Where to Keep Medium Term Savings

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Where to Keep Medium Term Savings

Postby ChrisAZ » Fri Dec 28, 2012 10:14 pm

Hello everyone,

I hope you are all enjoying your holiday season. Quick question regarding our savings as I have not posted here in while and need to put back on the right track.

We have the ability to save about $6,500/mo. We have a cash emergency fund that is appropriate size for our income. We do not own a home but are looking to potentially buy one in 3-6 years from now. Unfortunately I cannot pin down the time frame any further, which is part of the reason for my dilemma. We would like to put at least 20% down when we finally do purchase.

I am looking for somewhere to keep our medium term savings which will probably (but not definitely) be used for a home purchase down the road. It might also be used for car purchases, etc. I am torn between an online savings account like ING and investing in a municipal bond fund (we are in the 33% tax bracket). More specifically I have been considering all of the following:

ING savings
VMLTX - Vanguard Limited Term Tax Exempt
VWITX - Vanguard Intermediate Term Tax Exempt

We are pretty risk averse however I do not want to lose money to inflation due to an baseless fear of investing. The bond funds seem to have shown slow and steady growth for many years, however I also see a period during the early 80s when that was not the case and the possibility of future interest rate increases has me even more confused on these options.

For some other background, we do invest for retirement according to our predetermined asset allocation. This money would be for targeted savings.

Thanks in advance for any help!

Chris
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Re: Where to Keep Medium Term Savings

Postby Rainier » Fri Dec 28, 2012 10:18 pm

After tax aren't you still better off with Ally at 95bps over the limited term tax exempt?
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Re: Where to Keep Medium Term Savings

Postby john94549 » Sat Dec 29, 2012 12:01 am

PenFed offers some nice medium-term CDs. Their 2-year CD is 1.5 and the 3-year is 1.75.
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Re: Where to Keep Medium Term Savings

Postby Grandpaboys » Sat Dec 29, 2012 9:37 am

Limited Term Tax Ex. has a Dist. Income of 1.84%, also no taxes. Much better than Ally .95%, with taxes.
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Re: Where to Keep Medium Term Savings

Postby Xile F Investor » Sat Dec 29, 2012 10:00 am

I would also consider iBonds if you can part with your funds for at least a year. Between a year and 5 years, the rate minus the penalty is still competitive w/ the likes of ING/Ally/Penfed or the Vanguard funds, and you don't pay federal taxes on your gains. After 5 years, no penalty. The only variable is the inflation calculation every 6 months. You may want to watch the "fiscal cliff" for this one.
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Re: Where to Keep Medium Term Savings

Postby Sidney » Sat Dec 29, 2012 10:20 am

Grandpaboys wrote:Limited Term Tax Ex. has a Dist. Income of 1.84%, also no taxes. Much better than Ally .95%, with taxes.

If OP is going to hold it for perhaps twice the duration, isn't the more relevant yield for Limited Term TE the SEC Yield? A lot of the holdings are marked to market well above the face value in Ltd TE so there will be NAV erosion over the life of the holding.
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Re: Where to Keep Medium Term Savings

Postby RobInCT » Sat Dec 29, 2012 10:36 am

I am in a virtually identical situation with a virtually identical time frame, and my uncertainty about timing of my home purchase has actually lead me to a somewhat more aggressive allocation than any you have listed. I'm about 30% equities, 30% tax-free long-term bonds (I'm also in a high tax bracket, would prefer a more balanced bond mix, but long-term was the only tax-free bond index fund I could find), and 40% cash.

My reasoning is that the traditional guidance about being more conservative with nearer term investments rests on the assumption that an investor with nearer-term goals may not have the time to recover from a downward swing. However, I felt my flexibility with respect to timing made this less of a concern for me because in the event of a serious downswing, I would be able and content to postpone buying a house indefinitely while waiting for the situation to stabilize.

I would advise asking yourself what kind of uncertainty you are experiencing with respect to timing. Are you going to need/want to purchase a home at a specific time or keyed off a specific event (e.g. having a child, getting promoted to a new position in a different city) whose time you are just not yet certain of but over which you might not have total control? Or are you more generally ambivalent to the goal of purchasing a home altogether such that you don't feel you need/want to accomplish that goal within any particular time frame?

I would personally adopt different strategies for each kind of uncertainty.
Last edited by RobInCT on Sat Dec 29, 2012 10:44 am, edited 1 time in total.
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Re: Where to Keep Medium Term Savings

Postby Grandpaboys » Sat Dec 29, 2012 10:43 am

Sidney
At 84 years of age I looked at income in my pocket and 1.84% does that for me, compared to what is available else where. I also use Ally Bank's .95% for my emergency money and have living expenses for a year in that account. I also use Tax Ex. fund to give me room for taking long term capital gains and paying no taxes to the limit of the 15% tax bracket.
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Re: Where to Keep Medium Term Savings

Postby Dandy » Sat Dec 29, 2012 11:36 am

You want it all - don't lose money even to inflation, get a safe high(er) yield for the medium term. Welcome to the club. It is great that you can save $6500 per month. That should enable you to weather some ups and downs if you choose. I have always felt money intended for house purchase should be safe. Any intermediate term bond fund that you will likely deplete in 3 to 6 years is likely to experience some drop due to interest rate increases. So, it is more of a risk than someone that was able to ride out the ups and downs.

Taxes on such a large amount is a bit of a concern. but as it has been pointed out it is the after tax that matters.

For me I would split the funds between Intermediate and LTD tax exempt funds and CDs that mature in 2006 (earliest house buy year). Put the $6500 per month in the LTD tax exempt and every 6 months or so move money to CDs or Intermediate Term tax exempt. As you get closer to 3 years from now you will have a better idea of when you will use the money and can adjust your investment mix.
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Re: Where to Keep Medium Term Savings

Postby ChrisAZ » Sat Dec 29, 2012 12:14 pm

Thanks everyone, I appreciate all the input.
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Re: Where to Keep Medium Term Savings

Postby Sidney » Sat Dec 29, 2012 12:15 pm

Grandpaboys wrote:Sidney
At 84 years of age I looked at income in my pocket and 1.84% does that for me, compared to what is available else where. I also use Ally Bank's .95% for my emergency money and have living expenses for a year in that account. I also use Tax Ex. fund to give me room for taking long term capital gains and paying no taxes to the limit of the 15% tax bracket.

I can appreciate your situation but I was trying to address the OPs situation since he started the thread.
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Re: Where to Keep Medium Term Savings

Postby Grandpaboys » Sat Dec 29, 2012 12:49 pm

Sidney
Understand, Happy New Year.
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Re: Where to Keep Medium Term Savings

Postby zebrafish » Sat Dec 29, 2012 1:29 pm

If you need the cash in under 5 years, I would park it in a savings account
I don't think there is a huge inflation issue over that time horizon
If interest rates rise in the next 5 years significantly, you might lose money in bonds, no?
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Re: Where to Keep Medium Term Savings

Postby Rainier » Sat Dec 29, 2012 1:52 pm

Grandpaboys wrote:Limited Term Tax Ex. has a Dist. Income of 1.84%, also no taxes. Much better than Ally .95%, with taxes.


What is the right yield to look at in this case? Obviously 1.84 is better than .95, but s it the right metric to compare? I'm curious, I'd happily move funds to ltd term te.
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Re: Where to Keep Medium Term Savings

Postby Grandpaboys » Sat Dec 29, 2012 4:03 pm

It is for me. I am only interested in yield I get today. SEC yield does not give me that.
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Re: Where to Keep Medium Term Savings

Postby Default User BR » Sat Dec 29, 2012 5:39 pm

Grandpaboys wrote:It is for me. I am only interested in yield I get today. SEC yield does not give me that.

Distribution yield only tells you what you already received, not what you will get going forward.


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Re: Where to Keep Medium Term Savings

Postby Grandpaboys » Sat Dec 29, 2012 7:45 pm

How far forward are you talking about? Look at the Dist. Yield for the past year and it shows my return to be good. If I look at it based on the SEC yield I would not buy the fund. Bird in the hand is worth two in the bush. Return on investment is what I look at and if the return goes away, so do I. I have used Dist. Yield for over 20 years and have never lost money.
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Re: Where to Keep Medium Term Savings

Postby bikenfool » Sat Dec 29, 2012 11:10 pm

You got those birds, but whats in the bush now? Isn't SEC yield a better look forward?
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Re: Where to Keep Medium Term Savings

Postby FB01 » Sun Dec 30, 2012 1:11 am

ChrisAZ wrote:Hello everyone,

I hope you are all enjoying your holiday season. Quick question regarding our savings as I have not posted here in while and need to put back on the right track.

We have the ability to save about $6,500/mo. We have a cash emergency fund that is appropriate size for our income. We do not own a home but are looking to potentially buy one in 3-6 years from now. Unfortunately I cannot pin down the time frame any further, which is part of the reason for my dilemma. We would like to put at least 20% down when we finally do purchase.

I am looking for somewhere to keep our medium term savings which will probably (but not definitely) be used for a home purchase down the road. It might also be used for car purchases, etc. I am torn between an online savings account like ING and investing in a municipal bond fund (we are in the 33% tax bracket). More specifically I have been considering all of the following:

ING savings
VMLTX - Vanguard Limited Term Tax Exempt
VWITX - Vanguard Intermediate Term Tax Exempt

We are pretty risk averse however I do not want to lose money to inflation due to an baseless fear of investing. The bond funds seem to have shown slow and steady growth for many years, however I also see a period during the early 80s when that was not the case and the possibility of future interest rate increases has me even more confused on these options.

For some other background, we do invest for retirement according to our predetermined asset allocation. This money would be for targeted savings.

Thanks in advance for any help!

Chris




Chris,

As these funds are in taxable account, do you reinvest the monthly dividend or you keep it separate?

VMLTX - Vanguard Limited Term Tax Exempt
VWITX - Vanguard Intermediate Term Tax Exempt

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Re: Where to Keep Medium Term Savings

Postby Default User BR » Sun Dec 30, 2012 3:41 am

Grandpaboys wrote:How far forward are you talking about? Look at the Dist. Yield for the past year and it shows my return to be good. If I look at it based on the SEC yield I would not buy the fund. Bird in the hand is worth two in the bush. Return on investment is what I look at and if the return goes away, so do I. I have used Dist. Yield for over 20 years and have never lost money.

This doesn't make any sense. You can't the get bird in the hand again. You're chasing a new bird. That's like buying a stock because it went up in the past. That doesn't tell you anything about what it will do in the future.


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Re: Where to Keep Medium Term Savings

Postby Rainier » Sun Dec 30, 2012 7:32 am

Assuming the distribution is all coupons and capital gains and not principal then it seems like a good metric to use.
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Re: Where to Keep Medium Term Savings

Postby bullie76 » Sun Dec 30, 2012 9:49 am

john94549 wrote:PenFed offers some nice medium-term CDs. Their 2-year CD is 1.5 and the 3-year is 1.75.



These are hard to beat. I own a ladder of CD's with them.
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Re: Where to Keep Medium Term Savings

Postby ObliviousInvestor » Sun Dec 30, 2012 10:10 am

Regarding SEC yield vs distribution yield, this recent thread (especially Doc's contributions) may be of assistance: viewtopic.php?f=10&t=107142

Doc wrote:There are two problems with distribution yields. 1) They are retrospective. 2) They are subject to manipulation by a fund manager. At the end of an accounting period the manager could just sell some bonds that are selling at a premium and juice up his yield at least for a short time. The SEC yield is an attempt to stop the manager from doing this and it probably works because knowledgeable folks don't use distribution yield to compare one fund with another - at least over short periods of time. What the distribution yield is good for is telling you how much (monthly) income you can expect over the next few time periods without selling your shares. Boggleheads are taught to think in terms of total return not monthly dividends and interest so this distribution yield doesn't mean a whole lot.

On the other hand SEC yield can give you an idea about the relative risk of two funds with similar maturity/duration. The fund with the higher SEC yield must have more risk (assuming equal fund costs).
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Re: Where to Keep Medium Term Savings

Postby Sidney » Sun Dec 30, 2012 10:38 am

Rainier wrote:Assuming the distribution is all coupons and capital gains and not principal then it seems like a good metric to use.

but part of it is principal in a way. The value of the underlying bonds trends down from the premium market value to the face value as they approach maturity.
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Re: Where to Keep Medium Term Savings

Postby Grandpaboys » Sun Dec 30, 2012 12:15 pm

"What the distribution yield is good for is telling you how much (monthly) income you can expect over the next few time periods without selling your shares"

That is what I use Dist.Yield for. At 84 age I am not interested what it is going to be 5 to 10 years from now, I may not be here. I am living for today and with the current very low interest rates I try to squeak out all the income I can to pay bills. Why should I get a 5 year CD at Ally Bank paying 1.61% less taxes when I can get 1.84% in Limited TE paying no taxes. Right now I have capital gains in my TE account. If that changes I can sell in 24 hours and invest elsewhere.
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Re: Where to Keep Medium Term Savings

Postby Robin » Sun Dec 30, 2012 12:33 pm

Grandpaboys wrote:"What the distribution yield is good for is telling you how much (monthly) income you can expect over the next few time periods without selling your shares"

That is what I use Dist.Yield for. At 84 age I am not interested what it is going to be 5 to 10 years from now, I may not be here. I am living for today and with the current very low interest rates I try to squeak out all the income I can to pay bills. Why should I get a 5 year CD at Ally Bank paying 1.61% less taxes when I can get 1.84% in Limited TE paying no taxes. Right now I have capital gains in my TE account. If that changes I can sell in 24 hours and invest elsewhere.

As long as you realize that you are receiving a 1.85% cash distribution -- not earning a 1.85% return going forward, in your situation that might be a good solution to whatever your goals are.
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Re: Where to Keep Medium Term Savings

Postby dbr » Sun Dec 30, 2012 12:38 pm

Robin wrote:
Grandpaboys wrote:"What the distribution yield is good for is telling you how much (monthly) income you can expect over the next few time periods without selling your shares"

That is what I use Dist.Yield for. At 84 age I am not interested what it is going to be 5 to 10 years from now, I may not be here. I am living for today and with the current very low interest rates I try to squeak out all the income I can to pay bills. Why should I get a 5 year CD at Ally Bank paying 1.61% less taxes when I can get 1.84% in Limited TE paying no taxes. Right now I have capital gains in my TE account. If that changes I can sell in 24 hours and invest elsewhere.

As long as you realize that you are receiving a 1.85% cash distribution -- not earning a 1.85% return going forward, in your situation that might be a good solution to whatever your goals are.


It comes again to the fact that a withdrawal is a withdrawal is a withdrawal. If a person wants money today, it is certainly possible to take whatever one wants by cashing distributions and selling shares. The implication will be what happens to the asset as time goes on.
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Re: Where to Keep Medium Term Savings

Postby jebmke » Sun Dec 30, 2012 12:44 pm

dbr wrote:It comes again to the fact that a withdrawal is a withdrawal is a withdrawal. If a person wants money today, it is certainly possible to take whatever one wants by cashing distributions and selling shares. The implication will be what happens to the asset as time goes on.

Exactly. Annuities are a clear example of this. The asset disappears between the date purchased and the date you die (for straight life annuities). But I have had people come into my tax center with annuities and proudly claim they were getting X% on their investment where X was the payment divided by their original annuity purchase. So there is a myth that that math is "yield".

Also get people who are very happy with the "tax-free" return of capital on GNMAs so, who knows?
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Re: Where to Keep Medium Term Savings

Postby KyleAAA » Sun Dec 30, 2012 1:10 pm

The Limited Term Tax Exempt fund is great. That's where I currently have my new car fund.
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