at least a years worth of cash in a money market account and 2-3 years cash in a Vanguard Lifestyle fund and then about 10 years cash in Wellesley.
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