Short term munis vs. CDs for extra cash on hand?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
Topic Author
jjunk
Posts: 402
Joined: Fri Aug 24, 2012 9:52 pm
Location: Seattle

Short term munis vs. CDs for extra cash on hand?

Post by jjunk »

I'm planning to early retire from full time work in the next 2-3yrs. I've currently been growing my cash reserves to take care of my first year of retirement expenses as well as having enough to pay for a house outright in the area we retire to (basically this is 300-400k all up). Right now the money is sitting in a money market so I've been looking at what I could do with it to not lose too much to inflation over this time frame. I've been considering short term muni ETFs (like SUB) or possibly buying 1yr and 2yr CDs.

I like the fact that SUB is liquid, so we're not locked into a defined time frame if we want to pull our money out earlier and retire. I like that CDs have a iron clad guarantee but to get the best rates I'll likely need to open new accounts, which I'd prefer not to do but I'm not against it. Is there any other investments I should consider? Any opinions on which way to go here? We're in the 31% bracket right now, but will drop back to 28% next year. We're not interested in I-Bonds because the accounts have always been a pain to get setup and funded.

Would love some ideas here.
sschoe2
Posts: 631
Joined: Fri Feb 24, 2017 4:42 pm

Re: Short term munis vs. CDs for extra cash on hand?

Post by sschoe2 »

I do short term corporate and just eat the tax. Short term muni yield less than my savings account 1% last I checked.
aristotelian
Posts: 8928
Joined: Wed Jan 11, 2017 8:05 pm

Re: Short term munis vs. CDs for extra cash on hand?

Post by aristotelian »

I do combination of short-term corporate and intermediate/long term munis (VTEB, VWLUX). I do hold I-Bonds as well. I consider this segment of my portfolio to serve as 2nd tier emergency funds, long term savings (car replacement, etc) and part of my bond allocation.
User avatar
Topic Author
jjunk
Posts: 402
Joined: Fri Aug 24, 2012 9:52 pm
Location: Seattle

Re: Short term munis vs. CDs for extra cash on hand?

Post by jjunk »

I hadn't considered short term corporates. Thanks for that suggestion. What are you using in that space? ETF or mutual fund?
aristotelian
Posts: 8928
Joined: Wed Jan 11, 2017 8:05 pm

Re: Short term munis vs. CDs for extra cash on hand?

Post by aristotelian »

I have PIMCO CORP ETF because it is commission free at Schwab. Looking closer at its holdings, though, it is probably riskier than I would like. Take a look at Vanguard Short Term Corporate Bond Index (VCSH).
Nearly A Moose
Posts: 1184
Joined: Fri Apr 22, 2016 5:28 pm

Re: Short term munis vs. CDs for extra cash on hand?

Post by Nearly A Moose »

If you know you need the cash in 2-3 years (and likely not sooner), that lines up reasonably well with some popular CD timeframes, making it more practical to buy CDs with liquidity when you need it without having to do a bunch of laddering. You're not talking about returns that much more than a savings account, but you could try an Ally raise your rate CD under the theory some increase is better than no increase. Also, you can look at the early withdrawal penalties for CDs, which usually are a few months' interest. You can easily figure out where the breakeven point is between buying a CD and canceling early and just keeping things in savings.

Also, when comparing munis against your savings account, make sure you're accounting for tax in both. I have a next house downpayment fund sitting in Vanguard Limited Term Tax-Exempt, which has a slightly longer duration than their short-term muni fund. It yielded about 1.6% annualized last month if I recall correctly. I don't know your tax situation, but I'm paying a marginal 50% state and federal tax on my 1% online savings account interest, so in reality the muni fund is three times the (still small) yield. Just a thought.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.
Chuck
Posts: 2189
Joined: Thu May 21, 2009 12:19 pm

Re: Short term munis vs. CDs for extra cash on hand?

Post by Chuck »

Does it have to be an ETF? I use VFSTX (Vanguard Short-Term Investment Grade) and it comes with a checkbook if you want it. I use it for all my annual one-offs (Property tax/insurance, car insurance, etc.)

Its 2% yield competes with 5-year CDs, with only 2.6 years duration. (Standard disclaimer: Yes it's a bond fund with no stable NAV.)
User avatar
Topic Author
jjunk
Posts: 402
Joined: Fri Aug 24, 2012 9:52 pm
Location: Seattle

Re: Short term munis vs. CDs for extra cash on hand?

Post by jjunk »

Thanks for the additional suggestions. No, it doesnt have to be an ETF but I'm a Fidelity customer so I usually look for NTF/zero trade items where I can. I'll see if they have an equivalent to Vanguards offerings, so far it looks like SLQD might be the only corporate limited term, I'll see what else they have.
Post Reply