Decumulation phase of retirement: money market a safe place to park money needed over the next two years?

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JCP7
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Decumulation phase of retirement: money market a safe place to park money needed over the next two years?

Post by JCP7 » Sun Nov 11, 2018 8:22 pm

I've been following the recent threads posted about money market funds. I'm still a bit unclear on a few things.

My husband and I have all our IRAs at Vanguard in a 50/50 basic four fund portfolio. At this point, we know that we will be taking money out and not much will be going in anymore. He is 75, still working part-time in his own business with a fairly low income; I'm almost 68 and retired.

When we need funds we usually sell from our IRAs, besides taking our RMDs in early January (his and my small inherited IRA). Given the way the market has been lately, I realize this is not the best way to do this.

1) Is a money market fund a good place to park money that we will need over the next year? I'd like to withdraw funds when I rebalance our portfolio, but not move them to our usual credit union savings and money management accounts, which have very low (or no) interest.

2) If one has a Vanguard money market fund, are you exchanging funds into it (no tax consequences) until you actually transfer the funds to your bank or credit union account? Meaning, is it still within your IRA and tax advantaged?

3) Would we each set up our own money market fund if it is a matter of exchanging funds? Or if we are actually selling, would we do a joint account? Can one open the account(s) by exchanging or selling from an IRA?

4) Suggestions on which one might be better: Prime or Federal Money Market Fund? Our income is low, so New York tax exempt might not be appropriate.

5) Any other suggestions as to where to hold funds one will need within the next year or two?

Thanks in advance.

J

sport
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Re: Decumulation phase of retirement: money market a safe place to park money needed over the next two years?

Post by sport » Sun Nov 11, 2018 10:06 pm

JCP7 wrote:
Sun Nov 11, 2018 8:22 pm
I've been following the recent threads posted about money market funds. I'm still a bit unclear on a few things.

My husband and I have all our IRAs at Vanguard in a 50/50 basic four fund portfolio. At this point, we know that we will be taking money out and not much will be going in anymore. He is 75, still working part-time in his own business with a fairly low income; I'm almost 68 and retired.

When we need funds we usually sell from our IRAs, besides taking our RMDs in early January (his and my small inherited IRA). Given the way the market has been lately, I realize this is not the best way to do this.

1) Is a money market fund a good place to park money that we will need over the next year? I'd like to withdraw funds when I rebalance our portfolio, but not move them to our usual credit union savings and money management accounts, which have very low (or no) interest.

2) If one has a Vanguard money market fund, are you exchanging funds into it (no tax consequences) until you actually transfer the funds to your bank or credit union account? Meaning, is it still within your IRA and tax advantaged?

3) Would we each set up our own money market fund if it is a matter of exchanging funds? Or if we are actually selling, would we do a joint account? Can one open the account(s) by exchanging or selling from an IRA?

4) Suggestions on which one might be better: Prime or Federal Money Market Fund? Our income is low, so New York tax exempt might not be appropriate.

5) Any other suggestions as to where to hold funds one will need within the next year or two?

Thanks in advance.

J
1. A MM fund is a great place for money needed within one year.
2. You can have a MM fund in your IRA, or you can have one in a taxable account, or both. Your choice.
3. If you want a MM fund in your IRA, you must each have one in your respective accounts. If you want to have a taxable account, you can have a joint account.
4. Either Prime or Federal would be good. Prime has a little higher yield. Prime is very safe. Federal is very very safe. There is also a Treasury MM fund which is very very very safe, but has an initial purchase minimum of 50K. You may also be interested in writing checks against a MM fund. Vanguard offers those checks for free, but the minimum amount for writing a check is $250.

sbaywriter
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Re: Decumulation phase of retirement: money market a safe place to park money needed over the next two years?

Post by sbaywriter » Sun Nov 11, 2018 10:17 pm

3)
Can one open the account(s) by exchanging or selling from an IRA?
I think you have to open the account first before you can exchange/sell into it. Could be wrong though - I only have IRA accounts at Vanguard.

delamer
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Re: Decumulation phase of retirement: money market a safe place to park money needed over the next two years?

Post by delamer » Sun Nov 11, 2018 10:34 pm

If you want to move your IRA money into a Money Market fund without it being a taxable event, then you need establish the Money Market fund as an investment option within your IRA.

And yes, it is a good option for money you are going to spend within a couple years.

hawkfan55
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Re: Decumulation phase of retirement: money market a safe place to park money needed over the next two years?

Post by hawkfan55 » Sun Nov 11, 2018 10:36 pm

Yes, Vanguard Prime Money Market is a safe place to park money needed over the next two years. My DW and I are retired and we set up automatic withdrawal from my Rollover IRA Prime Money Market Account each month into our checking account. You can also have federal/state taxes taken out from your withdrawal. Changes are easy to do online. We only keep one year's withdrawals in Prime Money Market and years 2-4 in short term bond funds.
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sport
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Re: Decumulation phase of retirement: money market a safe place to park money needed over the next two years?

Post by sport » Sun Nov 11, 2018 10:49 pm

hawkfan55 wrote:
Sun Nov 11, 2018 10:36 pm
You can also have federal/state taxes taken out from your withdrawal.
This is true for federal taxes. It is only true for taxes for some states but not other states. Vanguard will not withhold for my state.

hawkfan55
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Re: Decumulation phase of retirement: money market a safe place to park money needed over the next two years?

Post by hawkfan55 » Mon Nov 12, 2018 12:14 pm

This is true for federal taxes. It is only true for taxes for some states but not other states. Vanguard will not withhold for my state.
I stand corrected. My state mandates that Vanguard withhold 5% on all withdrawals. I do like that I can specify the amount of federal taxes withheld.
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Kevin M
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Re: Decumulation phase of retirement: money market a safe place to park money needed over the next two years?

Post by Kevin M » Mon Nov 12, 2018 1:00 pm

JCP7 wrote:
Sun Nov 11, 2018 8:22 pm
5) Any other suggestions as to where to hold funds one will need within the next year or two?
SEC yield on Prime money market currently is 2.23%, but it has been gradually increasing, and almost certainly will continue to do so as long as the Fed keeps increasing the federal funds rate. You can get a higher yield with Treasuries starting at 2-month maturity (the Treasury recently started auctioning 2-month Treasuries). You can see approximate yields on various maturity Treasuries here: Daily Treasury Yield Curve Rates (look in the last row for the most recent yields).

On that Treasury.gov web page, the 6-month yield is 2.52%, 1-year is 2.73%, and 2-year is 2.94%. So you could build a "ladder" of Treasuries out to 2-year maturity, with the amount in each rung targeted for expected expenses at that maturity. You can buy these Treasuries "at auction" at Vanguard, where you will get the same yields as institutional investors investing millions of dollars.

If you pay any state income tax, the taxable-equivalent yield of a Treasury in a taxable account will be higher, due to the state tax exemption. If you don't pay state income tax, or in an IRA where the state tax exemption doesn't apply, then a 2-year CD has a higher yield at 3.10%, but Treasuries have higher yields at the shorter maturities. So, you could use Treasuries out to 1-year, but use a CD for the 2-year rung of your ladder.

Whether or not you end up earning more from the Treasury/CD ladder depends on how fast the yield on the money market fund increases.

I'm very comfortable with the safety of Prime MM, but Treasuries are even safer in terms of default risk--they're about as safe as you can get. FDIC-insured CDs are pretty much as safe as Treasuries, and all CDs Vanguard sells are FDIC insured (as long as you stay within the insurance limits).

You can buy Treasuries and CDs in your IRAs as well as in your taxable accounts at Vanguard, as long as they are brokerage accounts. If you are still on the old mutual-fund only platform, you can easily upgrade your accounts to brokerage accounts.

Kevin
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GerryL
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Re: Decumulation phase of retirement: money market a safe place to park money needed over the next two years?

Post by GerryL » Mon Nov 12, 2018 2:37 pm

Another thing you might want to consider to build up your cash holdings inside your IRA is to turn off the reinvestment option and have earnings from your 4-fund portfolio go into the MM fund inside your IRA.

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