Alternatives to Cash? Advice Requested

[connor77]

I posted a "Greetings from Maine" hello for reference...
We're about to retire next year and I feel like I might have too much in cash. I have 3 years worth total. One is in checking account (earning nothing) and the other 2 years are in Vanguard essentially earning nothing. Is my best option a short term bond fund? Given the run up in the market I'm leery of keeping this money in equities for two reasons: 1) recent market performance and 2) what this site has taught me about sequence risk.
What are my options? I really hate seeing this money doing nothing but won't be thrilled about exposing it to downside market risk. As mentioned in my original "greetings" post, I feel the market is over-valued and due for a correction but obviously I'm speculating.

If there's a thread already that covers my question, please just direct me to it. TIA.

 

[CincyDave]

I keep about 2 years of living expenses in 1 yr CDs in case the market tanks. Currently earning about .6%. If I would need to cash one out you just lose a couple months interest.

 

[Montecfo]

T-Mobile Money. 1 percent, FDIC insured.

I keep cash there and in CDs entered into in times of higher rates (3.5 pct). I consider cash as the least risky component of my fixed income ("bond") portfolio.

In my opinion, this is not a good time to add bonds, even short-term. FED action figures to drive higher rates over next few months. This will drive losses in most classes of bonds. Ibonds would be an exception, and could make sense for smaller amounts of cash.



There is a long running thread on cash/CD rates and many of us use deposit accounts.com as a resource.

 

[UnrealizedPotential]

Well, you are in a tough spot. For myself I have bought a few bond funds and US treasuries where I could. It's tough to watch the market go up sometimes and my assets just sit there and I am well aware about inflation. But for now, I believe this is still an expensive market based on historical norms. I cannot afford to start over and until I see better market PE's and less euphoria, which we may be starting to see, I am playing it as safe as I can.

I have experienced a few large bear markets and they are brutal. I take risks where I have to, and where I do not have to, I don't. Simple as that. My advice for you, I do not have any. But I am willing to share how I feel about the current market.

 

[RE2Boys]

I have a checking account at Discover Bank currently earning nothing but it is linked to a Discover Bank so-called high-yield savings account currently earning 0.4% such that I can keep a minimum balance in checking but can move money immediately between accounts. Also park cash in a non-FDIC demand notes account (really ultra-short term bond purchase) at Dominion Energy currently paying 1.25% generally very liquid. (https://investors.dominionenergy.co...on-energy-reliability-investment/default.aspx). Toyota Finance and GM Finance have similar non-FDIC accounts. Long term cash is in I bonds that I have purchased intermittent for the last 20 years.

Agree with Monfecfo that this may not be a good time for bonds

 

[Lsbcal]

Currently bond prices reflect what we all know i.e. Fed might well raise rates 2 to 3 times next year and expect a good dose of inflation for 2022. So good luck getting ahead of that news.

What I have done: raise the stock allocation somewhat and maybe buy short term investment grade bonds in a fund like VFSUX (Vanguard Short Term IG). In the last 12 months VFSUX has returned about zero but it has a duration of 2.8 years so should be evaluated over that time period.

BTW, when rates do climb it would be wise to adopt a longer term bond strategy. Maybe some TIPS if they have decent real rates. I still have TIPS bought 4 years ago and a good chunk of iBonds from 2001. That mitigates the ugly choices now.

 

[HawkOwl]

I-bonds are currently earning 7.12%.

Since you can only put 10k/person/year aside (more or less) and the money can’t be accessed for the first year, it is not a short term solution to your problem. But steady contributions over a decade will allow a build-up a sizable nest egg that will at least keep up with inflation (minus taxes).

 

[COcheesehead]

Cash is cash. It will not earn much in the current environment so I minimize how much I have.
It won’t help the OP because rates have gone down so much, but I built a muni bond ladder in our taxable account almost seven years ago and the combination of interest and maturing bonds takes care of our cash flow needs. I added to the ladder when muni’s dipped for just a few short days in early 2020 and the ladder now funds us into 2031.
I use FMSDX for the value/income side in our deferred accounts and it has been a good performer.
I also keep a little in PTIAX really just for rebalancing and ballast in deferred accounts.
Both of these yield over 3%.
Otherwise it’s equity ETFs for taxable and three allocation funds for deferred. I am comfortable with my allocation and it’s loosely managed in a bucket strategy so I can sleep at night.

 

[sengsational]

It isn't cash, but if you buy an equity position in a company that has a record for not cutting dividends, and has a nice yield, that might work. The market could drag them down, but if they're a utility or something that's going to keep going in various economic conditions, the yield keeps them from going too far south. It's riskier than cash, of course, and events may line-up against you, and you'd need to sell low, which would be bad. But that eventuality is not highly likely. It seems like taking a little risk is required nowadays if you don't want to get eaten-alive by inflation.

 

[pb4uski]

Here are mine.

Online savings account that pays 0.4%... there are some that pay more but I'm too lazy to move it.

Corporate note programs similar to commercial paper... operate similar to an online savings account... stable value/not interest rate risk, pay interest, can deposit or withdraw wheneve you want... but some credit risk... mine are Toyota IncomeDriver notes (1.15%), Dominion Energy Reliability Investment notes (1.10% and GM RightNotes (1.25%)... slightly higher than 1 year bank CDs.

And then I also have i-bonds but at a limit of $10k per person per year it take a while to accumulate any meaningful balances.

 

[jazz4cash]

I use FMSDX for the value/income side in our deferred accounts and it has been a good performer.

That’s a gem. I wasn’t familiar with it before. Thanks.

I do use a Fidelity single state muni fund that distributes ~2% annually the last 6 yrs…tax free.

 

[mebden]

Online savings accounts

I posted a "Greetings from Maine" hello for reference...
We're about to retire next year and I feel like I might have too much in cash. I have 3 years worth total. One is in checking account (earning nothing) and the other 2 years are in Vanguard essentially earning nothing. Is my best option a short term bond fund? Given the run up in the market I'm leery of keeping this money in equities for two reasons: 1) recent market performance and 2) what this site has taught me about sequence risk.
What are my options? I really hate seeing this money doing nothing but won't be thrilled about exposing it to downside market risk. As mentioned in my original "greetings" post, I feel the market is over-valued and due for a correction but obviously I'm speculating.

If there's a thread already that covers my question, please just direct me to it. TIA.

Find an online savings account paying .51 or .50 The Couple I know of are Vio Bank, CIT Bank and Marcus these are better than getting nothing and are FDIC Insured

 

[Happyras]

We are maxing out the FDIC insurance limit at Marcus, but their 1.1% rate on MM savings is the best insured option I know of. We get .5% plus .1% for AARP and another .5% for referral bonus. These bonuses expire, but for each friend you extend the rate a few months. Nice part is your referred friend and you both get the bonus each referral. Obviously more than happy to share a referral code, just PM me.

 

[mystang52]

Presuming you want to maintain 3 years' expenses, start now with I Bonds. If you don't need to actually use any of the money, short term, over time you can accumulate a nice chunk of change. But you have to get started. If you go this route, don't buy an electronic 10,000 (maximum) Bond; buy 4 $2500 Bonds, or smaller denominations, in event you need to tap into just some of the money down the road.
Ally Savings currently paying a whopping 0.5%, and a drop more for CD's, but that's still better than 0% from Checking.

 

[connor77]

Again, thanks to all of you for your great suggestions. You've given me some options that I was unaware of. Merry Christmas to all!

 

[24601NoMore]

While some may disagree, I see absolutely nothing wrong with keeping 3 years cash reserves - assuming the AA for the rest of your portfolio is adequate to meet your long term needs..

We personally hold way more than 3 years cash. I'm fully aware that it's losing purchasing power - but aside from wishing that wasn't the case, don't lose that much sleep over it because my cash will give me the ability to pay the bills in down market conditions. That works for us because some of my expenses are relatively constant and not getting hit as much by inflation.

And since there have been periods of time where the market is down or returns right around zero over 10 years, wouldn't you like the ability to not have to sell equities when they're down? If you can ride out ANY down market (short of Armageddon unexpectedly happening), it's IMHO a pretty good strategy if you can swing it.

I do think cash gets a bum rap and I don't think it's a stretch to say the bias here on ER is strongly toward taking as much - and sometimes more - equity risk than may be advisable..from my own perspective, I underweight equities, hold bonds and cash so that I have a truly diversified AA. That's cuz I realize I'm not smart enough to time the market OR constantly re-allocate in response to changing market conditions (ie: rates are rising, so sell bonds)..

It's been shown many times by people far smarter than me (Kitces, Bernstein, ...) that a balanced AA is the single greatest determinant of long term portfolio success..over-weighting equities just so one "doesn't miss out" is counter to that approach IMHO..I guess you can say I have a definite "Tortoise" approach to my ER strategy, vs. the "Hare" approach that's easy to get pulled into due to FOMO..

PS: I agree wholeheartedly with you that this market is WAY over-valued and suspect we will indeed see a perhaps major drop over the next 6-18 months, if not sooner. It's sure been showing signs of stress in the past few months, which to me is a big red flag on that. Guess time will tell.

 

[jazz4cash]

I think the point was not whether 3 yrs was too much or not…..it was ideas on how to earn more than zero. Is your cash sitting in a traditional bank account earning ~0%?

 

[24601NoMore]

I think the point was not whether 3 yrs was too much or not…..it was ideas on how to earn more than zero. Is your cash sitting in a traditional bank account earning ~0%?

Hmmm..OP mentioned thinking he has 'too much' cash. So, while options to earn more than zero did indeed seem to be the main question, it also appears he thought he may "have too much" cash also.

I'm fortunate to still have some 2-3% CU Certificates that have not yet matured. For funds that did, I'm sitting in MM accounts earning 0.5 - 1% max.

NASA Federal has had a 49 month Certificate paying 1.7% APY (min $10K, new money only) but I've been hesitant to commit to a 4+ year CD paying "only" 1.7% since we expect 3 rate bumps next year and 2 the following..that's 1.25% right there..

ETA - www.depositaccounts.com is one of the best sources I've found for the latest on good cash rates.

 

[Montecfo]

Find an online savings account paying .51 or .50 The Couple I know of are Vio Bank, CIT Bank and Marcus these are better than getting nothing and are FDIC Insured

TMobile Money, which is just a "branded" savings account at a bank, pays 1.00 percent to anyone. FDIC insured.

You do not need to be a subscriber, but they used to offer some additional interest for subscribers, but it was like 4 pct on first 3000 or somesuch. Not sure what they do now, I'm just there for the 1.00 percent.

 

[connor77]

Hmmm..OP mentioned thinking he has 'too much' cash. So, while options to earn more than zero did indeed seem to be the main question, it also appears he thought he may "have too much" cash also.

I'm fortunate to still have some 2-3% CU Certificates that have not yet matured. For funds that did, I'm sitting in MM accounts earning 0.5 - 1% max.

NASA Federal has had a 49 month Certificate paying 1.7% APY (min $10K, new money only) but I've been hesitant to commit to a 4+ year CD paying "only" 1.7% since we expect 3 rate bumps next year and 2 the following..that's 1.25% right there..

ETA - www.depositaccounts.com is one of the best sources I've found for the latest on good cash rates.

Thanks for pointing this out. My message was unclear. I don't feel I have too much cash in having 3 years worth of expenses covered. What I'm not thrilled about - which you picked up on - is earning essentially zero on this money for 3 years.

Again, I've been given some solid options by way of this thread and any of them will give me more than the zero % I'm getting now. The I bond suggestion has the greatest appeal due to the yield. Wish we (wife and I) could throw more than $20k at them but we'll start buying now as someone suggested. Will look into the other suggestions for any "extra" cash we feel we won't need right away. FWIW, a good chunk of our bond holdings are investment grade so I'd like to *think* we could handle a market correction as long as it's not for a long time. No crystal ball...I get that.

 

[jazz4cash]

Thanks for pointing this out. My message was unclear. I don't feel I have too much cash in having 3 years worth of expenses covered. What I'm not thrilled about - which you picked up on - is earning essentially zero on this money for 3 years.

Again, I've been given some solid options by way of this thread and any of them will give me more than the zero % I'm getting now. The I bond suggestion has the greatest appeal due to the yield. Wish we (wife and I) could throw more than $20k at them but we'll start buying now as someone suggested. Will look into the other suggestions for any "extra" cash we feel we won't need right away. FWIW, a good chunk of our bond holdings are investment grade so I'd like to *think* we could handle a market correction as long as it's not for a long time. No crystal ball...I get that.

Not sure it was mentioned but if you act quickly you can put 10k each for 2021 plus 10k each for 2022 plus 5k if you have a tax refund. I think there are some more exotic workarounds like purchasing inside a trust but that too much work unless the trust is already in place.

 

[Lsbcal]

Thanks for pointing this out. My message was unclear. I don't feel I have too much cash in having 3 years worth of expenses covered. What I'm not thrilled about - which you picked up on - is earning essentially zero on this money for 3 years.

Again, I've been given some solid options by way of this thread and any of them will give me more than the zero % I'm getting now. The I bond suggestion has the greatest appeal due to the yield. Wish we (wife and I) could throw more than $20k at them but we'll start buying now as someone suggested. Will look into the other suggestions for any "extra" cash we feel we won't need right away. FWIW, a good chunk of our bond holdings are investment grade so I'd like to *think* we could handle a market correction as long as it's not for a long time. No crystal ball...I get that.

Regarding investment grade bonds, I did a study of intermediate versus short treasuries that went back to the 1950's. The 1950's saw irregular rising rates too. Not too surprisingly, short term beat intermediate from roughly 1956 to 1984 when looking at 5 year rolling returns.

The data for investment grade from about 1980 is consistent with Treasuries so I think this also would have held for investment grade differential returns (intermediate versus short term IG).

That is why I currently hold short term IG when I cannot get decent real yields on TIPS. If we get up to the 4% level on intermediate IG I might switch to intermediate IG.

I could display the chart if anyone asked for it here.

 

[connor77]

Regarding investment grade bonds, I did a study of intermediate versus short treasuries that went back to the 1950's. The 1950's saw irregular rising rates too. Not too surprisingly, short term beat intermediate from roughly 1956 to 1984 when looking at 5 year rolling returns.

The data for investment grade from about 1980 is consistent with Treasuries so I think this also would have held for investment grade differential returns (intermediate versus short term IG).

That is why I currently hold short term IG when I cannot get decent real yields on TIPS. If we get up to the 4% level on intermediate IG I might switch to intermediate IG.

I could display the chart if anyone asked for it here.

Any chance you could summarize? My intermediate to short term holdings ratio is probably 70/30 and I guess I'd be interested to know if it was a significantly different (better) return on the short term durations. It wouldn't be that big of a deal for me to move money between funds since these are held in our IRA's. The two funds are VFSUX and VFIDX for clarity.

 

[Lsbcal]

Any chance you could summarize? My intermediate to short term holdings ratio is probably 70/30 and I guess I'd be interested to know if it was a significantly different (better) return on the short term durations. It wouldn't be that big of a deal for me to move money between funds since these are held in our IRA's. The two funds are VFSUX and VFIDX for clarity.

Those are the 2 investment grade (IG) funds I would consider. I should mention that my choices are consistent with my overall portfolio which is targeted to 60/40 but is currently 70/30 with half of the fixed income in VFSUX.

Here is a chart showing 10 year rates going back as far as the 1950's.

Here is a chart that summarizes what I was mentioning about intermediate versus short term bonds. Just looking at the green bars we see when it was better to be in intermediate versus short term Treasuries. This data extends back to the 1940's. As an example, the green bar for 1959 shows that intermediate bonds were beat by short term bonds. The difference was an annual 1.7% for 5 years from 1955 to 1959. So when rates were irregularly rising it was better to be in short term bonds (but not every year of course).

The magenta bars are for investment grade bonds whose data does not extend back as far. But you can see the in general IG bonds had similar trends to Treasuries and actually accentuated the differentials of intermediate minus short term bonds.

CAVEAT: I don't know what the next 5 years holds in bond rates. I personally think that rates are so low the likely path is irregularly upwards.

 

[connor77]

Thank you for the chart lsbcal. Interesting for sure...
I've bought $20k worth of i-bonds to start. Bought today (12/31/2021) and apparently the money will be withdrawn from our account on 1/3/2022. I'm hopeful that I can buy another $20k in 2022. Wasn't thrilled to learn that one forfeits the last 3 months of interest unless they are held for 5 years but it is what it is. I was under the impression that one would get the full 7.12% after a full year. I've never bought I bonds before so I'm still learning but I know the interest that is paid isn't achievable anywhere else so I went for it.