Cash In Bank...Or Not.

[Fermion]

Options are great when used wisely.

Knowing we were going to retire in 2015, in 2014 I sold some LEAP 2016 calls against a basket of stocks I had significant gains. I used the proceeds from the sale to pay off our 3.625% home loan (the balance had gotten smallish and we were right at standard deduction territory).

In 2016 when the calls expire our tax bracket will be 10% or lower. The capital gains from the stock plus the call premium will be our ACA qualifying income for 2016 so we don't have to go on Medicaid.

From 2014 to 2016 I have also been collecting dividends on these stocks, around 2 to 3% for each. The strikes were far enough out that I am not too concerned about early exercise but that is always a risk.

[jlenhart80]

There has been a lot of discussion on this thread over the past two days. Appreciate all of the thoughts. Here is where I am on this topic:

1.I immediately want to get the money into a “high yield” interest savings account or money market account with no maintenance fees. Best I have seen is something like 1.05% from GE capital. I'll also move some money I have idle in an investment account there so it is put to work while I do some DCA investment of those funds.
2.Long term, I'm looking for maximum flexibility with some amount of cash. Probably a couple months worth so that will stay in cash for sure.
3.Leveraging a HELOC is a nice idea, but not an option for me.


For the remainder if what is currently cash I will investigate the following options while the money is in the high yield savings account:
a.DCA into current investment portfolio. Seems like a straightforward option.
b.Better utilize negotiations for cash payment. Like the idea for big ticket items.
c.Learn a bit about puts, options and covered calls. Currently know nothing about this topic, but knowledge is power.
d.Long term CD w/ low withdrawal penalties.

This discussion is all very helpful and like many things, there is never one “right answer”. Further comments welcome.

[JoeWras]

Quote:

Originally Posted by jlenhart80 1.I immediately want to get the money into a “high yield” interest savings account or money market account with no maintenance fees. Best I have seen is something like 1.05% from GE capital. I'll also move some money I have idle in an investment account there so it is put to work while I do some DCA investment of those funds.

Exactly. That's what I'm doing.

I'm no special PNC fan, but I like the fact they have a physical presence everywhere. Their introductory rate of a bit over 1% is nice for a branch bank. We'll go somewhere else after the year is up.

I also have some in Ally, but that's on-line.

[jlenhart80]

Quote:

Originally Posted by JoeWras Exactly. That's what I'm doing. I'm no special PNC fan, but I like the fact they have a physical presence everywhere. Their introductory rate of a bit over 1% is nice for a branch bank. We'll go somewhere else after the year is up. I also have some in Ally, but that's on-line.

I have a couple PNC accounts but I don't see a 1.0% offer anywhere. Maybe it's over? I'll go see them Monday, but if you see one on the web, can you post here? Thanks.


Sent from my iPhone using Early Retirement Forum

[JoeWras]

Quote:

Originally Posted by jlenhart80 I have a couple PNC accounts but I don't see a 1.0% offer anywhere. Maybe it's over? I'll go see them Monday, but if you see one on the web, can you post here? Thanks. Sent from my iPhone using Early Retirement Forum

It was an introductory offer for a new customer account. We opened in December. My guess is the offer is over.

Sorry about that. The point is to check around and you may find one of these. The problem of course is that it is for a limited time.

[steelyman]

Quote:

Originally Posted by jlenhart80 c.Learn a bit about puts, options and covered calls. Currently know nothing about this topic, but knowledge is power.

I think that's a good point and helps understand what those screaming talking heads are talking about.

There is a good book, Create Your Own Hedge Fund by Mark Wolfinger, that explains the basics and terms (e.g., "rolling forward").

There's another book, Options As A Strategic Investment, by Lawrence McMillan, that seems more like a "bible" to me, suited for people really serious about Finance. I'm not in that league.

I did covered calls and cash-covered puts for a little while, but it was more work than I wanted. I still sell puts when I want to buy a stock at a lower price but that's not frequent. I wouldn't include them as part of a cash-management plan.

[Jerry1]

Personally, I like a good amount of cash on hand. However, what I started doing when I got up to $100K was to take some of it and bought some dividend stocks. I did this when I first hit $100K and put $50K in a Schwab account and I'm about to hit $100K again and about to do it again. The stocks I bought were 5 of the highest dividend yielding stocks from the S&P Dividend Aristocrats. These are companies that have increased their dividends every year for 25 consecutive years. I bought the stocks because buying the ETF diluted the yield. I expect that I will get about 3% on these funds. It's not as liquid as I would like, but I sacrificed liquidity for some return. And of course, it is liquid, it's just the risk of the stock price being low when you need to sell that is the risk.

I've been in this for about a year and even though the stock prices have been a little volatile, the dividend return on my original $50K has been as expected. I'm actually looking forward to the next $50K drop into that account (even though my cash will drop and need to be built up again).

[scrabbler1]

Quote:

Originally Posted by growing_older I understand the desire to keep the emergency fund all liquid, but once one has accumulated enough other assets I think that it no longer necessary. An "emergency" that requires six months or more of expenses to settle is unlikely to need that sum on short notice all at once. So I keep mine in tiers. A couple months expenses immediately available in a bank account, the rest spread like my portfolio allocation. That part of the emergency fund has not been needed and as a result has grown to multiples of what it would be had it stayed in immediately accessible bank accounts. Even in a 60% or more down market I'm still ahead. Plus I agree with others that a HELOC (while not a guaranteed emergency fund and could be frozen, etc) can be used to smooth out emergency cash needs, so this make the tiered approach even more useful.

I, too, have a tiered approach to my overall portfolio. However, I despise the idea of keeping a large blob of money in something which generates next to nothing in interest.

My first tier consists of a small amount of money in my local bank's checking account. This amount is simply a buffer of about $750 above the minimum balance required to avoid monthly account fees. I often need to tap into that buffer, or surplus, to meet my monthly expenses, as this highly liquid cash can cover small, unforeseen expenses via check, debit card, or ATM cash withdrawal, for example. My ER budget has some "lumpy" expenses so the buffer smoothes them out rather well.

My second tier is about $40k in an intermediate-term muni bond fund. This bond fund generates about 2%-2.5% in mostly tax-free interest on an annual basis (or about $100 per month). There is some risk to the principal, of course, but it is generating interest to offset any fairly small loss in principal. But I rarely have to access this fund, only if the first tier can't cover larger, unforeseen expenses (on average less than once a year). I have checkwriting privileges in this bond fund which makes the money more accessible, a plus.

If the OP doesn't like the risk associated with an intermediate-term muni bond fund, then he can invest in a shorter-term muni bond fund with a lower rate of return but less volatility in its principal.

[Sunset]

Quote:

Originally Posted by HawkHorn01 I have used cash/check to get 15%-25% discounts on many big tickets expenses. Saved that much on dentist, eye doctor bills, lawn services, exterminator services, house when I got it painted inside and out, new roof cost and a "minor" surgery bill which I saved almost 50% on which saved over $750.00 dollars on that alone. This technique AND to read a book entitled " How to Negotiate Anything??" Tells you about the things you can negotiate from of course cars, appliances, furniture and hundreds of other items including many services. It also tells how many of these can be paid by cash or checks that include substantial discounts.

It sounds like most of your discounts have been from the ability to negotiate, vs saving the person 3% CC fee, or for some, allowing them to not claim the income so not pay tax on it.

I don't think the discounts add up all that much, as lets say you have 100K in cash for 2 yrs of spending safety. Since you can only get a discount on some of the spending (not groceries, phone, cable, etc) the % as counted from your total cash would be pretty small. Even smaller considering some of those discounts could happen even if paying by CC as it was your negotiation skills that made up the bulk/all the discount.

I'm not saying its not good, but I'd take a 3% CD any day vs talking Chili's waitress down on the cost of a meal.

[mistershankly]

Quote:

Originally Posted by scrabbler1 My second tier is about $40k in an intermediate-term muni bond fund. This bond fund generates about 2%-2.5% in mostly tax-free interest on an annual basis (or about $100 per month). There is some risk to the principal, of course, but it is generating interest to offset any fairly small loss in principal. But I rarely have to access this fund, only if the first tier can't cover larger, unforeseen expenses (on average less than once a year). I have checkwriting privileges in this bond fund which makes the money more accessible, a plus.

I've been considering this fund/option as a supplement to my HELOC emergency fund... i.e. use this fund to repay the HELOC (depending on interest rates, etc).

How did you determine how much you wanted in this relatively low risk tier? Is it your entire emergency fund or a percentage of it? Do you syphon off any portion as it grows (e.g. $1k or more) to a fund offering better returns or has that tier grown to that point and continues to grow without touching it?

[scrabbler1]

Quote:

Originally Posted by mistershankly I've been considering this fund/option as a supplement to my HELOC emergency fund... i.e. use this fund to repay the HELOC (depending on interest rates, etc). How did you determine how much you wanted in this relatively low risk tier? Is it your entire emergency fund or a percentage of it? Do you syphon off any portion as it grows (e.g. $1k or more) to a fund offering better returns or has that tier grown to that point and continues to grow without touching it?

To answer your questions, let me give you a history of this muni bond fund and another one in my portfolio in the 20+ years I have been in them.

Back in my working days, I had a lot more money in muni bond funds because I was in a higher tax bracket. I was just getting into stock funds in the mid to late 1990s (just in time for the big booming markets of those glory years).

But when I ERed in late 2008, I knew my income would drop along with my tax bracket (from 25% to 15%), so I began looking for ways to reduce my muni bond fund holdings. I did that by paying some large expenses with my muni bond funds and by doing some rebalancing away from muni bond funds. The intermediate-term muni bond fund dropped into the $40k-$50k after a few years while my other muni bond fund (a long-term, home-state fund) has just recently dropped into the about the same amount.

I always considered my muni bond fund holdings to be more part of my overall AA than my EF. I just tap into my intermediate-term muni bond fund as my first choice if my bank account's surplus can't cover an expense.

Other than the interest both bond funds earn, I haven't added any new money to them, only subtracted from them since I ERed in late 2008. The two bond funds now make up about 6% of my total taxable account's value.

I hope that answers your questions.

[mistershankly]

Quote:

Originally Posted by scrabbler1 I hope that answers your questions.

Yes, it does. Thank you!