Where To Allocate 600,000 Fixed Income?

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Baseballmom94
Posts: 70
Joined: Fri Mar 01, 2013 10:25 am

Where To Allocate 600,000 Fixed Income?

Post by Baseballmom94 » Mon Feb 12, 2018 3:04 pm

Bogleheads, if you had 600,000 of new cash to invest in fixed income this week, where would you place it?

Looking to allocate 600,000 in accumulated cash into fixed income investments within taxable account. Baseballdad and I are 6-10 years from retirement with a 58/42 stock/FI allocation.

As of now, we are looking at doing 3 indvidual and joint Ally 12-month CDs at 2% in order to stay under the FDIC limits. I understand the interest will be taxable (most likely we'll be in the new 24% bracket) but at least we won't be losing money.

Honestly not interested in losing money by investing in bonds in the current environment but wondering if we should invest a portion of the 600K in the Vanguard limited term and immediate term tax-exempt funds? These are not attractive on the surface because they are negative YTD but wondering if I'm missing something. If so, please enlighten me:)

Edited to include background info as requested:

Emergency funds: Yes

Debt: Mortgage 237,000 10 more years to pay at 2.75% (approx. 400,000 equity in home)

Ages: Him 53/Her 52
Two Young Adult/Kids - college/grad school
Years to retirement: 6-8

College Funds: Fully funded for state university with additional $$ left over for 2 years grad school for each kiddo.

Tax Filing Status: Married Filing Jointly
Fed Tax: 24% (new 2018 bracket)
State Tax: 5%
Local: 2%
Property Tax on home: 16,000 annually

Desired Asset allocation: 55% stocks / 45% bonds. (Current AA: 58/42)
Desired International allocation: 18% of stocks

Current Total Portfolio: 3.4M (almost Financially Independent at 4% withdrawal rate)
Desired Net Worth in 10 years at full retirement: 4 -5 million

Current retirement assets:

Taxable:

20% Cash $600,000

Vanguard Taxable: $1.2M
21% VTSAX Vanguard Total Stock Admiral
5% VTIAX Vanguard Total Internation Stock Admiral
10% CDs
2% US TIPs

His Rollover IRA at Vanguard: $513K

10% VTSAX
1% VTIAX
2% Gold
3% CDs


His Sep IRA at Vanguard: $7200
1% VGTSX Total International Stock


His IRA at Schwab: $645K
15% SWTSX Schwab Total Stock
2 % SWISX Schwab Total International
1% SWLBX Schwab Total Bond
1% US TIPs
1% Gold


His 401K: 92K
2% FFEZX:
1% FXSIX:


Her Roth IRA; $81,000
2% VTHRX Vanguard Total Retirement 2030


New annual Contributions:
$24,500 his 401K
(Company match – approx. $27,000)
$5,000 his Sep IRA
$6,500 her IRA/Roth IRA
$ 50,000 taxable
Total New Contributions: $110,000 per year

Total Living Expenses per year: $120,000 ($28,000 of this is mortgage)

Thanks for sharing your Boglehead wisdom:)
Last edited by Baseballmom94 on Tue Feb 13, 2018 12:31 pm, edited 3 times in total.

3funder
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Joined: Sun Oct 15, 2017 9:35 pm

Re: Where To Allocate 600,000 Fixed Income?

Post by 3funder » Mon Feb 12, 2018 3:27 pm

Fixed income usually refers to bond or bond-like investments. Consider the following:

https://personal.vanguard.com/us/funds/ ... true#tab=2

rkhusky
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Re: Where To Allocate 600,000 Fixed Income?

Post by rkhusky » Mon Feb 12, 2018 3:32 pm

How long do you expect before you need to spend the money? Duration of Limited Term TE is 2.8 years, duration of Intermediate Term TE is 5.4 years. Duration is the expected length of time for the extra income from an increase in interest rate to offset the drop in price resulting from the increase in interest rate.

Also note that Short-Term Tax Exempt has a duration of 1.4 years and an SEC yield of 1.52%, which is the same as the after-tax return of a 2.0% CD in the 24% tax bracket. The bond fund has slight variations in price, but also no withdrawal penalty. However, I'm guessing the Ally CD also has no withdrawal penalty, so the Short Term TE fund is not competitive on a risk-adjusted performance basis, although it is probably easier to use if you intend to move money in and out of the fund regularly. The other TE options therefore give you the potential for higher return, with more risk, albeit small risk.

mickroark
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Re: Where To Allocate 600,000 Fixed Income?

Post by mickroark » Tue Feb 13, 2018 5:15 am

Bitcoins no doubt. Make some money. Expected price by experts on the internet = $50000.00 within weeks.

mega317
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Re: Where To Allocate 600,000 Fixed Income?

Post by mega317 » Tue Feb 13, 2018 5:38 am

I think this is a case where you'd get much better advice by posting your whole story. See "asking portfolio questions".

I am interested to know why you want bonds in taxable.

If this is for retirement why 1 year CDs?

Also why would you be concerned about loss in bonds but also considering tax-exempt bond funds? Where do you live?

Baseballmom94
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Joined: Fri Mar 01, 2013 10:25 am

Re: Where To Allocate 600,000 Fixed Income?

Post by Baseballmom94 » Tue Feb 13, 2018 12:06 pm

Thank you for responses so far. I've edited my post to include additional background info.

We don't necessarily "want" bonds in taxable. We max out our tax sheltered space each year and have an extra $100,000 to invest annually so it has to go in taxable and can not all go into stocks in order to maintain our desired 55/45 asset allocation.

123
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Re: Where To Allocate 600,000 Fixed Income?

Post by 123 » Tue Feb 13, 2018 12:14 pm

If you want the security of CDs in this interest rate environment I would put no more then half of it in 12 month CDs and hold the rest in a high money market savings account. In 2 or 3 months I would revisit the rate available on 12 month, or alternate period CDs, and perhaps buy another. You do not want to have all your fixed income on the same interest rate cycle. A few months back you had to get a 2 year CD to get 2%, now you get it with a 12 month CD.
The closest helping hand is at the end of your own arm.

Lafder
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Location: East of the Rio Grande

Re: Where To Allocate 600,000 Fixed Income?

Post by Lafder » Tue Feb 13, 2018 12:17 pm

1) Pay hyourself first, pay off your mortgage. Then invest the equivalent of the payments monthly per your IPS. This still leaves you a good chunk to invest now, and a guaranteed interest rate on the mortgage balance you cannot get guaranteed anywhere else.

2) I would invest in tax advantages bonds. But since you said you do not want bonds, perhaps laddered CDs.

Lafder

radiowave
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Re: Where To Allocate 600,000 Fixed Income?

Post by radiowave » Tue Feb 13, 2018 12:21 pm

Another option to consider is short term Treasury Bills in taxable. You can buy these directly in Vanguard and provide similar returns to CDs and backed by the full faith and credit of the US. No state tax.
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bloom2708
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Location: Fargo, ND

Re: Where To Allocate 600,000 Fixed Income?

Post by bloom2708 » Tue Feb 13, 2018 12:23 pm

Where is your taxable account currently located? Vanguard, Fidelity, etc.

If this is $600k new money, would not part go to stocks and part to bonds/CDs? Or is $600k 40% of the new money to maintain your 60/40 split?

If this is "long term" investment money, then I would not let the potential of rising interest rates drive your plan. Stay Limited or Intermediate-
Term.

$100k in a CD - If interest rates are set to rise, then I would keep this at 12 months or so. If you lock in, then you are stuck.

$200k Limited-Term Tax-Exempt (Vanguard)

$300k Intermediate-Term Tax-Exempt (Vanguard)

If interest rates do rise, the Net Asset Value will drop a little. Bonds will be sold in the fund and new bonds will be added to increase the yield. You want to participate in the higher rates coming (maybe coming). To do that, you risk some that the NAV will drop but be compensated by higher interest returning back to you.

We only use Int-Term Tax-Exempt in our taxable account at Vanguard. The duration is in that 5-6 year range. I am willing to accept some risk to get some tax-exempt interest. Limited-Term has less risk (shorter duration), but also gets you less interest. That is the trade-off. CD interest is ordinary income, so you will lose 22% or 25% to taxes. 2% is not 2% net.

If this money is needed in the next years, then CDs/Money Market are the way to go.

I do like the idea of paying off your mortgage with a portion. 2.75% guaranteed return.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

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BolderBoy
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Re: Where To Allocate 600,000 Fixed Income?

Post by BolderBoy » Tue Feb 13, 2018 12:25 pm

Lafder wrote:
Tue Feb 13, 2018 12:17 pm
1) Pay hyourself first, pay off your mortgage. Then invest the equivalent of the payments monthly per your IPS. This still leaves you a good chunk to invest now, and a guaranteed interest rate on the mortgage balance you cannot get guaranteed anywhere else.

2) I would invest in tax advantages bonds. But since you said you do not want bonds, perhaps laddered CDs
I agree with Lafder's advice. Also, I have a boatload invested in Intermediate Term TE Bond at VG and am not "feeling" the pain of it being down YTD. Still throws off a lot of tax-free income every month.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

Lou354
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Re: Where To Allocate 600,000 Fixed Income?

Post by Lou354 » Tue Feb 13, 2018 12:57 pm

Baseballmom94 wrote:
Tue Feb 13, 2018 12:06 pm
We don't necessarily "want" bonds in taxable. We max out our tax sheltered space each year and have an extra $100,000 to invest annually so it has to go in taxable and can not all go into stocks in order to maintain our desired 55/45 asset allocation.
You don’t have to add to bonds in taxable. Instead you can buy equities in a taxable account, and maintain your desired overall allocation by selling stocks and buying fixed income (e.g., bonds, CDs) in tax-advantaged accounts.

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