Investing for income while you are young

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Topic Author
jlq39
Posts: 438
Joined: Tue Dec 16, 2008 12:26 pm

Investing for income while you are young

Post by jlq39 »

Hey Guys and Gals,

I posted my portfolio a couple days ago and got some good response. One of the things I'm still wrestling with is this idea of investing for some income even though I'm young. Presently, my wife and I are able to max out 401k and Roths. We'd still have some disposable income left, right around a $1,000/month. I wanted to open up a taxable account and invest this portion. One thing I've wanted to do is invest for some income now, even though we are still young. We both have some things we want to do over the next 10-15 years and feel we will have more than enough money put back for our post retirement life. My question to anyone is, what sort of investment should I be looking at to generate some income. Preferably monthly. Any ideas?
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CyberBob
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Joined: Tue Feb 20, 2007 1:53 pm

Post by CyberBob »

If you want money to spend monthly, why complicate it by investing in anything? Just divert it directly from your paycheck? :P

Bob
Topic Author
jlq39
Posts: 438
Joined: Tue Dec 16, 2008 12:26 pm

Post by jlq39 »

CyberBob wrote:If you want money to spend monthly, why complicate it by investing in anything? Just divert it directly from your paycheck? :P

Bob
We don't necessarily want to spend the extra money now. But we also don't want to tie it up in a retirement account that we can't touch until we're 59 1/2 either. It would be nice to be able to invest it and earn some income off of it over say, just sitting in a crappy money market account that doesn't pay much interest.

We also already have sufficient emergency savings of 6 months, so basically it's just extra money that we need to do something with. Thought it'd be nice to park somewhere and build a nice income stream from it.
livesoft
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Joined: Thu Mar 01, 2007 7:00 pm

Post by livesoft »

Well, I think it would be unwise to use a taxable account in order to invest for income. I hope that is not what you are trying to do.

If you want to invest for more income, use your tax-sheltered accounts. The monthly income would be tax-free (if in Roth) or tax-deferred (if in 401(k)). Later when you are retired, you will be able to re-arrange things differently and still keep your taxes low.

The idea that you will be tying up this money in a retirement account is a false one. See for example this bit in the bogleheads' Wiki: http://www.bogleheads.org/wiki/index.ph ... ed_Account
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CyberBob
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Post by CyberBob »

It depends on when you need the money. I use a timed list roughtly similar to the one below. It's a sliding scale, so the money should transfer to the next one down as the date you need the money gets closer.

up to 1 year: Vanguard Prime money market fund
1 to 3 years: Vanguard Short-Term bond index fund
3 to 7 years: Vanguard Total bond market index fund
7-10 years: TIPS
10+ years: Total Stock/Total International combo, or Total World Stock

If you're in a high tax-bracket, muni funds may be a better solution.

Bob
TheEternalVortex
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Location: San Jose, CA

Post by TheEternalVortex »

I don't understand why you want more income. Apparently you already have more than enough? If you just want to invest for some long-term goals that's fine, but in general it's going to be much better for you to invest it all in tax-efficient stock funds.
Topic Author
jlq39
Posts: 438
Joined: Tue Dec 16, 2008 12:26 pm

Post by jlq39 »

CyberBob wrote:It depends on when you need the money. I use a timed list roughtly similar to the one below. It's a sliding scale, so the money should transfer to the next one down as the date you need the money gets closer.

up to 1 year: Vanguard Prime money market fund
1 to 3 years: Vanguard Short-Term bond index fund
3 to 7 years: Vanguard Total bond market index fund
7-10 years: TIPS
10+ years: Total Stock/Total International combo, or Total World Stock

If you're in a high tax-bracket, muni funds may be a better solution.

Bob
Thanks, I like that list with those time frames. Makes perfect sense.
Topic Author
jlq39
Posts: 438
Joined: Tue Dec 16, 2008 12:26 pm

Post by jlq39 »

livesoft wrote:Well, I think it would be unwise to use a taxable account in order to invest for income. I hope that is not what you are trying to do.

If you want to invest for more income, use your tax-sheltered accounts. The monthly income would be tax-free (if in Roth) or tax-deferred (if in 401(k)). Later when you are retired, you will be able to re-arrange things differently and still keep your taxes low.

The idea that you will be tying up this money in a retirement account is a false one. See for example this bit in the bogleheads' Wiki: http://www.bogleheads.org/wiki/index.ph ... ed_Account
What other way could we invest for income that we want to use before retirement, not after. As I said above, we have more than enough going to retirement accounts. This money would be pooling to be spent sometime in the next 1-5 years or so. Generating some income from it would be nice. I was just curious to hear if anyone else invests for income even though they are relatively young. We do not want this extra money tied up in a retirement account.
Topic Author
jlq39
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Joined: Tue Dec 16, 2008 12:26 pm

Post by jlq39 »

livesoft wrote:Well, I think it would be unwise to use a taxable account in order to invest for income. I hope that is not what you are trying to do.

If you want to invest for more income, use your tax-sheltered accounts. The monthly income would be tax-free (if in Roth) or tax-deferred (if in 401(k)). Later when you are retired, you will be able to re-arrange things differently and still keep your taxes low.

The idea that you will be tying up this money in a retirement account is a false one. See for example this bit in the bogleheads' Wiki: http://www.bogleheads.org/wiki/index.ph ... ed_Account
Thanks for the link. I'll check it out :)
Swivelguy
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Joined: Sun Jan 18, 2009 10:37 pm

Post by Swivelguy »

I think we're getting tied up in terminology here.

"Investing for income" means using investments to generate a stream of income off of which to pay for things.

It sounds like what you want to do, jlq39, is make some safe investments separate from your retirement savings, that you can use for vacations, large purchases, home upgrades, etc. This is a perfectly fine thing to do.

The safest investment for it would be FDIC-insured CDs, but if it's going to be over 5 years until you need the money and you're willing to take a little more risk, you could use a bond fund, like Total Bond Market, to generate a bit more return on the money.

The next question is where to hold this money. It sounds like you currently only have things you consider investments inside retirement accounts, and the surplus of your savings is just going into taxable savings accounts. This situation isn't bad, and if you don't want to, you don't have to change anything - just start a CD ladder and gradually add to it.

If you're willing to slog through a bit more paperwork, you can save some money on your taxes by holding your cash and bonds in your retirement accounts and holding some stocks in taxable. Gains on stocks are mostly taxed at the lower capital-gains rate, while interest from bonds and CDs is taxed as regular income, at your marginal tax rate.

The way this would work is that you sell $10,000 of stock and buy $10,000 of CDs or bonds in, say, a Roth IRA, then buy $10,000 of stock in a taxable account. Let's say a few years down the road, you want a fancy new refrigerator, for $2000. You sell $2000 of stock in the taxable account, generating $2000 of spendable cash. You then sell $2000 of bonds in the IRA and buy the $2000 of stock there.

You can read some more about this strategy at the page already linked: Placing Cash Needs in a Tax-Advantaged Account

Another option would be to hold a tax-exempt bond fund in taxable. This is not quite as good as the above method, but is simpler. Depending on your tax bracket, the yield of a tax-exempt bond fund may not be any higher than the after-tax yield of bank CDs.
Topic Author
jlq39
Posts: 438
Joined: Tue Dec 16, 2008 12:26 pm

Post by jlq39 »

Swivelguy wrote:I think we're getting tied up in terminology here.

"Investing for income" means using investments to generate a stream of income off of which to pay for things.

It sounds like what you want to do, jlq39, is make some safe investments separate from your retirement savings, that you can use for vacations, large purchases, home upgrades, etc. This is a perfectly fine thing to do.

The safest investment for it would be FDIC-insured CDs, but if it's going to be over 5 years until you need the money and you're willing to take a little more risk, you could use a bond fund, like Total Bond Market, to generate a bit more return on the money.

The next question is where to hold this money. It sounds like you currently only have things you consider investments inside retirement accounts, and the surplus of your savings is just going into taxable savings accounts. This situation isn't bad, and if you don't want to, you don't have to change anything - just start a CD ladder and gradually add to it.

If you're willing to slog through a bit more paperwork, you can save some money on your taxes by holding your cash and bonds in your retirement accounts and holding some stocks in taxable. Gains on stocks are mostly taxed at the lower capital-gains rate, while interest from bonds and CDs is taxed as regular income, at your marginal tax rate.

The way this would work is that you sell $10,000 of stock and buy $10,000 of CDs or bonds in, say, a Roth IRA, then buy $10,000 of stock in a taxable account. Let's say a few years down the road, you want a fancy new refrigerator, for $2000. You sell $2000 of stock in the taxable account, generating $2000 of spendable cash. You then sell $2000 of bonds in the IRA and buy the $2000 of stock there.

You can read some more about this strategy at the page already linked: Placing Cash Needs in a Tax-Advantaged Account

Another option would be to hold a tax-exempt bond fund in taxable. This is not quite as good as the above method, but is simpler. Depending on your tax bracket, the yield of a tax-exempt bond fund may not be any higher than the after-tax yield of bank CDs.
You've summed up what I was looking for exactly! Thanks for your post. Maybe I wasn't able to make myself clear enough in my OP. I've read the article and it's great. Opens my eyes to more options than I realized.
knowmad
Posts: 466
Joined: Thu Feb 05, 2009 10:39 pm

Re: Investing for income while you are young

Post by knowmad »

Municipal Bond Funds are nice for income that is free from federal taxes. Vanguard offers several good muni funds with a range of maturities. I like VWITX (the Intermediate fund with average duration of 7 years). It yields around 4% tax free (which is 4.5-7.5% tax equivalent yield depending on your bracket). Just be prepared for NAV fluctuations. For example, that fund has dropped 3% in the last month. Over the long run, however, it is safer than a stock fund.
Topic Author
jlq39
Posts: 438
Joined: Tue Dec 16, 2008 12:26 pm

Re: Investing for income while you are young

Post by jlq39 »

knowmad wrote:Municipal Bond Funds are nice for income that is free from federal taxes. Vanguard offers several good muni funds with a range of maturities. I like VWITX (the Intermediate fund with average duration of 7 years). It yields around 4% tax free (which is 4.5-7.5% tax equivalent yield depending on your bracket). Just be prepared for NAV fluctuations. For example, that fund has dropped 3% in the last month. Over the long run, however, it is safer than a stock fund.
Thanks, I'll have a look at that fund.
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