Sitting on Cash

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pdxinvest
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Sitting on Cash

Post by pdxinvest »

Hello Friends:

Here is my situation:

I'm 67, bride is 68. Own home outright. Three pensions, all of them defined benefit, however, none adjust for inflation. Social Security. The bride has social security and a very small taxable IRA.

The pensions cover expenses handily.

CASH: $200K in bank. Used to be in CDs when they actually gave us a return. Now..well, .50% a year.

I have two traditional IRAs: $85k, Vanguard, mostly target date retirement account of 2025 since I am partly retired but still working part time and generating about $25 k in income, and 80K, again in a cash IRA bank account.

Recently I have come into another $200K in inheritance. I'm talking to my accountant about using some of that cash as tax payments to convert some of that traditional IRA to Roth. But I still need to park the rest.

So here's my question: where can I park this taxable cash where it will generate some return, say 3% or so, to hedge inflation, without an alarming exposure to the market. Basically, I need to replace the CD bucket with a Vanguard fund that has lower risk than a stock index. Some short term bond index fund? I'm not in a high bracket, so I'm not concerned that it has to be tax free bonds.

Thanks for your help.
mosilaby
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Re: Sitting on Cash

Post by mosilaby »

You can't get 3% return without exposing yourself to market risk.
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goodenyou
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Re: Sitting on Cash

Post by goodenyou »

MYGAs would fit the bill.
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desconhecido
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Re: Sitting on Cash

Post by desconhecido »

In the Vanguard world, you might consider VTC which will likely yield 2 - 2.5% but has a duration of about 8 years. Wellesley income fund (VWIAX) might yield 2.5%. It's about 60% (maybe a bit more) bonds. A bit into the Vanguard high yield fund (VWEAX) could juice your returns a bit without outrageous risk though some will probably set their hair on fire when they read this.

The problem is, in this interest ratte environment you're not going to get any decent return without some risk. Except maybe Ibonds, if you can take the hassle.
etfan
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Re: Sitting on Cash

Post by etfan »

VASIX (Vanguard Life Strategy Income Fund) is 80% bonds and only 20% stocks. About 4% yield at its worst historically but more like 5+% it seems.

At 20% stocks, you get some growth potential but minimize exposure.

I know this may be beyond your risk tolerance level but it's just something to look into.
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Wiggums
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Re: Sitting on Cash

Post by Wiggums »

I-bonds ate paying 3.54% right now.

My 92 year old Mom has money in Wellesley to stay ahead of inflation.
Last edited by Wiggums on Sun Jul 25, 2021 8:38 pm, edited 1 time in total.
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Topic Author
pdxinvest
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Re: Sitting on Cash

Post by pdxinvest »

etfan wrote: Sun Jul 25, 2021 8:31 pm VASIX (Vanguard Life Strategy Income Fund) is 80% bonds and only 20% stocks. About 4% yield at its worst historically but more like 5+% it seems.

At 20% stocks, you get some growth potential but minimize exposure.

I know this may be beyond your risk tolerance level but it's just something to look into.
20% exposure is tolerable. That's something to look into. Thanks.

Anything else with these ratios?
sycamore
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Re: Sitting on Cash

Post by sycamore »

pdxinvest wrote: Sun Jul 25, 2021 8:38 pm
etfan wrote: Sun Jul 25, 2021 8:31 pm VASIX (Vanguard Life Strategy Income Fund) is 80% bonds and only 20% stocks. About 4% yield at its worst historically but more like 5+% it seems.

At 20% stocks, you get some growth potential but minimize exposure.

I know this may be beyond your risk tolerance level but it's just something to look into.
20% exposure is tolerable. That's something to look into. Thanks.

Anything else with these ratios?
A caveat on Life Strategy Income. It doesn't "yield" 4% like a bond fund or CDs have a yield. I think etfan is referring to its CAGR which has been 6.3% over its lifetime, but that amount includes reinvested dividends and capital appreciation. It's also had a worst year drop of 10.5% and a max drawdown of 15% and volatility of 4.42%.

So if you're okay with the volatility and risk of losing a chunk here and there, it could be a reasonable choice (I use it myself for a portion of my portfolio).

The 20% stocks is split 60% to US stocks, 40% to International stocks.
The 80% bonds is split 70% US bonds, 30% International bonds.
etfan
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Re: Sitting on Cash

Post by etfan »

sycamore wrote: Sun Jul 25, 2021 8:44 pm A caveat on Life Strategy Income. It doesn't "yield" 4% like a bond fund or CDs have a yield. I think etfan is referring to its CAGR which has been 6.3% over its lifetime, but that amount includes reinvested dividends and capital appreciation.
Yes. Isn't that what matters though? (The overall growth of the money in the VASIX bucket).
The 20% stocks is split 60% to US stocks, 40% to International stocks.
The 80% bonds is split 70% US bonds, 30% International bonds.
I like the diversity. The 20% stocks rebalance automatically into bonds, solidifying your gains, and during a market crash, losing 50% of your equities means you lose 10% of the fund's value.
So if you're okay with the volatility and risk of losing a chunk here and there, it could be a reasonable choice (I use it myself for a portion of my portfolio).
How do you integrate that into a portfolio, if you don't mind me asking?
sycamore
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Re: Sitting on Cash

Post by sycamore »

etfan wrote: Sun Jul 25, 2021 9:04 pm
sycamore wrote: Sun Jul 25, 2021 8:44 pm A caveat on Life Strategy Income. It doesn't "yield" 4% like a bond fund or CDs have a yield. I think etfan is referring to its CAGR which has been 6.3% over its lifetime, but that amount includes reinvested dividends and capital appreciation.
Yes. Isn't that what matters though? (The overall growth of the money in the VASIX bucket).
Classic counter point: if the overall growth is all that matters, then why not go for a 60/40 or 80/20 fund? :)

Potential growth matters for sure. Past growth matters somewhat (but never a guarantee). I'll argue another part that matters is the risk aspect. A 20/80 fund can go up and down 10% in a year. If an investor is used to seeing a always-increasing value for their CD, they may be very disappointed to find that their VASIX dropped 10%. Compared to a bond fund, VASIX will be more volatile. Perhaps bond fund investors are used to winning some/losing some and so VASIX would be more palatable?
etfan wrote: Sun Jul 25, 2021 9:04 pm
The 20% stocks is split 60% to US stocks, 40% to International stocks.
The 80% bonds is split 70% US bonds, 30% International bonds.
I like the diversity. The 20% stocks rebalance automatically into bonds, solidifying your gains, and during a market crash, losing 50% of your equities means you lose 10% of the fund's value.
So if you're okay with the volatility and risk of losing a chunk here and there, it could be a reasonable choice (I use it myself for a portion of my portfolio).
How do you integrate that into a portfolio, if you don't mind me asking?
I bought two all-in-one funds (LS 20/80 and Target Retirement Income 30/70) for a portion of my portfolio. One in taxable, the other in an IRA. My other accounts hold just one stock fund each.

Main reasons I use the all-in-one funds:
(1) Automatic rebalancing. I was not keeping up with rebalancing separate bond and stock funds like I'd planned to.
(2) Simplicity. Compared to multiple separate funds for US and International stocks and US bonds, having fewer funds overall is easier for my spouse to understand and manage (in the event I'm not here).
(3) The lower volatility provides stability especially in the taxable account where I may need to withdraw from (depending on job/life changes). It's mental accounting, but helps to avoid behavioral mistakes for me and DW.

The particular LS and TR funds I picked were based in part on my overall AA (of course) and how much $ I happened to have in other stock funds. A 40/60 or 60/40 or even a TR 2025 might've been fine if circumstances were different.
NancyABQ
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Re: Sitting on Cash

Post by NancyABQ »

pdxinvest wrote: Sun Jul 25, 2021 7:58 pm Recently I have come into another $200K in inheritance. I'm talking to my accountant about using some of that cash as tax payments to convert some of that traditional IRA to Roth. But I still need to park the rest.
With ~$165K in TIRA, it seems unlikely to me that Roth conversions make sense for you. That is, unless you are spending your own money paying the taxes now, as a favor to passing it on as a Roth to your heirs. That would be a valid reason, but make sure that's your actual reason? Your RMDs will not be significant on $165K so there is probably no need to convert to reduce them.

As for your actual question, I think MYGA or I-bonds are your safest current returns if you don't want to invest it in equity index funds.
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JoeRetire
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Re: Sitting on Cash

Post by JoeRetire »

pdxinvest wrote: Sun Jul 25, 2021 7:58 pmSo here's my question: where can I park this taxable cash where it will generate some return, say 3% or so, to hedge inflation, without an alarming exposure to the market.
Unlikely to generate 3% without at least some exposure to the market. You get to decide how "alarming" that is.
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yobyot
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Re: Sitting on Cash

Post by yobyot »

So, I don't think people will like my answer here...but why bother? Sit on the cash.

I learned my lesson in the auction-rate securities debacle in 2008. Since then, I've kept seven figures in cash. Yup...cold, hard, inflation-degrading cash. Why?

Two good reasons:
1). If the bottom falls out, FDIC has my back. I never lose a night's sleep.
2). It allows me to have a _very_ aggressive "remainer of portfolio" strategy. I am lucky to own a smallish chunk of a technology high-flyer. That lofty valuation makes up a growing portion of my overall positions. Yet I don't have to worry about capital gains taxes or missing a high. It's so heavily appreciated, it could drop by 30% or more in a bear market and it wouldn't matter to me. Or, I could leave it for my heirs, assuming step-up basis survives.

In short, cash is king.
My retirement portfolio is so incoherent a famous advisor yelled at me and then declined. We'll still have more than enough.
delamer
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Re: Sitting on Cash

Post by delamer »

NancyABQ wrote: Mon Jul 26, 2021 2:18 pm
pdxinvest wrote: Sun Jul 25, 2021 7:58 pm Recently I have come into another $200K in inheritance. I'm talking to my accountant about using some of that cash as tax payments to convert some of that traditional IRA to Roth. But I still need to park the rest.
With ~$165K in TIRA, it seems unlikely to me that Roth conversions make sense for you. That is, unless you are spending your own money paying the taxes now, as a favor to passing it on as a Roth to your heirs. That would be a valid reason, but make sure that's your actual reason? Your RMDs will not be significant on $165K so there is probably no need to convert to reduce them.

As for your actual question, I think MYGA or I-bonds are your safest current returns if you don't want to invest it in equity index funds.
Agreed re: the Roth conversions assuming the two IRAs are you & your wife’s only tax-deferred accounts.

And if that cash is part of your retirement portfolio, you should determine an overall allocation that you want to implement for that portfolio and then invest accordingly.

If your pensions cover expenses handily, then you don’t need a large cash position. But if you want a large cash position for some reason, then invest your non-cash in stocks to achieve some growth.
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etfan
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Re: Sitting on Cash

Post by etfan »

sycamore wrote: Mon Jul 26, 2021 2:07 pm Classic counter point: if the overall growth is all that matters, then why not go for a 60/40 or 80/20 fund? :)
Lower risk?

A 20/80 fund can go up and down 10% in a year. If an investor is used to seeing a always-increasing value for their CD, they may be very disappointed to find that their VASIX dropped 10%.
Despite the short term "zig-zags", the gains will be solidified past a certain point, correct? That's the point of having the 80% bond part (more and more bonds will be bought with the stock gains over time).
I bought two all-in-one funds (LS 20/80 and Target Retirement Income 30/70) for a portion of my portfolio. One in taxable, the other in an IRA. My other accounts hold just one stock fund each.

Main reasons I use the all-in-one funds:
(1) Automatic rebalancing. I was not keeping up with rebalancing separate bond and stock funds like I'd planned to.
(2) Simplicity. Compared to multiple separate funds for US and International stocks and US bonds, having fewer funds overall is easier for my spouse to understand and manage (in the event I'm not here).
(3) The lower volatility provides stability especially in the taxable account where I may need to withdraw from (depending on job/life changes). It's mental accounting, but helps to avoid behavioral mistakes for me and DW.

The particular LS and TR funds I picked were based in part on my overall AA (of course) and how much $ I happened to have in other stock funds. A 40/60 or 60/40 or even a TR 2025 might've been fine if circumstances were different.
I'm in a similar boat. But LS 20/80 is very similar to TDF 30/70. Is one of those two more tax-efficient in a taxable account?

Contrary to general sentiment here, I sort of like "mental accounting" in some instances. For example, having a second-tier emergency fund in the form of Life Strategy fund 20/80 (in taxable) is just a nice way to keep things organized.

So the "buckets" are: TDF for retirement, LS 20/80 for EF, and VTI for other purposes, etc.
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AAA
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Re: Sitting on Cash

Post by AAA »

goodenyou wrote: Sun Jul 25, 2021 8:21 pm MYGAs would fit the bill.
And what is that?
02nz
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Re: Sitting on Cash

Post by 02nz »

mosilaby wrote: Sun Jul 25, 2021 8:17 pm You can't get 3% return without exposing yourself to market risk.
I bonds are currently at 3.54%. With inflation where it is, it's likely to remain high for some time (rate is tied to inflation and adjusted semiannually). Limit is $10K/person, but that means OP can drop $40K into I bonds in the next 6 months.

I agree that Roth conversions likely do not make sense.
02nz
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Re: Sitting on Cash

Post by 02nz »

yobyot wrote: Mon Jul 26, 2021 3:23 pm So, I don't think people will like my answer here...but why bother? Sit on the cash.

I learned my lesson in the auction-rate securities debacle in 2008. Since then, I've kept seven figures in cash. Yup...cold, hard, inflation-degrading cash. Why?

Two good reasons:
1). If the bottom falls out, FDIC has my back. I never lose a night's sleep.
2). It allows me to have a _very_ aggressive "remainer of portfolio" strategy. I am lucky to own a smallish chunk of a technology high-flyer. That lofty valuation makes up a growing portion of my overall positions. Yet I don't have to worry about capital gains taxes or missing a high. It's so heavily appreciated, it could drop by 30% or more in a bear market and it wouldn't matter to me. Or, I could leave it for my heirs, assuming step-up basis survives.

In short, cash is king.
Maybe for someone with a 7-figure net worth or higher and a huge position in a high-flying tech stock. Got it. What about for OP?
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goodenyou
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Re: Sitting on Cash

Post by goodenyou »

AAA wrote: Mon Jul 26, 2021 4:50 pm
goodenyou wrote: Sun Jul 25, 2021 8:21 pm MYGAs would fit the bill.
And what is that?
Multi Year Guaranteed Annuity. It is a CD-like instrument that is offered by insurance companies. There are a few differences between them.

https://www.blueprintincome.com/fixed-a ... 4cQAvD_BwE
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sycamore
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Re: Sitting on Cash

Post by sycamore »

etfan wrote: Mon Jul 26, 2021 4:02 pm Despite the short term "zig-zags", the gains will be solidified past a certain point, correct? That's the point of having the 80% bond part (more and more bonds will be bought with the stock gains over time).
Solidified sounds so permanent :) But what happens when stocks drop after that? During 2001-2002 and 2008-2009, stocks kept dropping for months and months so bonds were sold to buy more stocks. Eventually stocks reversed course and rose, but the problem is if you need to cash out during those stock drawdowns.

etfan wrote: Mon Jul 26, 2021 4:02 pm I'm in a similar boat. But LS 20/80 is very similar to TDF 30/70. Is one of those two more tax-efficient in a taxable account?

Contrary to general sentiment here, I sort of like "mental accounting" in some instances. For example, having a second-tier emergency fund in the form of Life Strategy fund 20/80 (in taxable) is just a nice way to keep things organized.

So the "buckets" are: TDF for retirement, LS 20/80 for EF, and VTI for other purposes, etc.
I would assume the higher stock allocation fund will be better tax-wise. More stock means greater proportion of stock distributions than bond distributions. Qualified stock divs have better tax rate than bond divs, which are treated as income. But going from 20/80 to 30/70 may not really be all that noticeable unless you have a lot invested.

If buckets help keep someone on the right track, that's okay by me :)
etfan
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Re: Sitting on Cash

Post by etfan »

sycamore wrote: Mon Jul 26, 2021 8:25 pm
etfan wrote: Mon Jul 26, 2021 4:02 pm Despite the short term "zig-zags", the gains will be solidified past a certain point, correct? ...
Solidified sounds so permanent :) But what happens when stocks drop after that? [...] the problem is if you need to cash out during those stock drawdowns.
Maybe that's a strong word, but there is a limit to how low the fund's value will go. Let's say the LS 20/80 loses practically the entire value of its equities. So now your $100K investment in that fund is now only worth $80K (rebalanced $64K bonds and $16K equities). Let's deduct $30K more to account for corporate bonds losing value.

And that's an extreme scenario. But I think we can at least say a $100K investment in LS 20/80 has a "solid" cash value somewhere between $50K and $80K at the worst of times.

All I being too pessimistic or too optimistic?

I would assume the higher stock allocation fund will be better tax-wise. More stock means greater proportion of stock distributions than bond distributions.
In that case, a single TDF across all accounts seems efficient enough, if it's mostly stocks.
If buckets help keep someone on the right track, that's okay by me :)
Yes. It helps big time. I don't know why it's frowned upon.
sycamore
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Re: Sitting on Cash

Post by sycamore »

etfan wrote: Mon Jul 26, 2021 9:38 pm ...And that's an extreme scenario. But I think we can at least say a $100K investment in LS 20/80 has a "solid" cash value somewhere between $50K and $80K at the worst of times.
That's reasonable. My own guesstimate is on the higher side; it's unlikely to drop more than 15%.
etfan wrote: Mon Jul 26, 2021 9:38 pm All I being too pessimistic or too optimistic?
I'll let you know in a few years!
hudson
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Re: Sitting on Cash

Post by hudson »

pdxinvest wrote: Sun Jul 25, 2021 7:58 pm Hello Friends:

Here is my situation:

I'm 67, bride is 68. Own home outright. Three pensions, all of them defined benefit, however, none adjust for inflation. Social Security. The bride has social security and a very small taxable IRA.

The pensions cover expenses handily.

CASH: $200K in bank. Used to be in CDs when they actually gave us a return. Now..well, .50% a year.

I have two traditional IRAs: $85k, Vanguard, mostly target date retirement account of 2025 since I am partly retired but still working part time and generating about $25 k in income, and 80K, again in a cash IRA bank account.

Recently I have come into another $200K in inheritance. I'm talking to my accountant about using some of that cash as tax payments to convert some of that traditional IRA to Roth. But I still need to park the rest.

So here's my question: where can I park this taxable cash where it will generate some return, say 3% or so, to hedge inflation, without an alarming exposure to the market. Basically, I need to replace the CD bucket with a Vanguard fund that has lower risk than a stock index. Some short term bond index fund? I'm not in a high bracket, so I'm not concerned that it has to be tax free bonds.

Thanks for your help.
You want a place to park $200 or $400K. You want to hedge inflation.
I vote:
VWIUX...a muni bond fund is paying out around 2%; that amount is slowly declining.
and or TIPS to hedge inflation. If I went TIPS, I would duration match.

When my CDs mature, I will be in the same situation as you are. When that happens, all I can think of is TIPS, VWIUX, or maybe long treasuries. I would duration match. I might go half TIPS and half VWIUX.

Bottom Line: Maybe hold your nose and go for the best available safe fixed income.

For Reference:
10 Year treasuries are paying 1.25%
20 Year T's = 1.81%
30 Year T's = 1.89%
Penfed 5 Year CD 1.1%
7eight9
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Re: Sitting on Cash

Post by 7eight9 »

goodenyou wrote: Mon Jul 26, 2021 7:45 pm
AAA wrote: Mon Jul 26, 2021 4:50 pm
goodenyou wrote: Sun Jul 25, 2021 8:21 pm MYGAs would fit the bill.
And what is that?
Multi Year Guaranteed Annuity. It is a CD-like instrument that is offered by insurance companies. There are a few differences between them.

https://www.blueprintincome.com/fixed-a ... 4cQAvD_BwE
+1

Many conservative investors, myself included, favor fixed annuities these days. They pay much better than bank accounts, money market funds, CD and other low-risk fixed income investments.

There was a good thread recently titled Purchasing MYGAs (multi year guaranteed annuities) - mega thread that might be worth a look.
viewtopic.php?f=1&t=334589

I've purchased from Blueprint Income, Canvas and Gainbridge.
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