Placed New IRA Account all in Money Market Funds

[Healthy Lifestyle]

Hoping to hear opinions good and bad based on my latest decision considering market conditions. The Fed will continue increasing interest rates throughout the year which will lower bond fund prices, but increase bond yields, what to do?

I recently retired (66) and rolled over my 401K to an IRA account at Merrill Edge. I am married and wife (64) still working.
I am also planning to delay SSI until age 70.

My entire Tax deferred cash account (large) was recently placed in Merrill Edge MMF's yielding ~4.5% at the moment.
Do you think this was the right decision at my age, or should I have stayed with a 2-3 fund 55/45 portfolio?

Look forward to any and all thoughts.

Thanks!

 

[pb4uski]

You'll get a variety of views. I like what you did. You have a boatload of "dry powder" available now. I'm bearish on stocks and think earning 4.5% until you can deploy the money into bonds isn't bad, but I would not dilly-dally for long on buying bonds, just be patient.

I got mostly out of stocks a couple of years ago... too overpriced (P/Es are way too high) in my view. In principal preservation mode. Might try to do some selective picking of stocks later in 2023 but perhaps not. We are lucky to be in a postition where we don't need the growth of stocks to be financially secure and have chosen not to play.

YMMV.

 

[Al18]

I think your plan is too conservative because the interest rate on MMF will never keep up with inflation. In addition MMF are not guaranteed by the Government. Instead, you may want to invest in CD’s ranging from 3 months to 3 years (staying under the 250K guarantee limit). It’s not a bad idea to keep 4 years of expenses in CD’s and an high yield savings account. Also you may want to invest a percentage in some broad based stock funds.

 

[Montecfo]

I think avoiding stocks right now is not a terrible idea. But i would be buying some bonds. After the market begins to anticipate the end of Fed hiking, rates will drop and you will know you should have locked some.

I would suggest building a ladder of CD's bonds or similar.

 

[Car-Guy]

I can't say it's bad or that I would disagree since I have more than a couple of million in MM/CD's/Bonds/Fixed income. Current equities = 0

 

[rkser]

I too have bought CDs with increasing coupons in exchange of BND in our IRAs, but there are lot of BNDs still left.

Between me & DW we have around a million $ in our IRAs. I am so disappointed with BNDs with their 6.6 yr duration.
There are two ways I see to get rid of BNDs in our case, Roth Conversion into VTI & increasing our Asset Allocation to stocks in retirement & second is to buy CDs. We are doing both

 

[pb4uski]

^^^ Why haven't you just sold out of BND to stop the bleeding? and put the proceeds in a 4+% MMF until you figure out how to redeploy?

 

[Chuckanut]

Don’t forget to keep an eye on Ibonds. They might boost the fixed rate again. Maybe.

 

[Dash man]

You can do better than money markets with CDs and treasuries, so I’d move a chunk into them.
I’m your age and increasing my stocks to 75% from 70%. Time in the market beats timing the market, and the biggest enemy of fixed income is inflation. My dividends will keep being paid regardless of stock prices with the companies I’ve picked. They all survived a number of recessions over the years while still paying and growing their dividends. This year I will receive approximately $122k in dividends with about half in a Roth. These stocks have histories of raising their dividends 5-15% each year which helps me keep up with inflation.
I also collect some interest on CDs, Treasuries and bonds, all of which I am holding to maturity.

 

[FREE866]

Here's the thing. If you need equity like returns to meet your investment goals then you're making a horrible mistake. If you don't need or want high returns then you've made the right move. Just know that at 66 and in good health, barring a tragedy, you have a pretty long investment time frame.

 

[Dtail]

I think your plan is too conservative because the interest rate on MMF will never keep up with inflation. In addition MMF are not guaranteed by the Government. Instead, you may want to invest in CD’s ranging from 3 months to 3 years (staying under the 250K guarantee limit). It’s not a bad idea to keep 4 years of expenses in CD’s and an high yield savings account. Also you may want to invest a percentage in some broad based stock funds.

MMF is not protected by the government, but when is the last time we have seen a "break the buck" situation with the major brokerages?

 

[Dtail]

Have you tried Firecalc?

 

[Healthy Lifestyle]

From the first response to the last, I can agree with everyone of your thoughtful comments.
In my case, I am not chasing higher equity returns. I feel I am financial comfortable to enjoy a full modest life.

I did move some of the cash to Treasuries about 30% with 70% in MMFs.
Hopefully when the inflation, recession issues settle down, I would like 40-55% in Equities. But here I am in the what to do position?!

I truly want to thank all of you well informed members for very insightful thoughts.

 

[Dash man]

From the first response to the last, I can agree with everyone of your thoughtful comments.
In my case, I am not chasing higher equity returns. I feel I am financial comfortable to enjoy a full modest life.

I did move some of the cash to Treasuries about 30% with 70% in MMFs.
Hopefully when the inflation, recession issues settle down, I would like 40-55% in Equities. But here I am in the what to do position?!

I truly want to thank all of you well informed members for very insightful thoughts.

If you want 40-55% in equities, you should consider dollar cost averaging into equities now. You seem to think you can identify the right time to get back into the market. You can’t. You will miss the upturn in the market either because you want to be certain, or it will happen so fast you’ll lose out in the big gains. It’s happened to millions of people over the years. Timing the stock market is a losing effort. It can be done a bit more easily with bonds, but no one can predict the movements of stocks accurately with any regularity. Time in the market in the best path to successful investing.

 

[Happyras]

From the first response to the last, I can agree with everyone of your thoughtful comments.
In my case, I am not chasing higher equity returns. I feel I am financial comfortable to enjoy a full modest life.

I did move some of the cash to Treasuries about 30% with 70% in MMFs.
Hopefully when the inflation, recession issues settle down, I would like 40-55% in Equities. But here I am in the what to do position?!

Some of us maintain a 50% or more equity position, but sell covered calls. For us, we have been holding SPY as our equity position, and rolling covered calls. This has yielded a nice stable return. You get to collect the dividends on SPY about 1.6% annually, while collecting the time premium of the option call. Of course VIX is your friend when playing this, but you should be able to get at least a 7% annual return holding SPY while rolling out the calls as they expire. Up until recently, 7% was a nice return. However, for more risk you could get up into the mid teens. I am happy with the simple hold and roll out play for now. When/If the hammer drops equities down, you can always buy back your call and hold SPY for the ride up.

Of course this is not for everyone, as you hold all the downside risk, but if you are going to hold equities anyway, the $2/month time premium is there for the taking.

 

[Spock]

MMF is not protected by the government, but when is the last time we have seen a "break the buck" situation with the major brokerages?

Sept 16, 2008.
The day after Lehman went bankrupt and the same day the feds bailed out AIG.

 

[pb4uski]

I have a faint recollection that subsequent to that there were reforms put in place to reduce the chance of that happening again.

 

[COcheesehead]

The first decision - all in money markets - isn’t bad, but what you do from here matters more.

 

[Dtail]

Sept 16, 2008.
The day after Lehman went bankrupt and the same day the feds bailed out AIG.

Yes 15 years ago before reforms were put in place.

I have a faint recollection that subsequent to that there were reforms put in place to reduce the chance of that happening again.

Yup

 

[oldtimer]

Unless you need to spend 100% of your IRA in the next 5 years or less, you made the wrong decision going 100% MMF. Look at your expected cash flow over your retirement and match your portfolio to support your retirement spending needs.

 

[xlf11]

Another factor is recent retiree may need some transition adjustment from working to retiring and it's more than likely to take a more conservative view after the regular paycheck stops. So take your time to learn more about realistic investment strategy that has proven time and time again, which may help you feel more comfortable with appropriate market risk level.

 

[copyright1997reloaded]

Yes 15 years ago before reforms were put in place.



Yup

The point is, it did happen.

Don't get me wrong - I have many six-figures in MM funds at the moment. But they do have risk > T-Bills or CD's, and if I thought financial conditions were starting to get really sketchy, I would be moving on down the road from those funds.

Each of us when investing in a money market fund should take the time to download the spreadsheet of its holdings to get an idea of the holdings and to be comfortable with those holdings.

ETA: I lost $ in a Schwab "near money market" fund during that time (2008-09) which it turns out had some of its holdings in short term "safe" MBS, that ended up being not so safe. Schwab ended up paying $ in a class action lawsuit.

 

[copyright1997reloaded]

From the first response to the last, I can agree with everyone of your thoughtful comments.
In my case, I am not chasing higher equity returns. I feel I am financial comfortable to enjoy a full modest life.

I did move some of the cash to Treasuries about 30% with 70% in MMFs.
Hopefully when the inflation, recession issues settle down, I would like 40-55% in Equities. But here I am in the what to do position?!

I truly want to thank all of you well informed members for very insightful thoughts.

Disclaimer: I am at the lowest equity % in a long long time (38-39%) with most of the remainder in short term fixed (most T-Bills, some CD's, some preferred, a smattering of corporate bonds.) Having given the disclaimer, a long term plan that is mostly bonds is not a good one in an inflationary environment, and I will "eventually" need to up my allocation to equities. In the meantime, I'm trying to enjoy/leverage the higher short term rates.

 

[dmpi]

My 2 cents worth. You're OK being 100% in high-yield money market for the moment. But eventually (maybe month, maybe years) the MM will starting paying crap and best to have a plan before that happens. There's no rush but I would slowly move some of it into stocks.

 

[NW-Bound]

Some of us maintain a 50% or more equity position, but sell covered calls. For us, we have been holding SPY as our equity position, and rolling covered calls. This has yielded a nice stable return. You get to collect the dividends on SPY about 1.6% annually, while collecting the time premium of the option call. Of course VIX is your friend when playing this, but you should be able to get at least a 7% annual return holding SPY while rolling out the calls as they expire. Up until recently, 7% was a nice return. However, for more risk you could get up into the mid teens. I am happy with the simple hold and roll out play for now. When/If the hammer drops equities down, you can always buy back your call and hold SPY for the ride up.

Of course this is not for everyone, as you hold all the downside risk, but if you are going to hold equities anyway, the $2/month time premium is there for the taking.

I usually ran 70-80% stock AA, but have lowered to roughly 60% since Jan 2022. And I sell OTM covered calls on the ETFs and individual stocks that I hold. Individual stocks inside the S&P 500 often have much higher volatility than the S&P. Holding individual stocks lets you see the crazy sector rotation, which I try to take advantage of via selling options (I do not buy options, and only sell them).

The remaining 40% of portfolio is in I bonds, a stable value fund, and also a short-term Treasury fund. I sell OTM cash-covered puts, and that boosts up the yield on my cash.

I have very little bonds. Thought about putting in the time to follow them, but I already spend plenty of time on my option selling effort and that makes good money already, so do not have time for bond investing.

The above is not for everyone, as it is quite active investing though not as much as day trading. It's more like week or at most month trading as my option expiries are that short.

PS. Taken together, although I choose the strike prices of the OTM options to avoid assignments (30% chance or lower), when the market goes crazy the options force me to buy low/sell high. Overall, it helps the return. However, you must be able to conquer greed/fear to do this.