$500,000 in No-Risk Savings Account?

[reubenray]

With the recent downturn (which has upturned some) I am researching a different route for our $500,000. It is now with an investment firm which all of the accounts take hits when the market is down, but they also gain when the markets are good. Since I started drawing money two years ago it has kept the balance about the same until this last downturn which it was reduced about $20,000.

Are there any completely safe options that will also earn me some money? Also what type of tax hit would I take if I moved the money? The money is in a combinations of IRA's. Roth IRA's, bonds, mutual funds and stocks. I am also paying about $5,000 in fees a year for these accounts. I am retired (64) and about $400,000 is in my name where the wife will turn 59 1/2 in January. I would need to pay bills directly off of this account are do monthly transfers to my checking account.

 

[REWahoo]

Are there any completely safe options that will also earn me some money?

No. (I love it when I know the answer to a question! )

 

[Car-Guy]

No such thing as no risk. FDIC insured CD's (up to 250k each) are probably as about low risk as you can get. Also one of the lowest returns you can get, courtesy of the US government and their financial wisdom. No fees and you can get up 2% at some banks. If you ladder them correctly you could make withdrawals without penalties to pay your bills.

 

[reubenray]

How much interest would I get for $500,000 that pays about 1%? I could set up two accounts that would be FDIC insured.

 

[Car-Guy]

Not much. $5,000 a year, before tax.

 

[Car-Guy]

How much interest would I get for $500,000 that pays about 1%? I could set up two accounts that would be FDIC insured.

There are plenty of banks here in Texas that will pay better than that. Here's an example of a bank that will pay 1.99% for an IRA savings account and it's FDIC insured. Not much but about twice as good as 1%.

Fayetteville Bank | Fayetteville, Texas

 

[pb4uski]

rubenray, while you are preoccupied with market risk, I'm guessing that you are totally ignoring inflation risk. If you have $100,000 and invest it safely and earn 1% annually at the end of 10 years you'll have $110,462. But if inflation averages 2.5% over that 10 years then the goods and services that would have cost $100,000 when you made that $100,000 investment would cost $128,008 so your buying power has declined by 14%.

There is no such thing as a free lunch. You are best off investing in a diversified portfolio of low-cost stock and bond mutual funds with 30-70% in stocks and the rest in bonds.

 

[Another Reader]

You are paying someone 1 percent of your assets every year to manage your money. This is something you can easily do yourself and save the fees. That's $5,000 that stays in your pocket.

You don't say how much you are drawing, but the accounts have grown by about the same amount. That is not "safe." That results from having money invested in a bull market. Your best bet is to spend some time learning about investing and how to mitigate risk. Pulling everything out and laddering the principal in CD's at today's low rates will not give you much income, even though it is "safe."

 

[robertf57]

The safest return you could make is to save the 1% you are paying to this investment firm! Learn a bit more about investing and manage your own money.

 

[Sunset]

You definitely need to educate yourself about investments.
Read on the internet, go to the library and get some books.

You can phone up Vanguard (they should pay me I say this so often) and tell them your story about having IRA's. Roth IRA's, bonds, mutual funds and stocks.
Tell them you want to move IN KIND your IRA's to them and they will help you .
Once it is done, you can do the same for Roth.
Then mutual funds and stocks.

As long as you move the stuff IN KIND, there is no tax effect and you have all the same stuff but it will be at Vanguard.

You will then have control over all of them and not pay the 1% management fee.
You will still be paying the probably high mutual fund fees, but you can change those.
Next you can, as you feel comfortable, sell X and buy Y as you see fit, with hopefully the idea being to simplify your account to a couple of low cost mutual funds.

 

[Katsmeow]

You have to consider the risk of inflation as mentioned. A CD is not completely say because of the effect of inflation.

 

[bingybear]

I don't think the OP is really looking at inflation risk at this point.
You can get small returns with what is considered "safe" investments by putting it in banks that are FDIC or credit unions with appropriate backing. The 250k limit is for the fdic insurance. The get this higher you may need to use multiple banks, not just separate accounts under the same registration. The risk of loss would be very low, sans inflation.
In general you need to take some risk to keep up with inflation, but that was not your question. You really need to decide if you can stand some level of volatility in account balance or if you can survive with small returns that are likely not keeping up with inflation. Sometimes we have a battle between are risk tolerance and what we need in investment returns to live out retirement. I would suggest you need to understand this.

 

[Car-Guy]

I don't think the OP is really looking at inflation risk at this point.
You can get small returns with what is considered "safe" investments by putting it in banks that are FDIC or credit unions with appropriate backing. The 250k limit is for the fdic insurance. The get this higher you may need to use multiple banks, not just separate accounts under the same registration. The risk of loss would be very low, sans inflation.
In general you need to take some risk to keep up with inflation, but that was not your question. You really need to decide if you can stand some level of volatility in account balance or if you can survive with small returns that are likely not keeping up with inflation. Sometimes we have a battle between are risk tolerance and what we need in investment returns to live out retirement. I would suggest you need to understand this.

That's pretty much the way I read the OP too. But I think it's okay for folks to point out the effect of inflation on "safe (low risk) investments" as I think the OP was asking about. However, in reality, inflation hits all investments. (or even no investments) Although, the effect of inflation on your bottom line might be more or less pronounced between investment types. So are management fees, market downturns, etc.

And of course there are many other issues to understand with any investment strategy. Example, even with simple T-IRA's, you need to understate tax withdrawal strategies, RMD's, etc. R-IRA's are different. As someone else mentioned, the OP should probably learn more about investing to make the best/better decisions "in his case". I think that's why he's asking questions.

 

[Katsmeow]

I don't think the OP is really looking at inflation risk at this point.

I agree he isn't. I'm not sure if it is because he doesn't care about it or if he is unaware of it. If the latter, I think it is important to take it into account.

The problem that I see is that many people confuse low volatility with low risk. They can see that higher volatility of equities and it makes them uncomfortable. But, they don't see the risk of inflation eating away at investments. (I recognize that some people do take account of inflation risk and knowingly take on low volatility investments in the context of the overall portfolio).

 

[reubenray]

I am not concerned as much about the fees (tax deductible) as I am the market going crazy and loosing a lot of money. This is why I was asking about a safe option. I had a feeling the answer to this was "NO".

Due to us (wife & myself) doing a lot of traveling in our RV managing something myself would be impossible. A lot of time we may not have phone or internet for days or weeks.

 

[meierlde]

Note that you can stack accounts at banks for over 250k by for example making one a payable on death account, each different beneficiary leads to a 250k limit. In addition joint accounts are distinct from individual accounts.
BTW State Farm bank is paying 2.03% on 60 month CDs right now.

If you are in a town of any size there will likley be a state farm agent and they do handle banking issues.

 

[stephenson]

Reubenray, a bit off topic, but I believe you should consider getting a smart phone with hot spot capability for your travels ...you need to be in contact with your investments, and you may need the knowledge available on the Internet for your travels for directions, opportunities for investigation and safety.


Sent from my iPad using Early Retirement Forum

 

[meierlde]

I am not concerned as much about the fees (tax deductible) as I am the market going crazy and loosing a lot of money. This is why I was asking about a safe option. I had a feeling the answer to this was "NO".

Due to us (wife & myself) doing a lot of traveling in our RV managing something myself would be impossible. A lot of time we may not have phone or internet for days or weeks.

Often rest areas now have wifi. Also most places do phone business, so unless your in the very far boonies you can make contact. (even if it means a pay phone). Of course if you are in the far boonies a satellite phone might make sense (it would have saved the guy who took dirt roads in NV and got stuck 100+ miles from help, obviously no cell service there).

 

[robertf57]

I am not concerned as much about the fees (tax deductible) Personally, I am quite concerned when somebody is taking money out of my pocket, even if I don't pay taxes on the loss as I am the market going crazy and loosing a lot of money. This is why I was asking about a safe option. I had a feeling the answer to this was "NO".

Due to us (wife & myself) doing a lot of traveling in our RV managing something myself would be impossible. What? Any safe investment would not require you to babysit it so tightly that your RVing would be an impediment!! A lot of time we may not have phone or internet for days or weeks.

Being a conservative "safe" investor should not require any contact with your investment daily or even weekly. It isn't rocket science and actually, probably the less you mess with a low cost diversified portfolio, the better your returns.

 

[reubenray]

Reubenray, a bit off topic, but I believe you should consider getting a smart phone with hot spot capability for your travels ...you need to be in contact with your investments, and you may need the knowledge available on the Internet for your travels for directions, opportunities for investigation and safety.


Sent from my iPad using Early Retirement Forum

I have that plus another hotspot. The issue is we stay a lot a state or national parks which are to far away to receive any dependable phone or internet service. I really do not want to manage my own retirement buying and selling!

One penalty that I do not want to incur is if I lose my ACA supplement that is based off of my yearly income. If I move money into a savings account it would stop this supplement. Right now I would love to be able to remove $5k for a down payment on a car, but I don't want to incur the hit from ACA.

 

[REWahoo]

I really do not want to manage my own retirement buying and selling!

I don't think we can help you.

 

[kaneohe]

Being a conservative "safe" investor should not require any contact with your investment daily or even weekly. It isn't rocket science and actually, probably the less you mess with a low cost diversified portfolio, the better your returns.

+10, perhaps that is part of the required learning, hopefully from other's histories and not having to reinvent the wheel.

 

[Dawg52]

I understand your wishes, but I would still consider moving to a firm like Fidelity. You could easily set up a ladder of Cd's and put a portion in a balanced fund. Not much managing to do at all. You can even set up auto w/d to your checking acct. No way im paying 5k a year on fees when you can set up plan that is pretty much on auto pilot.

 

[ERD50]

I am not concerned as much about the fees (tax deductible) as I am the market going crazy and loosing a lot of money. ...

But you should be. You really should be.

One rule-of-thumb is that it is relatively safe to draw 4% annually (*1). If you are paying 1% (*2) to an advisor, that means that 1/4 of your cash flow is gone.

So another way to look at that is, it would take an additional 1/3rd in assets to get you back to your 4%. So you need a $666,667 portfolio with a 1% fee to provide the same income as a $500,000 portfolio without the fee. So you have 'lost' $167,667 to your advisor. And if you stay with them, you never get it back. A diversified portfolio may dip, but they tend to come back.

(*1) - but this also is based on a diversified portfolio, including equities

(*2) - and you are probably paying more, because typically the investments those managers put you in have their own high expenses built in, their "Expense Ratio"

Being a conservative "safe" investor should not require any contact with your investment daily or even weekly. It isn't rocket science and actually, probably the less you mess with a low cost diversified portfolio, the better your returns.

or even monthly. As a matter of fact, you might not even need to look at it annually. Have any divs, interest, cap gains auto deposited to a checking/savings account, and get on with your life.

... I really do not want to manage my own retirement buying and selling! ...

It is often said here, the hardest thing about managing your own portfolio is to understand how simple it is. You could put it all in a Target Retirement fund, collect the distributions as I outlined above, and simply forget about it. Other than the initial transfer (which a place like Vanguard or Fidelity will assist you with), there is no 'buying and selling'.

One penalty that I do not want to incur is if I lose my ACA supplement that is based off of my yearly income. If I move money into a savings account it would stop this supplement. Right now I would love to be able to remove $5k for a down payment on a car, but I don't want to incur the hit from ACA.

OK, I see that this is in an IRA, so any withdraws are taxable. But transfers within the IRA are not a taxable event. But that applies regardless of how it is invested.

-ERD50

 

[pb4uski]

....Due to us (wife & myself) doing a lot of traveling in our RV managing something myself would be impossible. A lot of time we may not have phone or internet for days or weeks.

Not a concern... I rebalance once a year.... takes less than an hour.