Where to invest "car fund" for 10 years or more

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DebiT
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Where to invest "car fund" for 10 years or more

Post by DebiT » Thu Jul 18, 2019 12:40 pm

I'm a recent widow, age 62, and beginning to sort out how I want to allocate some "buckets" in my head regarding finances. I'm used to managing our 7 figure retirement money, thankfully, and have a 50/50 allocation. I'm a self-employed counselor, planning to take SS at 70, likely to work until 70, esp since now I will not have have husband's SS once I do retire. (We were same age, equal earners, and I do know that I can claim a survivors benefit on his SS when I reach FRA).

I'm sorting out how to handle the life insurance money which I'm viewing as the equivalent of my late husband's former salary, pre-paid. That model is working well for me mentally at this point. So I am viewing that money as separate from retirement money at this point. There may be excess, perhaps significant excess, by the time I'm ready to take my SS at age 70, but I'm not dealing with that right now. The bulk of that life ins money is now in SWVXX, Schwab Money Market Advantage, earning about 2.31%.

I have a new vehicle that I expect to last at least 10 years. What I want to do next, in our taxable account, is allocate money for my next car to a separate tax-free fund so that when I need a new vehicle the money is there, separate from the rest. I don't want to buy a 10 year CD at today's interest rates.

I ran a quick screen at Schwab for mutual funds, intermediate govt, tax-free federally and in California, obviously no-load, no fee, Morningstar rated 4 or 5 stars, and came up with 4.

ALCAX AB Municipal ER 0.80 Total return 4.75
MECMX Blackrock California ER 0.82 TR 4.19 -- this fund is much much larger than the rest
DCAAX BNY Mellon California ER 0.95 TR 4.59
EACAX Eaton Vance California ER 0.84 TR 5.33

I'd appreciate comments as to these funds, and if there is anything significantly wrong with this type of investment, in a taxable account, for 10 year money. For my purposes, I want it in a separate fund from my other investments.

Thanks for any help the board can provide.
Last edited by DebiT on Thu Jul 18, 2019 12:49 pm, edited 1 time in total.
Age 62, complete retirement not til 70, target is 50/50 -- Stock US 30, Intl 15, REIT 5. Bonds US 45, cash ~5

Chadnudj
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Re: Where to invest "car fund" for 10 years or more

Post by Chadnudj » Thu Jul 18, 2019 12:46 pm

DebiT wrote:
Thu Jul 18, 2019 12:40 pm
I'm a recent widow, age 62, and beginning to sort out how I want to allocate some "buckets" in my head regarding finances. I'm used to managing our 7 figure retirement money, thankfully, and have a 50/50 allocation. I'm a self-employed counselor, planning to take SS at 70, likely to work until 70, esp since now I will not have have husband's SS once I do retire. (We were same age, equal earners, and I do know that I can claim spousal on his when I reach FRA).

Sorry for your loss.

One thing to note (that you may or may not be aware of): you may be entitled to claim your husband's SS now/soon, and then switch over when you turn 70 to your own (higher, 8% a year increased) benefit.
Widows and widowers who collect a survivors benefit, but also qualify for a benefit on their own, may potentially collect a survivors benefit in the early years of retirement and leave their own Social Security benefit to accrue delayed retirement credits. They may then switch to their own (augmented) retirement benefit as late as age 70.

Let’s look at an example of how survivors benefits might work for one widow — Kathy.

Kathy

Kathy is 66 years old, in good health, and nearing retirement. Bill, her deceased husband, was already collecting his full retirement age benefit when he died, which was about $300 more than hers. Kathy would like to retire and move closer to her children, but she wonders whether she should continue working a bit longer and delay taking her Social Security benefit to increase the size of her monthly checks.

As a new widow, Kathy has some important decisions to make, including how and when to file for her Social Security benefits. Her benefit filing strategy can have a significant impact on her monthly cash flow and on the benefit she receives over her lifetime.

Like anyone eligible for Social Security, Kathy could file for benefits starting at age 62 and accept a reduced monthly payout for life; she could delay her retirement benefit until her full retirement age (66) and collect 100 percent of the benefit to which she is entitled; or she could delay claiming Social Security beyond her full retirement age to increase the size of her future benefit. If she waits until age 70, she would increase the size of her monthly benefit by as much as 32 percent for the rest of her life.

As a widow, however, she also has another option. She could file for a survivors benefit at her full retirement age based on Bill’s earnings record, letting her own retirement benefit accrue delayed credits until age 70, at which point she would stop her survivors benefit and switch to collecting her own benefit. Under this scenario, Kathy could potentially collect tens of thousands of dollars more, if she lives until age 85 or older, than she would if she never filed for survivors benefits.
From this article: https://blog.massmutual.com/post/social ... he-widowed

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DebiT
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Re: Where to invest "car fund" for 10 years or more

Post by DebiT » Thu Jul 18, 2019 12:50 pm

Thank you, I do know that, and just now edited my first paragraph to say "survivor" not "spousal".
Age 62, complete retirement not til 70, target is 50/50 -- Stock US 30, Intl 15, REIT 5. Bonds US 45, cash ~5

Chadnudj
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Re: Where to invest "car fund" for 10 years or more

Post by Chadnudj » Thu Jul 18, 2019 1:00 pm

DebiT wrote:
Thu Jul 18, 2019 12:50 pm
Thank you, I do know that, and just now edited my first paragraph to say "survivor" not "spousal".
Cool. But be aware that you can claim your survivor benefit early (even now), albeit at a lower amount than if you waited, obviously.

And, again, sorry for your loss (and sorry that I don't really have any good advice/thoughts on the car fund question, but I'm sure someone else will!)

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whodidntante
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Re: Where to invest "car fund" for 10 years or more

Post by whodidntante » Thu Jul 18, 2019 1:01 pm

I don't see any advantage to having a car bucket in your situation. In your shoes, I would take the car bucket, and any other bucket you have, and invest it in your 50/50 asset allocation, as tax efficiently as possible. Most people should not hold munis, but should hold taxable bonds in tax deferred accounts. Munis have a lower after tax yield for most people.

rascott
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Re: Where to invest "car fund" for 10 years or more

Post by rascott » Thu Jul 18, 2019 1:15 pm

I agree that it should just be invested in the same manner as the rest of your portfolio. If you want a separate account for mental accounting, that's fine.

I wouldn't use any of those funds listed. Very high ERs.

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DebiT
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Re: Where to invest "car fund" for 10 years or more

Post by DebiT » Thu Jul 18, 2019 2:50 pm

They are crazy high, aren't they. The reason I'm thinking about munis is because of California's wonderfully high tax rates.

I know a car bucket is sort of stupid, but for right now, my brain needs it. The life insurance money is not part of my 50/50 allocation. To me, this is more like "pre-paid" salary and needs to be 100% risk free, at least until I get better handle on my new situation.
Age 62, complete retirement not til 70, target is 50/50 -- Stock US 30, Intl 15, REIT 5. Bonds US 45, cash ~5

aristotelian
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Re: Where to invest "car fund" for 10 years or more

Post by aristotelian » Thu Jul 18, 2019 3:19 pm

DebiT wrote:
Thu Jul 18, 2019 2:50 pm
They are crazy high, aren't they. The reason I'm thinking about munis is because of California's wonderfully high tax rates.

I know a car bucket is sort of stupid, but for right now, my brain needs it. The life insurance money is not part of my 50/50 allocation. To me, this is more like "pre-paid" salary and needs to be 100% risk free, at least until I get better handle on my new situation.
What does a car represent as a portion of your portfolio? Figure that out and adjust your allocation accordingly. If a car is 2% of your portfolio, do something like 48/52. The 2% is your car bucket. Over 5-10 years, a standard intermediate bond fund is petty close to risk free.

miket29
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Re: Where to invest "car fund" for 10 years or more

Post by miket29 » Thu Jul 18, 2019 4:00 pm

DebiT wrote:
Thu Jul 18, 2019 12:40 pm
I have a new vehicle that I expect to last at least 10 years. What I want to do next, in our taxable account, is allocate money for my next car to a separate tax-free fund so that when I need a new vehicle the money is there, separate from the rest. I don't want to buy a 10 year CD at today's interest rates.

I ran a quick screen at Schwab for mutual funds, intermediate govt, tax-free federally and in California, obviously no-load, no fee, Morningstar rated 4 or 5 stars, and came up with 4.

ALCAX AB Municipal ER 0.80 Total return 4.75
MECMX Blackrock California ER 0.82 TR 4.19 -- this fund is much much larger than the rest
DCAAX BNY Mellon California ER 0.95 TR 4.59
EACAX Eaton Vance California ER 0.84 TR 5.33
I'm sorry about your loss.

As for the funds above, I just looked at the first one ALCAX. It has a duration of 4.6 years, meaning that to a good approximation if interest rates change by 1% the fund will change value in the opposite direction by 4.6% -- a good thing if rates are cut as talk has been lately, but who knows if rates will stay this low for the next decade? While the total return on the fund has been great lately, this may be primarily due to the recent decline in interest rates (go to https://fred.stlouisfed.org/series/IRLTLT01USM156N and change to display the 1-year chart) and the duration effect just mentioned. The best (although imperfect) estimate of what the fund will do going forward, though, is the SEC yield, which for this fund is 1.53%

On Yahoo the fund summary says "The fund invests principally in high-yielding, predominantly investment grade municipal securities." "high-yielding" is a key word, meaning it invests in bonds with lower credit ratings; about 1/3 of the holdings are BBB or below.

Also you might want to double-check your filter settings for no-load since the ALCAX class A I see that has the 0.8% expense ratio has a 3% sales charge according to http://www.schwab.wallst.com/Prospect/R ... mbol=ALCAX (click on the prospectus link up above the chart).

There is no great strategy in today's low rate environment. You can stretch for yield with lower-quality bonds, but if something happens to the economy over the next decade these may be harder hit. You can increase returns a bit with longer-term bonds but this exposes you to more interest-rate risk.

2 funds you might want to look at are Vanguard California Intermediate-Term Tax-Exempt Fund Investor Shares (VCAIX) and Vanguard Limited-Term Tax-Exempt Fund Investor Shares (VMLTX). VCAIX has a SEC yield of 1.54% and a duration of 5 years with an expense ratio of 0.17% while VMLTX has a SEC yield of 1.51% and a duration of 2.5 years with an expense ratio of 0.17% VCAIX has less than 7% BBB or lower, for VMLTX it is less than 10% BBB or lower. VMLTX invests nationally so it is exempt from Federal taxes and the slice invested in CA (about 8%) is also exempt from CA tax.

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Duckie
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Re: Where to invest "car fund" for 10 years or more

Post by Duckie » Thu Jul 18, 2019 4:09 pm

DebiT wrote:I ran a quick screen at Schwab for mutual funds, intermediate govt, tax-free federally and in California, obviously no-load, no fee, Morningstar rated 4 or 5 stars, and came up with 4.

ALCAX AB Municipal ER 0.80 Total return 4.75
MECMX Blackrock California ER 0.82 TR 4.19 -- this fund is much much larger than the rest
DCAAX BNY Mellon California ER 0.95 TR 4.59
EACAX Eaton Vance California ER 0.84 TR 5.33

I'd appreciate comments as to these funds, and if there is anything significantly wrong with this type of investment, in a taxable account, for 10 year money. For my purposes, I want it in a separate fund from my other investments.
Those are expensive funds. If you're willing to pay the transaction fees of up to $49.95 per trade, at Schwab you can buy:
  • (VCAIX) Vanguard California Intermediate-Term Tax-Exempt Fund Investor Shares (0.17%) Annual return 6.09%
  • (VCITX) Vanguard California Long-Term Tax-Exempt Fund Investor Shares (0.17%) Annual return 7.00%
Or you could buy them at Vanguard with no transaction fees.

Topic Author
DebiT
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Re: Where to invest "car fund" for 10 years or more

Post by DebiT » Thu Jul 18, 2019 6:16 pm

That's right, I could just buy the Vanguard funds. If I do it this way, it will be a one-time transaction, so the $49 fee won't be a problem. I will keep thinking about this.
Age 62, complete retirement not til 70, target is 50/50 -- Stock US 30, Intl 15, REIT 5. Bonds US 45, cash ~5

venkman
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Re: Where to invest "car fund" for 10 years or more

Post by venkman » Thu Jul 18, 2019 10:14 pm

DebiT wrote:
Thu Jul 18, 2019 2:50 pm
They are crazy high, aren't they. The reason I'm thinking about munis is because of California's wonderfully high tax rates.
Your goal shouldn't be to minimize taxes; your goal should be to maximize after-tax return. If you're in the highest tax brackets, munis are probably a better choice. If you're somewhere in the middle tax brackets, it's a good idea to run the numbers.

Looking at current SEC yields (all are intermediate bond funds):
-Total Bond Market Index (VBTLX): 2.52%
-CA Intermediate Muni Fund (VCAIX): 1.54%
-National Intermediate Muni Fund (VWITX): 1.68%

If your combined federal+state tax rate is less than ~38%, the taxable VBTLX offers a better after-tax return than the CA muni fund. The national muni fund and the CA muni fund break even at a state tax rate of ~8%. (Even if your state tax rate is slightly higher, the extra diversity offered by the national fund is probably worth it.)

TN_Boy
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Re: Where to invest "car fund" for 10 years or more

Post by TN_Boy » Fri Jul 19, 2019 7:39 am

DebiT wrote:
Thu Jul 18, 2019 2:50 pm
They are crazy high, aren't they. The reason I'm thinking about munis is because of California's wonderfully high tax rates.

I know a car bucket is sort of stupid, but for right now, my brain needs it. The life insurance money is not part of my 50/50 allocation. To me, this is more like "pre-paid" salary and needs to be 100% risk free, at least until I get better handle on my new situation.
I'll throw in one more vote to forget about the car bucket. You have a 7 figure portfolio, with a 50-50 stock/bon allocation. Thus you have at least $500k in bonds. That's pretty safe money for 1/2 the portfolio. And your new car is probably 10 years away! Don't worry about it ....

I'd put all my money, including the life insurance money, into that 50-50 stock/bond allocation, and draw from it as needed, when needed, using the safe withdrawal method of your choice. It's simple and safe. That said, your MM earning (at this moment) 2.31% is not too bad, though I don't like a separate cash bucket if you have a big bond allocation: why have a lot of cash sitting around, over time earning less than the bonds.

The problem with a bunch of buckets is that it obscures the big picture -- how much money do I have? Well, I have the car bucket and the life insurance bucket and the .... Then deciding what investment vehicle to put the money for each bucket in ...

I used to want to think in buckets, but the more I pondered it and started actually using investment monies, the more I believe those mental buckets are useless. I care about how much I pull from the portfolio, but don't see value in pre-allocating parts of it. What if my needs change?

I would not have all my taxable account bond money in munis; I'd have a lot in short to intermediate term US treasuries. Which are exempt from state taxes.

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Re: Where to invest "car fund" for 10 years or more

Post by ClaycordJCA » Fri Jul 19, 2019 10:35 am

Another option that avoids the Schwab mutual fund transaction fee is to purchase an ETF at $4.95 (assuming the ETF does not trade free on the Schwab platform). For example, Ishares’ California muni fund, CMF, has a 0.25 ER. If you decide to go with a taxable bond fund, Schwab has a Total Bond Index Fund with a .04 ER.

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Re: Where to invest "car fund" for 10 years or more

Post by KyleAAA » Fri Jul 19, 2019 10:56 am

If you are planning on keeping this mentally separate anyway, I would just buy the Vanguard California muni fund directly at Vanguard and avoid the fees. Maintaining 2 accounts is trivial these days. Obviously, you will end up leaving money on the table with this sort of mental accounting, but you already knew that.

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dm200
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Re: Where to invest "car fund" for 10 years or more

Post by dm200 » Fri Jul 19, 2019 11:00 am

Another, different, approach -

Since new car financing, especially for those with a good credit score and history, is at very, very low interest rates - why not just put such funds into the long term (for her needs and situation) asset allocation. Then, when the new car is needed/desired - just finance it at such a very low interest rate.

Afty
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Re: Where to invest "car fund" for 10 years or more

Post by Afty » Fri Jul 19, 2019 12:00 pm

I'm sorry for your loss.

I know you stated you want to keep the buckets, but I'll throw in my vote as well to just treat it all -- car fund, life insurance money, existing retirement money -- as one big pile of money. You said your brain needs this. How recent was your loss? If it's very recent, consider not doing anything with the insurance money for 6 months to a year. Give yourself some time to process what has happened.

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dm200
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Re: Where to invest "car fund" for 10 years or more

Post by dm200 » Fri Jul 19, 2019 12:02 pm

Afty wrote:
Fri Jul 19, 2019 12:00 pm
I'm sorry for your loss.
I know you stated you want to keep the buckets, but I'll throw in my vote as well to just treat it all -- car fund, life insurance money, existing retirement money -- as one big pile of money. You said your brain needs this. How recent was your loss? If it's very recent, consider not doing anything with the insurance money for 6 months to a year. Give yourself some time to process what has happened.
Yes - but also have a very liquid "emergency fund" as well

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DebiT
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Re: Where to invest "car fund" for 10 years or more

Post by DebiT » Fri Jul 19, 2019 2:04 pm

Thank you all for your input. I need to look more at my tax rate vs yields, and this info helps. I know that the bucket thing isn't necessary, and even not the best, but it's what my brain needs right now. I've got my "after retirement" money, which will have to likely stretch further. And I need to have a more clear sense of what money is needed vs possibly excess before that. It's very possible that in a year or two I'll be ready to make it part of the regular allocation. None of this has to be engraved in stone.

Thank you again
Age 62, complete retirement not til 70, target is 50/50 -- Stock US 30, Intl 15, REIT 5. Bonds US 45, cash ~5

tesuzuki2002
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Re: Where to invest "car fund" for 10 years or more

Post by tesuzuki2002 » Fri Jul 19, 2019 9:43 pm

Having a 7 figure net worth.... I won’t be thinking about how to do this. I would simply cash out $25k when I need to and go buy the car. Preferably at a time when the market is hitting new highs so you’re taking out the least amount of shares!!

David Althaus
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Re: Where to invest "car fund" for 10 years or more

Post by David Althaus » Sat Jul 20, 2019 8:36 am

In ten years you will be at my current age. Consider leasing as an alternative strategy. Yes, it's more expensive--but probably not by a life changing number. What you get when leasing:
1. Almost always trouble free driving
2. The latest in safety technology. Trust me: it's more important as you age
3. No longer having to worry about maintenance
4. No worry being stuck with a lemon for years to come or take a big haircut on depreciation or being stuck with continual fixes
5. Takes the cost out of cashflow and means you won't have to think about where to put the money for ten years. You can just stay with your desired asset allocation

To us these benefits more than offset the higher cost. In other words, we find significant value in leasing.

All the best

Nissanzx1
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Re: Where to invest "car fund" for 10 years or more

Post by Nissanzx1 » Sat Jul 20, 2019 8:51 am

I’d honestly just set aside $200/mo from your income into a separate savings account and call it “vehicle repair/replacement.” We do $300 monthly and there is always money for whatever we need including acquiring a nice used vehicle, if necessary.

Seems like that would give you some piece of mind which you enjoy given your chosen asset allocation strategy. Very sorry for the untimely loss of your husband.

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Chief_Engineer
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Re: Where to invest "car fund" for 10 years or more

Post by Chief_Engineer » Sat Jul 20, 2019 9:16 am

I'm curious what the advice would be for someone in the accumulation stage.

Other than my EF, my entire portfolio is tied up in tax-advantaged accounts. If I want to save up for a large purchase in 10 years, where should I put the money? I'm interested it what the suggestions would be for this case.

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