Which fund for 2nd tier EF?

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hap_ca
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Joined: Sat Jun 09, 2018 3:42 pm

Which fund for 2nd tier EF?

Post by hap_ca » Sat Dec 08, 2018 5:38 pm

I'm seeking advice on what funds I should hold for a 2nd tier emergency fund. I am in California and expect to be in the 35% Federal bracket and 10.3% state bracket next year. I'm not a homeowner and do not itemize. For the 1st tier of emergency funds I plan to hold around 3 months in CA muni market or an online savings account. I also hold VTSAX and VFWAX equivalent to about 4x what I expect I need for EF in my taxable account which are part of my retirement holdings.

I've done some TEY calculations based on this post

Image

I pulled the max drawdown from Portfollio Visualizer with the longest possible time range for each fund.

1) VBIRX holds 64.8% in US treasuries and I believe in CA that means 64.8% of the yield should be exempt from state income tax. Is that correct? I used this formula: yield * (1-f) / (1 - f - s * 0.648)

2) How do I find the right term length for an EF since it's unknown when I'll need to tap into it? Looking at something longer term such as Vanguard CA Intermediate the max drawdown is only -5.07% and that doesn't seem like a very high amount of risk to take. In the worst case scenario an equivalent of 5.07% of VTSAX/VFWAX from my taxable can be liquidated to bridge the gap

3) Based on my calculations I'm not really sure what to pick. Short term treasury index looks pretty good with a decent yield and low risk, but CA intermediate term doesn't look bad if the max drawdown is an acceptable risk. On the other hand I've heard a lot of arguments here that Muni risk isn't really worth it.

Thanks.

Jack FFR1846
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Re: Which fund for 2nd tier EF?

Post by Jack FFR1846 » Sat Dec 08, 2018 5:41 pm

Why a fund at all? Mine is US Savings bonds
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3funder
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Re: Which fund for 2nd tier EF?

Post by 3funder » Sat Dec 08, 2018 5:43 pm

I'd go with VBIRX.

hap_ca
Posts: 20
Joined: Sat Jun 09, 2018 3:42 pm

Re: Which fund for 2nd tier EF?

Post by hap_ca » Sat Dec 08, 2018 6:07 pm

Jack FFR1846 wrote:
Sat Dec 08, 2018 5:41 pm
Why a fund at all? Mine is US Savings bonds
I've been considering I-Bonds as well, but I don't really want to deal with Treasury Direct if I can get something similar from Vanguard or Fidelity. Since I also have a Fidelity account I could do autoroll treasuries.
I'd go with VBIRX.
It does look pretty good, I am a bit surprised it holds up that well compared to the other funds even though I'm in a relatively high tax bracket. This is assuming my math is correct.

radiowave
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Re: Which fund for 2nd tier EF?

Post by radiowave » Sat Dec 08, 2018 7:36 pm

OP,

My first tier EF is high yield savings (currently 2.0%)
second tier is 1 year CDs (currently 2.65%) and 1 year T-bills
third tier is total US stock fund in taxable.

I was using the Vanguard municipal bond fund, but it was putting out a lot of unneeded dividends and raising my MAGI where I wouldn't be able to directly contribute to Roth IRA, so exchanged them for more total stock.
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livesoft
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Re: Which fund for 2nd tier EF?

Post by livesoft » Sat Dec 08, 2018 7:44 pm

Why an emergency fund at all? Why not just have 100% equities in your taxable account?
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whodidntante
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Re: Which fund for 2nd tier EF?

Post by whodidntante » Sat Dec 08, 2018 9:50 pm

Vanguard said those ex-USA developed market equities have reasonable valuations. Maybe buy some of those.

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