I am relying on interest income on FDIC accounts, what to do now?

[Gumby]

Thanks. Does that include digital series I savings bonds with the 7%?
....

It is my understanding that you can only buy I-Bonds directly from the Treasury via the Treasury Direct site.

 

[DrgLrd]

It is my understanding that you can only buy I-Bonds directly from the Treasury via the Treasury Direct site.

Which other treasury securities do you recommend now, that can be purchased elsewhere?

 

[COcheesehead]

Inflation cannot be ignored. A given "income" flow becomes problematic in terms of purchasing power if inflation rages.

My goal of all investing is to keep the purchasing power of my accumulated wealth and that requires acknowledgment of various risks, including inflation and to pursue strategies to hedge these risks.

I didn’t say ignore it. I said don’t buy fixed income assuming it will solve for inflation.

 

[Gumby]

Which other treasury securities do you recommend now, that can be purchased elsewhere?

You can purchase virtually any other US Treasury obligation on the secondary market via a brokerage account. I go through Vanguard to get mine. There are others on this board who are far more knowledgeable than I about precisely which issues may offer the best rate/duration combination.

This thread would be the most helpful to you, I think. https://www.early-retirement.org/fo...d-bonds-discussion-115186-91.html#post2922426

 

[Sunset]

My goal is to not lose money when investing, even if that means sacrificing purchasing power. Though as I stated being outside the US mostly mitigates that.

If you are thinking your money has to last 20 years or more, then you will lose money as losing purchasing power is losing money.

For most folks, interest earnings fall behind inflation, so you effectively lose money. Especially when paying income tax on the earnings.
This is a stealth way of losing money, as it's hard to see. A simple example is: $1 purchasing power earns 5% , so have $1.05, but inflation is 7% so really have 97.5 cents in purchasing power (or last years value).

Are you a US citizen ? (again taxation issue here).

 

[Alex The Great]

Yep: https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion

I believe foreign tax credit is more applicable in your case?
https://www.irs.gov/individuals/international-taxpayers/foreign-tax-credit

 

[MarieIG]

What about looking at investment options in the country in which you are living?

 

[DrgLrd]

For most folks, interest earnings fall behind inflation, so you effectively lose money.

You're talking about most folks in the US, I live a simple life on a tropical island and my expenses are about 2k per month. I do want to avoid the 'stealth' way of losing money, but the first priority is the actual way of losing money in investments.

Are you a US citizen ? (again taxation issue here).

Yes, all my funds are in US banks.

 

[aaronc879]

You will never keep up with inflation in fixed income. Even now with upper 4% to lower 5% treasuries and FDIC insured CDs, inflation is 6%. Add to that, the interest is taxed at the federal and sometimes the state level in a taxable account. I've read that even a 20% equity allocation can keep up with inflation.

Equities are not guaranteed like money market accounts. Equities should keep up with inflation long term but you can lose a lot short term. With the debt ceiling issue looming I would be concerned about a double digit loss coming this Summer. If you don't need the money then it's not a problem. Just leave it there and it will eventually come back but if you need the money you are taking it at a big loss instead of a guaranteed 5% gain in cash.

 

[DrgLrd]

if you need the money you are taking it at a big loss instead of a guaranteed 5% gain in cash.

Can you list some of those 5% guarantees?

 

[aaronc879]

Can you list some of those 5% guarantees?

I rounded up but I have my cash in on of Vanguards Money Market funds making 4.78%. It's VMRXX

 

[Sunset]

You're talking about most folks in the US, I live a simple life on a tropical island and my expenses are about 2k per month. I do want to avoid the 'stealth' way of losing money, but the first priority is the actual way of losing money in investments.

Yes, all my funds are in US banks.

I doubt many folks want to actually lose money. So for example I am not as brilliant as some folks here who can invest in bonds/CD's, etc and earn more than inflation or at least equal to inflation.
So I keep ~70%->85% in stocks, which go up and down in value every day, but looking long time over 20 years it has gone up a lot. The money not in stocks is there for times like this (or worse) when I need money I spend from the bonds/CD's.
Leaving the stocks alone, and wait 1->3 years for them to come back up in value. I do spend the dividends the stock pay.

I feel/believe that you are making an income tax mistake that is going to bite you. Your interest is not tax free.

This is where stocks really play well, the dividends up to a certain amount are actually tax free, whereas interest income is not.

Dividend Tax Rates for Tax Year 2022
Tax Rate Single
0% . . $0 to $41,675
15% . $41,676 to $459,750
20% . $459,751 or more

 

[DrgLrd]

I keep ~70%->85% in stocks, which go up and down

I don't have the option of funds going down.

Your interest is not tax free.

Usually not but when that's all there is, you may not pay any income tax.

 

[Sunset]

I don't have the option of funds going down.

Usually not but when that's all there is, you may not pay any income tax.

If your income is low enough, it's true none of it is taxable as long as it's less than ~12K for a single person .

If it's that low, no wonder you are trying to get higher returns.

 

[Dtail]

Another vote for looking into MYGA's, especially the AAA credit rated ones. It can be a good supplement to CD's.

 

[DrgLrd]

I rounded up but I have my cash in on of Vanguards Money Market funds making 4.78%. It's VMRXX

Gaining a extra point over banks, losing federal coverage, seems a safe option when rates go up.



And long term CDs are the option to have when rates go down?



Not sure where treasury securities fit in there but I'll check.

 

[DrgLrd]

Another vote for looking into MYGA's, especially the AAA credit rated ones. It can be a good supplement to CD's.

How long term would you go? Laddering strategies?

 

[Dtail]

How long term would you go? Laddering strategies?

Same conceptual laddering as a CD ladder. Just make sure you definitively don't need the principal, as there are typically large withdrawal penalties before maturity.
However, one can typically withdraw 10% of principal or market value (depending on the MYGA) for income this year. Alternatively, if rates go higher, one can use the 10% withdrawal and repackage it along with other monies into a new MYGA through a 1035 exchange which is a tax free exchange.

 

[DrgLrd]

If it's that low, no wonder you are trying to get higher returns.

2022 was not good to me, I locked into some shitty 12 month CDs that finally closed, because the bank rate was even worse.



If the rate stays at least 3.5% I never have to worry again.



But since it is decent now, it seems the right time to lock a half mil into the highest rate I can, long term maybe 10 years or more. Then the other half mil in short term CDs, savings, funds like VMRXX.



That's why I'm here, no access to financial planners in my location and my experience is all making and spending money, never investing.

 

[razztazz]

Which for me that means CDs, my question is about current strategies for locking in good rates. For example, one 10 year CD, one 5 year CD, one 1 year CD, and the remaining 250 in savings.

I was also looking at MYGAs and annuities but they lack the FDIC.

But when I look at 10 year CDs, the rates aren't much different than 1 year CDs. I feel like that makes them a bad investment, but I'm here for answers because I'm clueless.

1) Honestly. I am not the kind of person who has chased interest rates over the years, so I can't really say load up on the longs now or keep it short because rates might continue up. I just cannot say, not with a good reason. If your withdrawal rate is really in the dirt, as you say, today's long rates CD's just might do you.

2) Someone here is an expert on MYGA. I'm sure you can get a briefing on them here.

3) Annuities. My understanding is, that while not FDIC insured, there is some form of insurance on them at the State level. I don't have annuities but this has been discussed here before. I'm sure some here can clarify. Spreading your funds among several companies helps diffuse the risk

 

[COcheesehead]

How long term would you go? Laddering strategies?

If you buy brokered CDs you can flip out of them. No penalty, but you get the market price, which can actually be higher than you paid depending on the interest rate at which you purchased.

 

[ivinsfan]

2022 was not good to me, I locked into some shitty 12 month CDs that finally closed, because the bank rate was even worse.



If the rate stays at least 3.5% I never have to worry again.



But since it is decent now, it seems the right time to lock a half mil into the highest rate I can, long term maybe 10 years or more. Then the other half mil in short term CDs, savings, funds like VMRXX.



That's why I'm here, no access to financial planners in my location and my experience is all making and spending money, never investing.

But you can do some basic research on the net, correct?



That's where I'd start. Taxes, and such if you have a million bucks earning any kind of return you will pay some taxes. You freely admit you are clueless so do a little more research so you can get clued in. You keep saying inflation is not a problem for you which isn't really correct.



It would be in your best interest to research this yourself so you feel more comfortable in your money choices. good luck...

 

[Jerry1]

One thing you can do is get a 6 month CD right now using most of your million - say $750K. That will give you time to think while you earn some money. I just bought a 6 month CD for 4.9%. Anything close to that and you’ll earn over $15K.

A question I have is whether or not you plan on touching the million or if you plan on leaving it to your heirs. If you’re willing to tap the principal that can go a long way to covering inflation. In that same vein, how long are you planning for retirement? Obviously, if you’re 50 years old versus 70, it makes a difference.

 

[bada bing]

I'm looking to avoid risk.

One concept that is so often overlooked is that 100% cash/bonds/CDs is not the lowest risk portfolio. You might delve into the "Efficient Frontier" to understand why totally avoiding stocks is not the lowest risk portfolio. Avoiding a nominal dollar loss at all costs exposes you to some serious risks, like the short bout of inflation we have experienced which could easily surprise for a decade long run.

An option for someone as risk adverse as you are might be to buy a SPIA to annuitize part of your portfolio. That would effectively lock in today's rates for the rest of your life as well as give some longevity insurance. A 55y.o. male can get about 6.25% payout rate for life right now. Putting say $400K into an annuity would cover your $24K annual spending and might give you the confidence to invest the remainder in a 50/50 stock/bond portfolio. The annuity by itself is only a so-so recommendation unless it motivates you to do better with the remainder though.

 

[FLJim]

SCHD

SCHD is an etf, it pays 3.61% and would be treated much nicer by the IRS for taxes than interest.
It would also over the years go up in value which hopfully keeps up with inflation.

Are the quarterly dividends paid in cash, or re-invested in more shares, as is normal in mutual funds?