5 Years Till Retirement - Where to Stash Extra Money?

[mountainsoft]

We are planning to retire in five years. We'll have my wife's pension, and I'm currently maxing out my traditional IRA contributions. We have a little extra money coming in, so I'm trying to figure out the best place to stash it while we wait.

Currently we're just moving the extra to our online savings account. It's FDIC insured, we can get to it any time we need it for emergencies, but it currently only pays 1.8% interest.

I have another 30K in a one year CD that pays 2%. Again, it's FDIC insured, but it's basically unusable till it matures in May unless we pay an early withdrawal fee. I don't expect to need the money, but unplanned emergencies happen and I would prefer something more flexible without penalties.

I've thought about starting a Roth IRA for my wife. But we'll only have five years to contribute. I might work a little part time after we retire for further contributions, but it's not something I'm planning for. We couldn't contribute more than 6500 per year, though I doubt we could afford that anyway. Of course, we wouldn't be able to move that 30K CD to the Roth when it matures.

Another option is to open an individual or joint taxable brokerage account. The main disadvantage to this is taxes, but it would give us higher returns than a simple savings account and would offer the most flexibility. We could contribute to it after retirement if we wish, move the 30K CD balance there when it matures, and it would be a place to park RMD's when the time comes.

With only five years to go, which would you choose and why?

 

[pb4uski]

See post #17 in the other thread that you started.

 

[mountainsoft]

I thought I would get more responses to this, but after two days of researching options and going back and forth I'm kind of burned out. I've tried to balance risk vs reward, learn how dividends and capital gains work, determine which funds to choose, etc.

I found Ally's no penalty CD's yesterday which might give me slightly higher interest without the associated penalties, but the difference between 1.8% in savings and 2% in the CD isn't really worth the trouble.

I'm not talking about heaps of money anyway, so the difference between 1.8% and 6-8% earnings isn't going to make a world of difference in the grand scheme of things.

I think I'll just take a step back for a while and leave things where they are. We're going on vacation this week, so it'll give me time to clear my head.

 

[cooch96]

Why not a Roth IRA for DW? Five years to contribute is almost $30k. That seems a significant, if not earth-shattering, sum to me.

 

[Dtail]

As an aside, Ally savings is now at 1.85%.

 

[RunningBum]

Given that this was at least somewhat discussed in the other thread you started, and you rejected at least one good suggestion as too complex, said you aren't too concerned with squeezing everything you can out of your investments, and apparently rejected a Roth IRA even though you don't like the taxes on a regular account, it's very hard to know what to suggest. Also hard to justify putting much effort into thinking about something you'll probably reject.

This was following a thread where someone asked for tax advice, but only short term because why worry about taxes at 80? Thinking about hiring an advisor, though maybe we all worry too much about taxes. Hard to blame the forum for not wanting to spend time giving advice.

I can understand if you want to keep things simple, but maybe leaving it at 1.8% isn't bad. Or, how about VG Wellesley? Generally decent returns without too much volitility, though probably not too tax efficient.

 

[mountainsoft]

Why not a Roth IRA for DW? Five years to contribute is almost $30k. That seems a significant, if not earth-shattering, sum to me.

I haven't ruled anything out yet, but kind of got burned out researching all the different options. I'm gonna take a break for a few days and can have another look later when my heads not spinning with facts and figures.

 

[mountainsoft]

Given that this was at least somewhat discussed in the other thread you started, and you rejected at least one good suggestion as too complex, said you aren't too concerned with squeezing everything you can out of your investments, and apparently rejected a Roth IRA even though you don't like the taxes on a regular account, it's very hard to know what to suggest. Also hard to justify putting much effort into thinking about something you'll probably reject.

Wow, the way you describe it is not at all how I meant this to come across.

I'm just weighing the pro's and con's of the various options, and was hoping to hear other's opinions. Yeah, I know I keep wavering back and forth, but it's just a discussion, which I thought was the point of this forum. I'm not asking anyone to make a decision for me, and maybe I'll decide to do nothing. But I won't know the answer unless I ask the questions.

My other thread was only focused on one option which I said in my first post I knew nothing about. I realize this is all simple stuff for those of you with investing experience, but it can be a little scary for someone new. I don't recall rejecting anyone's suggestion, it just had more risk and complications than I'm comfortable with.

Most of my tax fears come from others saying how tax inefficient this or that fund is. I don't know anything about taxable accounts, and I don't know how they're taxed, that's why I was asking. I later learned I probably wouldn't be taxed on capital gains anyway because our income is low (Married jointly in the 12% tax bracket).

A Roth is a great option, but we could only contribute for five years till we retire. And since my wife just turned 50 we wouldn't be able to withdraw the earnings for almost 10 years (59-1/2). Neither is a deal breaker, just cons I'm weighing against other options.

We don't "need" to do anything, we'll get by just fine the way things are set up now. So I don't want to take unnecessary risk chasing maximum returns. I'm just trying to learn...

 

[Oz investor]

I haven't ruled anything out yet, but kind of got burned out researching all the different options. I'm gonna take a break for a few days and can have another look later when my heads not spinning with facts and figures.

in that case sit back , relax a while , and then come back with a refreshed mind .... this can have serious outcomes .

maybe have a short term solution ready and be prepared to switch to long term if a better opportunity rises ( say bonds jump another 1% in the next year )

good luck

 

[Oz investor]

Wow, the way you describe it is not at all how I meant this to come across.

I'm just weighing the pro's and con's of the various options, and was hoping to hear other's opinions. Yeah, I know I keep wavering back and forth, but it's just a discussion, which I thought was the point of this forum. I'm not asking anyone to make a decision for me, and maybe I'll decide to do nothing. But I won't know the answer unless I ask the questions.

My other thread was only focused on one option which I said in my first post I knew nothing about. I realize this is all simple stuff for those of you with investing experience, but it can be a little scary for someone new. I don't recall rejecting anyone's suggestion, it just had more risk and complications than I'm comfortable with.

Most of my tax fears come from others saying how tax inefficient this or that fund is. I don't know anything about taxable accounts, and I don't know how they're taxed, that's why I was asking. I later learned I probably wouldn't be taxed on capital gains anyway because our income is low (Married jointly in the 12% tax bracket).

A Roth is a great option, but we could only contribute for five years till we retire. And since my wife just turned 50 we wouldn't be able to withdraw the earnings for almost 10 years (59-1/2). Neither is a deal breaker, just cons I'm weighing against other options.

We don't "need" to do anything, we'll get by just fine the way things are set up now. So I don't want to take unnecessary risk chasing maximum returns. I'm just trying to learn...

i am neither a US citizen nor a US resident ... but learning is good , exploring options is good , stay calm , the global economy will share enough anxiety for everyone . ( maybe soon , maybe later )

the 'perfect answer ' will suit you ( and your DW ) best , it doesn't have to work for me ( and my plan will not work for you )

scary for you ?? it is scary for the top economists as well, this is totally uncharted territory and that is compounded by a President who uses his own rule book .

 

[lucky penny]

Vanguard prime money market account is currently paying 2.10%. Minimum to open is $3,000.

 

[RunningBum]

Wow, the way you describe it is not at all how I meant this to come across.

OK, it just sounded like you were disappointed there wasn't more discussion, and I was explaining why I think that is.

I think stepping back as you said you are doing makes sense. There's no hurry to do anything. And when I said in the other thread you should probably do some reading, I didn't mean just a quick overnight read. This forum is a great resource, but I don't think it's a starting point as the advice usually comes a bit at a time, incompletely. It's not a good way to learn the big picture.

btw, on the Roth, you can withdraw your contributions any time tax and penalty free. I suggest you read Roth IRA and Other Roth Retirement Accounts « Fairmark.com, especially the distribution pages, to learn about it.

 

[mountainsoft]

Vanguard prime money market account is currently paying 2.10%. Minimum to open is $3,000.

Thanks for the info. Using the compound interest calculator at investor.gov, starting with $3000 and adding $500 per month at 2.1% would work out to $34,615 in five years. My current 1.8% would pay $34.379 in five years, only $236 less over a five year period, and it's FDIC insured. Yeah, every little bit helps but the reward doesn't outweigh the extra risk for me.

If I could earn 6% on a Roth or taxable account, that would come to 37,837, or about $3458 more over five years. That starts looking a little more worthwhile.

 

[mountainsoft]

btw, on the Roth, you can withdraw your contributions any time tax and penalty free.

Yeah, we could withdraw our contributions, but not the earnings. For short term savings we may need access to, that would actually be worse than our savings account. At least with regular savings we can withdraw contributions and earnings any time we need to, and we can keep contributing even after we stop working. A Roth would be great for a long term, but it's not ideal for our short term.

I'm thinking about "testing the waters" so to speak by investing a minimal amount (3K to 5K or so) in a taxable account. That would let me become familiar with the account setup, filing taxes, etc. to know if it's something I'm comfortable with.

We'll see, I'm not doing anything for a week or two as I have other things going on.