How to beat 2% safely?

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ColHeights
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How to beat 2% safely?

Post by ColHeights » Sun Sep 08, 2019 6:36 pm

Hi Bogleheads,

Long-time fan of the site. Here is my situation. I have some windfall cash (a/o $400k or so). I already have some savings etc.

I am looking for a tax-efficient way to beat 2% return, assuming I might need the money in 2-3 years, but maybe 3-5 for a downpayment on a larger house (I already have some equity built up in my own home, but I am expecting my family to grow!). Right now all the money is in VMMXX but with interest rates going down...

Any thoughts or ideas? It just seems like CD ladders are too much work and you don't beat 2% with like a Goldman Marcus Savings account, but everything else just seems like I really risk losing principal (which I don't want to do). Even VTMFX just seems really risky.

Should I look at another fund family for something that is like 70/30 bonds/equity? Is there something else to manage my taxes with?

My work is on a two-year cycle btw so added wrinkle is im like 25% bracket in odd years and 39.6 in even ones!

Thank you!

wineandplaya
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Re: How to beat 2% safely?

Post by wineandplaya » Sun Sep 08, 2019 6:48 pm

How about paying down or off the mortgage of your current house? That money becomes available exactly when you need it, i.e. when selling your current house to move into a larger one?

Lafder
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Re: How to beat 2% safely?

Post by Lafder » Sun Sep 08, 2019 6:52 pm

The only way to guarantee more than 2% returns would be

1) CDs with rates over 2.

2) A mortgage of over 2% you can pay down. That is the only other guarantee of getting over 2% returns I can think of. The housing market may crash and you could lose some equity/part of your initial investment.

The chance of more gains comes with risk of losing more.

If you pay down/off your mortgage with an interest rate of over 2, you can then invest the monthly mortgage payments into investments. So you get the mortgage pay down plus investments. But it does tie up equity in your current home.

lafder

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ColHeights
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Re: How to beat 2% safely?

Post by ColHeights » Sun Sep 08, 2019 7:08 pm

My rate is 3.5 but I am nervous about tying up that much in my current home. What if there is a rescession?

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unclescrooge
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Re: How to beat 2% safely?

Post by unclescrooge » Sun Sep 08, 2019 7:21 pm

I wouldn't bother earning anything if you need the money in two years.

Prettyfrtnt
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Re: How to beat 2% safely?

Post by Prettyfrtnt » Sun Sep 08, 2019 7:59 pm

ColHeights wrote:
Sun Sep 08, 2019 7:08 pm
My rate is 3.5 but I am nervous about tying up that much in my current home. What if there is a rescession?
Pay off your mortgage!! The value of your house has zero to do with your bond obligation i.e. the mortgage.

Meaning if you have a 500k house with 400k mortgage and the cost of the house goes to 300k you’ve lost 200k... if you pay off the mortgage and your 500k house is 300k after a housing price drop you’ve still lost 200k. Your housing price has zero to do with whether this is good to pay off a mortgage.

In the second scenario at least you’ve gone up the net 1.5% per year in the returns.

If there is a recession... you’ve freed your own cash flow. You eliminate being upside down on your mortgage. You eliminate foreclosure risks. Job loss risks. All investments are risky. Your mortgage is a certainty. It’s the perfect place for you to invest this money. There is no other answer. You lose money even if you find a magical 3% fdic insured savings account. You lose money every day.

In fact one could argue a recession would be great for you. It’s the perfect time to upsize. Maybe you have a very secure job. I luckily upsized in the aftermath of the 2009 fiasco... And it’s been amazing. I was angry at the sales price of my old home at the time. All these paper losses. But right now I’m so happy the tax man has my house appraised for twice its purchase price...

I highly doubt your are itemizing above your standard deduction based on the info you provide. Even then you’ve eliminated risk.

The money is there the second you need it. When you upsize. If a recession comes don’t upsize... let it bottom out then upsize.

For you because the money would be for a bigger house the liquidity issue is not important. And those cds are not very liquid either.

Oh and if you have extra buy stocks.
Last edited by Prettyfrtnt on Sun Sep 08, 2019 8:13 pm, edited 7 times in total.

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Kevin M
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Re: How to beat 2% safely?

Post by Kevin M » Sun Sep 08, 2019 8:01 pm

Direct CDs are once again about the only way to get better-than-market safe yields. USAlliance is offering a 15-month CD at 2.70% APY, for example. Compare to the 1y and 2y Treasury yields of 1.73% and 1.53% respectively, and 2y brokered CD yields of 1.80%-1.90%.

The problem is that you probably aren't already a member of the credit union offering the best deals, so you'll probably have to join a credit union to get the best yield. I happen to be a member of USAlliance CU, since I've joined a number of CUs since 2010 to get the best CD deals.

At 39.6% marginal fed tax rate, Vanguard muni MM (VMSXX) as a compound taxable-equivalent yield (TEY) of 2.26%. You didn't say state marginal tax rates, but at CA 9.3%, VG Treasury MM fund is compound TEY of 2.39%, and about as safe as you can get. Or you could just roll 1m Tbills to earn about the same, but as you say, yields are falling, and short term yield almost certainly will continue to fall as the Fed is highly likely to raise the federal funds rate at its next meeting.

So the 15m CD at 2.70% is the best safe option I see for a 1-2 year time period. You can get $500K of NCUA deposit insurance (similar to FDIC, but for CUs) with a joint account with two owners, or with a POD account with two beneficiaries, so this would cover your $400K.

Kevin
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Kevin M
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Re: How to beat 2% safely?

Post by Kevin M » Sun Sep 08, 2019 8:08 pm

ColHeights wrote:
Sun Sep 08, 2019 7:08 pm
My rate is 3.5 but I am nervous about tying up that much in my current home. What if there is a rescession?
I ignored the mortgage pay down/off option because of this comment, but agree with other posters that you won't come close to 3.5% with any safe alternative.

So I would consider the scenarios. If you want to keep the option of walking away from your mortgage if it goes underwater, assuming it's non-recourse, then paying down the mortgage might not be the best option. Ditto for an uninsured disaster scenario where your equity is wiped out. Otherwise, any losses in a recession are amplified by the leverage of a mortgage, so paying down the mortgage still could be a good option.

Kevin
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Jags4186
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Re: How to beat 2% safely?

Post by Jags4186 » Sun Sep 08, 2019 8:09 pm

ColHeights wrote:
Sun Sep 08, 2019 7:08 pm
My rate is 3.5 but I am nervous about tying up that much in my current home. What if there is a rescession?
Money is fungible. If there is a recession and your home drops in value, you’ve lost the same amount of money whether or not you paid off your mortgage or kept the mortgage and the cash in the bank.

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Re: How to beat 2% safely?

Post by Jack FFR1846 » Sun Sep 08, 2019 8:32 pm

If you go the mortgage pay down route, first take out a zero cost HELOC. You really don't care what the interest rate is because you don't plan to ever use it. It's free insurance.

If you're too scared to pay down the mortgage, put $50k into a Redneck Bank Megamoney account. You have no hoops to jump through and they currently pay 2.4% and it's easy to pull out if its needed.
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Nate79
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Re: How to beat 2% safely?

Post by Nate79 » Sun Sep 08, 2019 8:34 pm

It doesnt have to be all or nothing. Keep extra aside as a good strong emergency fund and put the rest on your existing mortgage.

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billthecat
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Re: How to beat 2% safely?

Post by billthecat » Sun Sep 08, 2019 9:34 pm

Jack FFR1846 wrote:
Sun Sep 08, 2019 8:32 pm
If you go the mortgage pay down route, first take out a zero cost HELOC. You really don't care what the interest rate is because you don't plan to ever use it. It's free insurance.

If you're too scared to pay down the mortgage, put $50k into a Redneck Bank Megamoney account. You have no hoops to jump through and they currently pay 2.4% and it's easy to pull out if its needed.
Haha, redneck. What about CFG Community Bank @ 2.56% APY?
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Ferdinand2014
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Re: How to beat 2% safely?

Post by Ferdinand2014 » Sun Sep 08, 2019 9:45 pm

ColHeights wrote:
Sun Sep 08, 2019 7:08 pm
My rate is 3.5 but I am nervous about tying up that much in my current home. What if there is a rescession?
I would imagine having no mortgage payments and owning the home would be a comfort in a recession.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

Prettyfrtnt
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Re: How to beat 2% safely?

Post by Prettyfrtnt » Sun Sep 08, 2019 10:11 pm

Ferdinand2014 wrote:
Sun Sep 08, 2019 9:45 pm
ColHeights wrote:
Sun Sep 08, 2019 7:08 pm
My rate is 3.5 but I am nervous about tying up that much in my current home. What if there is a rescession?
I would imagine having no mortgage payments and owning the home would be a comfort in a recession.
+1

At 3.5% his mortgage is costing him almost $10 a day per 100k. So if he has 400k left he is saving himself $38.50 a day with paying it off.

If he gets 2% in his savings the 400k will earn him $21.90 a day. It’s as if a person is handing him $20 a day. That sounds good!

Not to mention risk. And this certain guarantee of yield. I mean no chance redneck bank mega money gets into some liquidity issues and assets get into some litigation issues. You’ll def get your money in a few years maybe via fdic.

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willthrill81
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Re: How to beat 2% safely?

Post by willthrill81 » Sun Sep 08, 2019 10:29 pm

Ferdinand2014 wrote:
Sun Sep 08, 2019 9:45 pm
ColHeights wrote:
Sun Sep 08, 2019 7:08 pm
My rate is 3.5 but I am nervous about tying up that much in my current home. What if there is a rescession?
I would imagine having no mortgage payments and owning the home would be a comfort in a recession.
People can call it emotional, illogical, or whatever else they wish, but we will be a happy family when our mortgage is (hopefully) paid off next April. And we're getting about a 5% imputed return compared to renting an equivalent property, which is very respectable these days.

Interestingly, many bemoan how illogical it is to pay off a mortgage early, but when someone says that they cannot hold more stock exposure due to their (emotional) risk tolerance, they are rarely questioned about it. :?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

CurlyDave
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Re: How to beat 2% safely?

Post by CurlyDave » Sun Sep 08, 2019 11:56 pm

wineandplaya wrote:
Sun Sep 08, 2019 6:48 pm
How about paying down or off the mortgage of your current house? That money becomes available exactly when you need it, i.e. when selling your current house to move into a larger one?
I don't think that works quite the way you claim.

OP has to live somewhere while buying the new house and empty houses sell faster than occupied ones. I suspect he is going to need a down payment for house #2 while still living in house #1. Better to keep the extra cash liquid.

Admiral
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Re: How to beat 2% safely?

Post by Admiral » Mon Sep 09, 2019 6:37 am

2% of $400k $8k. 3% is $12k. Before taxes.

Is the extra $4k worth market risk to you, someone who is in pretty high/very high tax brackets (i.e. makes a lot of money)? If not, don't chase the returns. If yes, but half in the market and the rest in CDs.

aristotelian
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Re: How to beat 2% safely?

Post by aristotelian » Mon Sep 09, 2019 6:58 am

BBVA has a 2.4% money market deal with $100 bonus. However, the rate is not guaranteed.

Wealthfront I believe has a 2.5% savings account.

I agree with others who say paying down debt makes a lot of sense unless you need the liquidity.

JBeck
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Re: How to beat 2% safely?

Post by JBeck » Mon Sep 09, 2019 7:16 am

Ally savings account; 2.2% interest

wineandplaya
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Re: How to beat 2% safely?

Post by wineandplaya » Mon Sep 09, 2019 8:01 am

CurlyDave wrote:
Sun Sep 08, 2019 11:56 pm
wineandplaya wrote:
Sun Sep 08, 2019 6:48 pm
How about paying down or off the mortgage of your current house? That money becomes available exactly when you need it, i.e. when selling your current house to move into a larger one?
I don't think that works quite the way you claim.

OP has to live somewhere while buying the new house and empty houses sell faster than occupied ones. I suspect he is going to need a down payment for house #2 while still living in house #1. Better to keep the extra cash liquid.
I would think that there should be some way to cheaply bridge a small overlap in buying and selling. Use a HELOC for current home to fund the down payment for next one? If overlap is small it won't result in much interest. It's hard do beat 3 to 4 % tax-free (assuming standard deduction) and essentially risk free. If you can resolve the liquidity issue.

livesoft
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Re: How to beat 2% safely?

Post by livesoft » Mon Sep 09, 2019 8:05 am

Note to self: Come back and visit this thread in a few years to see that a 60/40 portfolio did better than 2% over the next few years.

Also keep using your 2% cash-back card.
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Admiral
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Re: How to beat 2% safely?

Post by Admiral » Mon Sep 09, 2019 8:15 am

livesoft wrote:
Mon Sep 09, 2019 8:05 am
Note to self: Come back and visit this thread in a few years to see that a 60/40 portfolio did better than 2% over the next few years.

Also keep using your 2% cash-back card.
Hah. One can make 2% just on TSM dividends these days.

ohai
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Re: How to beat 2% safely?

Post by ohai » Mon Sep 09, 2019 8:28 am

Hi, OP. Given your tax rate, municipal bond funds will probably dominate any normal taxable bond alternative, unless you absolutely need default insurance. Consider investment grade municipal bond funds like MUB if you value tax efficient yields.

Also, if indeed you are hitting near 40% marginal tax rates in some years, then $400k is probably not a life changing amount for you. You might be better off just absorbing that into your general portfolio at your desired asset allocation, and not really think about it as a separate part of your portfolio.

flah
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Re: How to beat 2% safely?

Post by flah » Mon Sep 09, 2019 8:44 am

JBeck wrote:
Mon Sep 09, 2019 7:16 am
Ally savings account; 2.2% interest
It's 1.9% now. It hasn't been at 2.2% since August 6.

EnjoyIt
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Re: How to beat 2% safely?

Post by EnjoyIt » Mon Sep 09, 2019 8:47 am

I am a huge proponent of keeping a mortgage and investing the extra cash, but, in your situation I would pay off the mortgage, open up a HELOC just in case, or if you need cash for a down payment on a home. Then, take the money you would use to pay your monthly mortgage and start investing it at your desired asset allocation. This is a win/win strategy for you.

The general consensus is that you should not invest money that you will need in the next few years. Some say 3 years others say 5 years. Either way, your 1-2 year time frame dictates you invest in safe assets such as savings account, CD, short term treasuries, money market account, etc. If that is the case you will get a far better return by paying off your mortgage at 3.5%

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Wiggums
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Re: How to beat 2% safely?

Post by Wiggums » Mon Sep 09, 2019 9:11 am

livesoft wrote:
Mon Sep 09, 2019 8:05 am
Note to self: Come back and visit this thread in a few years to see that a 60/40 portfolio did better than 2% over the next few years.

Also keep using your 2% cash-back card.
I love this suggestion.

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Re: How to beat 2% safely?

Post by willthrill81 » Mon Sep 09, 2019 9:50 am

Admiral wrote:
Mon Sep 09, 2019 6:37 am
2% of $400k $8k. 3% is $12k. Before taxes.

Is the extra $4k worth market risk to you, someone who is in pretty high/very high tax brackets (i.e. makes a lot of money)? If not, don't chase the returns. If yes, but half in the market and the rest in CDs.
I agree that CDs are being seemingly ignored by too many. Prime Alliance bank's 5 year CDs are currently yielding 3.15%.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Topic Author
ColHeights
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Re: How to beat 2% safely?

Post by ColHeights » Mon Sep 09, 2019 9:54 am

Thanks to everyone for the suggestions!

RE: paying off the mortgage: here's the problem - the mortgage principal about 600k. So 400k won't pay it off. Would you still re-finance based on the fact that my horizon is pretty short-term?

EnjoyIt
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Re: How to beat 2% safely?

Post by EnjoyIt » Mon Sep 09, 2019 9:55 am

willthrill81 wrote:
Mon Sep 09, 2019 9:50 am
Admiral wrote:
Mon Sep 09, 2019 6:37 am
2% of $400k $8k. 3% is $12k. Before taxes.

Is the extra $4k worth market risk to you, someone who is in pretty high/very high tax brackets (i.e. makes a lot of money)? If not, don't chase the returns. If yes, but half in the market and the rest in CDs.
I agree that CDs are being seemingly ignored by too many. Prime Alliance bank's 5 year CDs are currently yielding 3.15%.
OP has a 1-2 year timeframe. I don't think a 5 year CD is the answer here.

EnjoyIt
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Re: How to beat 2% safely?

Post by EnjoyIt » Mon Sep 09, 2019 9:59 am

ColHeights wrote:
Mon Sep 09, 2019 9:54 am
Thanks to everyone for the suggestions!

RE: paying off the mortgage: here's the problem - the mortgage principal about 600k. So 400k won't pay it off. Would you still re-finance based on the fact that my horizon is pretty short-term?
Yes if the rate is lower with zero fees. Otherwise I would recast the mortgage.
How about paying down by $400k and then refinancing to 15 year on the remainder with zero fees or recast it. This would be a win/win as well. You will pay significantly less on your mortgage every month increasing cashflow which you can invest at your desired asset allocation and you will have the best "safe" return possible on your money.

The above recommendation is if you have a solid emergency fund and a decent nest egg incase you lose your job during the next 1-2 years. Also, you can always put $300k towards your mortgage and put $100k in CDs if it makes you feel better about the whole thing.

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Re: How to beat 2% safely?

Post by willthrill81 » Mon Sep 09, 2019 10:02 am

EnjoyIt wrote:
Mon Sep 09, 2019 9:55 am
willthrill81 wrote:
Mon Sep 09, 2019 9:50 am
Admiral wrote:
Mon Sep 09, 2019 6:37 am
2% of $400k $8k. 3% is $12k. Before taxes.

Is the extra $4k worth market risk to you, someone who is in pretty high/very high tax brackets (i.e. makes a lot of money)? If not, don't chase the returns. If yes, but half in the market and the rest in CDs.
I agree that CDs are being seemingly ignored by too many. Prime Alliance bank's 5 year CDs are currently yielding 3.15%.
OP has a 1-2 year timeframe. I don't think a 5 year CD is the answer here.
Ah, good point.

Over a 1-2 year time frame, I don't think that a 1% +/- difference should really matter.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Wiggums
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Re: How to beat 2% safely?

Post by Wiggums » Mon Sep 09, 2019 10:05 am

ColHeights wrote:
Mon Sep 09, 2019 9:54 am
Thanks to everyone for the suggestions!

RE: paying off the mortgage: here's the problem - the mortgage principal about 600k. So 400k won't pay it off. Would you still re-finance based on the fact that my horizon is pretty short-term?
“I am looking for a tax-efficient way to beat 2% return, assuming I might need the money in 2-3 years, but maybe 3-5 for a downpayment on a larger house”

It’s such a short period of time, that I can’t think of a lot of options. I agree with the previous response, that for a short period of time, a small difference in the return, doesn’t matter much. I’m a fan of paying down the mortgage, once you max out retirement accounts and have good cash flow. You will save on the mortgage costs. It’s hard to know if you will need the money in 2-3 years, 3-5 or 5 or more. If the housing market softens, you might get a new house at a great price but be stuck with the old house? Maybe you are thinking of renting the current house and need cash for the new one?
Last edited by Wiggums on Mon Sep 09, 2019 10:09 am, edited 1 time in total.

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dm200
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Re: How to beat 2% safely?

Post by dm200 » Mon Sep 09, 2019 10:07 am

ColHeights wrote:
Sun Sep 08, 2019 6:36 pm
Hi Bogleheads,
Long-time fan of the site. Here is my situation. I have some windfall cash (a/o $400k or so). I already have some savings etc.
I am looking for a tax-efficient way to beat 2% return, assuming I might need the money in 2-3 years, but maybe 3-5 for a downpayment on a larger house (I already have some equity built up in my own home, but I am expecting my family to grow!). Right now all the money is in VMMXX but with interest rates going down...
Any thoughts or ideas? It just seems like CD ladders are too much work and you don't beat 2% with like a Goldman Marcus Savings account, but everything else just seems like I really risk losing principal (which I don't want to do). Even VTMFX just seems really risky.
Should I look at another fund family for something that is like 70/30 bonds/equity? Is there something else to manage my taxes with?
My work is on a two-year cycle btw so added wrinkle is im like 25% bracket in odd years and 39.6 in even ones!
Thank you!
1. Since there are (or may be) several timeframes for different parts of these funds - invest accordingly

2. I really don't see CD laddering as much work at all. Some parts of a CD ladder might be to have many or most of the CDs to automatically renew - unless you want/need the money at maturity/renewal.

3. My opinion, as well, is that by assuming some very modest risk (perhaps with part of it) of having some in equities - you may achieve a higher return.

smitcat
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Re: How to beat 2% safely?

Post by smitcat » Mon Sep 09, 2019 10:08 am

willthrill81 wrote:
Mon Sep 09, 2019 10:02 am
EnjoyIt wrote:
Mon Sep 09, 2019 9:55 am
willthrill81 wrote:
Mon Sep 09, 2019 9:50 am
Admiral wrote:
Mon Sep 09, 2019 6:37 am
2% of $400k $8k. 3% is $12k. Before taxes.

Is the extra $4k worth market risk to you, someone who is in pretty high/very high tax brackets (i.e. makes a lot of money)? If not, don't chase the returns. If yes, but half in the market and the rest in CDs.
I agree that CDs are being seemingly ignored by too many. Prime Alliance bank's 5 year CDs are currently yielding 3.15%.
OP has a 1-2 year timeframe. I don't think a 5 year CD is the answer here.
Ah, good point.

Over a 1-2 year time frame, I don't think that a 1% +/- difference should really matter.
FWIW - our daughter just got an NFCU CD rate of 3% for 18 months last week.

international001
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Re: How to beat 2% safely?

Post by international001 » Mon Sep 09, 2019 10:30 am

ColHeights wrote:
Sun Sep 08, 2019 6:36 pm
Hi Bogleheads,

Long-time fan of the site. Here is my situation. I have some windfall cash (a/o $400k or so). I already have some savings etc.

I am looking for a tax-efficient way to beat 2% return, assuming I might need the money in 2-3 years, but maybe 3-5 for a downpayment on a larger house (I already have some equity built up in my own home, but I am expecting my family to grow!). Right now all the money is in VMMXX but with interest rates going down...

Any thoughts or ideas? It just seems like CD ladders are too much work and you don't beat 2% with like a Goldman Marcus Savings account, but everything else just seems like I really risk losing principal (which I don't want to do). Even VTMFX just seems really risky.

Should I look at another fund family for something that is like 70/30 bonds/equity? Is there something else to manage my taxes with?

My work is on a two-year cycle btw so added wrinkle is im like 25% bracket in odd years and 39.6 in even ones!

Thank you!
Do you exactly need those $400k to be safe? Or you just need any $400k to be safe, considering the savings you have?

It's a rhetoric question. But we often emphasize a complete security over a portion of your net worth, without considering the larger picture.
Imagine If you have another $400k at 60/40 (equity/bonds). Perhaps you can add the $400k to it and get an overall $800k portfolio of 40/60

If you had infinite net worth and you don't need to spend the money before retirement, the $400k should be invested in stocks , because *average* it will be ~6% over those 3 years. If you only have $400k that you will need for sure in 2 years, then invest it in some FDIC insured product by all means. If you (as most) are in the middle, find a compromise.

rj342
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Re: How to beat 2% safely?

Post by rj342 » Mon Sep 09, 2019 10:47 am

wineandplaya wrote:
Sun Sep 08, 2019 6:48 pm
How about paying down or off the mortgage of your current house? That money becomes available exactly when you need it, i.e. when selling your current house to move into a larger one?
No it probably is not. Most people can't pull off selling their existing house before buying a new one.

deikel
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Re: How to beat 2% safely?

Post by deikel » Mon Sep 09, 2019 12:38 pm

Jack FFR1846 wrote:
Sun Sep 08, 2019 8:32 pm
If you go the mortgage pay down route, first take out a zero cost HELOC. You really don't care what the interest rate is because you don't plan to ever use it. It's free insurance.

If you're too scared to pay down the mortgage, put $50k into a Redneck Bank Megamoney account. You have no hoops to jump through and they currently pay 2.4% and it's easy to pull out if its needed.
HELOC might cost you money when you sell the house (and close down the HELOC line before an agreed upon time) down the road, OP says between 2-5 years, that's not a no cost solution for safe money

HELOC can also be canceled by the banks in case of a crash (like th elast time) and you will have no money when you need it...
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deikel
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Re: How to beat 2% safely?

Post by deikel » Mon Sep 09, 2019 12:41 pm

Prettyfrtnt wrote:
Sun Sep 08, 2019 7:59 pm
ColHeights wrote:
Sun Sep 08, 2019 7:08 pm
My rate is 3.5 but I am nervous about tying up that much in my current home. What if there is a rescession?
Pay off your mortgage!! The value of your house has zero to do with your bond obligation i.e. the mortgage.

Meaning if you have a 500k house with 400k mortgage and the cost of the house goes to 300k you’ve lost 200k... if you pay off the mortgage and your 500k house is 300k after a housing price drop you’ve still lost 200k. Your housing price has zero to do with whether this is good to pay off a mortgage.

In the second scenario at least you’ve gone up the net 1.5% per year in the returns.

If there is a recession... you’ve freed your own cash flow. You eliminate being upside down on your mortgage. You eliminate foreclosure risks. Job loss risks. All investments are risky. Your mortgage is a certainty. It’s the perfect place for you to invest this money. There is no other answer. You lose money even if you find a magical 3% fdic insured savings account. You lose money every day.

In fact one could argue a recession would be great for you. It’s the perfect time to upsize. Maybe you have a very secure job. I luckily upsized in the aftermath of the 2009 fiasco... And it’s been amazing. I was angry at the sales price of my old home at the time. All these paper losses. But right now I’m so happy the tax man has my house appraised for twice its purchase price...

I highly doubt your are itemizing above your standard deduction based on the info you provide. Even then you’ve eliminated risk.

The money is there the second you need it. When you upsize. If a recession comes don’t upsize... let it bottom out then upsize.

For you because the money would be for a bigger house the liquidity issue is not important. And those cds are not very liquid either.

Oh and if you have extra buy stocks.

I agree in principle, but its not quite that rosy....if there is another housing crash and economy downturn, the bound up cash in your house might not be accessible because you don't sell your house well or at all (think Detroit), however, you can always walk away from a mortgage and let the bank deal with it (at a loss of your equity and the credit hit)
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deikel
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Re: How to beat 2% safely?

Post by deikel » Mon Sep 09, 2019 12:46 pm

There is only savings account (around 2 %), CD ladder (around 2%), MM (currently less than 2), bonds with some risk (around 2 %) and the mortgage (3.5% with the risk of bound capital and illiquidity)

None of the above are much work at all...
Everything you read in this post is my personal opinion. If you disagree with this disclaimer, please un-read the text immediately and destroy any copy or remembrance of it.

MichCPA
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Re: How to beat 2% safely?

Post by MichCPA » Mon Sep 09, 2019 1:05 pm

Option 1: Build a time machine

Option 2: Pay down any liability with an interest rate of 2%+

mptfan
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Re: How to beat 2% safely?

Post by mptfan » Mon Sep 09, 2019 1:55 pm

CurlyDave wrote:
Sun Sep 08, 2019 11:56 pm
OP has to live somewhere while buying the new house and empty houses sell faster than occupied ones.
Is this true? I've never heard it before.

bh7785
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Re: How to beat 2% safely?

Post by bh7785 » Mon Sep 09, 2019 2:22 pm

Jack FFR1846 wrote:
Sun Sep 08, 2019 8:32 pm
If you go the mortgage pay down route, first take out a zero cost HELOC. You really don't care what the interest rate is because you don't plan to ever use it. It's free insurance.

If you're too scared to pay down the mortgage, put $50k into a Redneck Bank Megamoney account. You have no hoops to jump through and they currently pay 2.4% and it's easy to pull out if its needed.
Redneck is awesome. The debit card is always good for a laugh, and people always ask about it. Interest rate is nice.

averagelonghorn
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Re: How to beat 2% safely?

Post by averagelonghorn » Mon Sep 09, 2019 2:24 pm

mptfan wrote:
Mon Sep 09, 2019 1:55 pm
CurlyDave wrote:
Sun Sep 08, 2019 11:56 pm
OP has to live somewhere while buying the new house and empty houses sell faster than occupied ones.
Is this true? I've never heard it before.
I'm a Realtor, so I have an opinion, though I can't say I've run any stats to prove it.
I'd say in general yes, an empty house will sell faster than a lived in house. If you still live there, and it is decluttered to an extreme state and kept absolutely spotless, it might not make a big difference.
Buyers THINK they can look past all the current owner's belongings; and often they can; but often they cannot. A blank slate is easier for a buyer to look at and imagine making it their own.
Now I did say "in general." There are always exceptions, sometimes it's better to have it lived in so they can have help imagining what fits and what doesnt. (Ok, there's NO exception to my advice that an owner should, as best as possible, declutter far more than they think is necessary; and keep a house that's on the market absolutely spotless. That's the goal, not always 100% achievable.)

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willthrill81
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Re: How to beat 2% safely?

Post by willthrill81 » Mon Sep 09, 2019 2:42 pm

deikel wrote:
Mon Sep 09, 2019 12:41 pm
I agree in principle, but its not quite that rosy....if there is another housing crash and economy downturn, the bound up cash in your house might not be accessible because you don't sell your house well or at all (think Detroit), however, you can always walk away from a mortgage and let the bank deal with it (at a loss of your equity and the credit hit)
Your 'just walk away' strategy will only work in a non-recourse state, of which I believe that there are only 13.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

BlackDiamond
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Re: How to beat 2% safely?

Post by BlackDiamond » Mon Sep 09, 2019 4:20 pm

SunTrust currently has a 12-month money market guaranteed at 2.23%

It's one of the best rates I've been able to find that are safe AND liquid. Further rate cuts are likely to come soon...

https://www.suntrust.com/personal-banki ... et-savings

wineandplaya
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Re: How to beat 2% safely?

Post by wineandplaya » Mon Sep 09, 2019 7:24 pm

deikel wrote:
Mon Sep 09, 2019 12:46 pm
There is only savings account (around 2 %), CD ladder (around 2%), MM (currently less than 2), bonds with some risk (around 2 %) and the mortgage (3.5% with the risk of bound capital and illiquidity)

None of the above are much work at all...
With standard deduction, 3.5 % for mortgage is tax-free savings. With 30 % tax rate (federal+state) that corresponds to a 5 % interest rate in a CD/MM.

nix4me
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Re: How to beat 2% safely?

Post by nix4me » Mon Sep 09, 2019 9:23 pm

Navy Federal CD or pay off mortgage or settle for 2% VMMXX

Otherwise you gotta take some risk. perhaps a 20/80 fund like Lifestrategy Income.

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willthrill81
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Re: How to beat 2% safely?

Post by willthrill81 » Mon Sep 09, 2019 9:26 pm

wineandplaya wrote:
Mon Sep 09, 2019 7:24 pm
deikel wrote:
Mon Sep 09, 2019 12:46 pm
There is only savings account (around 2 %), CD ladder (around 2%), MM (currently less than 2), bonds with some risk (around 2 %) and the mortgage (3.5% with the risk of bound capital and illiquidity)

None of the above are much work at all...
With standard deduction, 3.5 % for mortgage is tax-free savings. With 30 % tax rate (federal+state) that corresponds to a 5 % interest rate in a CD/MM.
Indeed.

Unless you can deduct the mortgage interest, it's usually the best guaranteed after-tax return right now. Even EE bonds, which yield 3.53% if held for 20 years, will be taxed upon maturing.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Sandtrap
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Re: How to beat 2% safely?

Post by Sandtrap » Mon Sep 09, 2019 9:36 pm

willthrill81 wrote:
Mon Sep 09, 2019 9:50 am
Admiral wrote:
Mon Sep 09, 2019 6:37 am
2% of $400k $8k. 3% is $12k. Before taxes.

Is the extra $4k worth market risk to you, someone who is in pretty high/very high tax brackets (i.e. makes a lot of money)? If not, don't chase the returns. If yes, but half in the market and the rest in CDs.
I agree that CDs are being seemingly ignored by too many. Prime Alliance bank's 5 year CDs are currently yielding 3.15%.
Thanks. This is a good one.
j :happy
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blessed
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Re: How to beat 2% safely?

Post by blessed » Mon Sep 09, 2019 9:56 pm

I use MUB (National Muni Bond etf) in taxable in the hopes that I'm at least meeting, but hopefully beating, my effective mortgage rate of 1.95% over the long term. I keep enough in MUB that I could pay off my mortgage at any time. The difference for me is I'm not necessarily looking at a 2-year time frame, but even if I was I still might stick with my approach of using MUB in taxable for this purpose.

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