Where to Allocate $600,000 New Cash Into Fixed Income in Current Evironment?

[Antares]

“I know I have to work to get to a place of higher logic in some of my financial decisions“

You said it, brother!

[White.Beard.Doc]

I have the same dilemma.  Should I pay off my last two remaining mortgages (I own a home and multiple investment properties) which are at 2.625% and 3.25% or put the money in CDs or savings or munis?

When you have won the game by reaching FI, it is wise to prioritize protecting your assets to some degree.  So that means some portion of the money goes into things like FDIC interest bearing accounts or government bonds or paying off the mortgage.

Given your plan to buy land and build in the future, you will easily be able to get a construction loan given your assets.  You could even collateralize a paid off current home for the construction and sale phase of the transition from the current house to the new one.  Maybe just pay off that current mortgage if you have sufficient liquidity.  Or at least pay off part of it since you will be getting a better rate than you would with CDs.  I do understand the psychology of wanting to hold onto that sweet mortgage rate. I am currently working on that issue so that I will be comfortable to pay off my 2.625% mortgage despite the sad feeling of never in my lifetime being likely to see a rate like that again.

Financial psychology isn't always logical.  I know I have to work to get to a place of higher logic in some of my financial decisions.

 

[Baseballmom94]

Just wanted to update everyone on our fixed income situation - thanks to all who provided input - certainly gave us a lot of options to consider. Our main concern at this point is safety. At almost 60% stock allocation, we feel we are taking enough risks on that side. I have another post coming soon on that particular topic

We decided to break the 600,000 up and spread it into three different "buckets". We will pay off about half the mortgage ($120,000) - this allows us to still have cash on hand in case we find the perfect lot and decide to build a house. $300,000 is in a short-term CD ladder at Ally. And the remaining $180,000 will go into either the Vanguard tax-exempt intermediate bond fund or TIPs - still thinking about that one! Again, many thanks to all of you.

[Rando]

Baseballmom94 wrote:

 Would like to keep cash available to buy a lot and build a home.

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I think this is the key.  What you're really asking is where to stash a lump sum that you want to access in 2-4 years.  In that case the paramount consideration is generally safety and not growth so you're probably stuck with MMA's, CD's, etc.

I would figure out how much money you want to access in a few years, put that away in a safe place as above, and fold the rest into your personal financial plan.  Normally I'd say pay off the house but I'm not smart enough to figure out the implications of that if you're leaving in 2-4 years.

[The White Coat Investor]

Baseballmom94 wrote:

Greetings fellow WCI followers, suppose you had $600,000 of new cash to invest in fixed income this week, where would you place it?

Looking to allocate $600k in accumulated cash into fixed income investments within taxable account. DrBaseballdad and I are 6-10 years from retirement with a 60/40 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 Add Background Info:  Basically just reached FI (4% withdrawal rate) but would love to add another 1 to 1.5 million as a nice cushion before pulling trigger.

Only debt is mortgage  $230,000 remaining at 2.75%   House worth about 600K

Yes, we could pay this off with the available cash but we don’t plan to stay in the house more than 2-4 years so not sure this makes sense since we don’t want all the cash tied up in house.

Thanks for sharing your WCI wisdom

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I would look at my written investment plan and allocate it that way. My plan calls for half of my fixed income to be in nominal bonds. That's been the G fund over the years, but since presumably this $600K isn't in the TSP, I'd put it into the Vanguard intermediate tax-exempt fund. The other half goes into TIPS. I like the Vanguard fund there, but Schwab has a nice ETF and it isn't unreasonable to buy individual TIPS either.

You should do what your investment plan says. If you don't have an investment plan, I suggest you get one. If you don't feel qualified to make one yourself, consider taking my online course or hiring a competent advisor at a fair rate.

Choosing an investment based on 5 weeks of performance might be the least effective method of investing. I certainly wouldn't shy away from a bond fund based on that if it otherwise meets the criteria I was looking for. In fact, a recent decrease in price means you're getting a bargain in some ways.

I also agree that paying off your mortgage gives a great "fixed" return. Honestly, I'd probably do that in your situation and invest the rest per my written investing plan.

[actuaryonfire]

Baseballmom94 wrote:

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

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As Zaphod says CDs will maybe only maintain purchasing power at best. It will be like putting the money under your mattress, no better. But it's liquid I guess.

With fixed income you would be better earning some credit spread and some 'term premium' - for example an intermediate credit bond fund. Remember you don't automatically lose with bonds if rates rise. You generally lose if rates rise faster than the market had priced in - which is what happened recently. Like you the bond market is expecting rates to rise, and therefore has to reward bond investors with additional yield - this is the so called 'term premium'.

So now that market expectations of future rates have moved up you might view this as a safer bet than earlier in the year.

But personally? I would pay off the house...

 

[Hatton]

Inertia is a strong principle.  I have most of my money at Vanguard. I like having at one place.  I have lots of intermediate muni funds.  I have several years of expenses in money funds and a short term bond fund. Hard to make any money on this but it lets you sleep at night when you are older.

[docnews]

Pay off the house. Ibonds to their limit. Then CDs. But if you want to rebalance you might want some bond funds for their liquidity, though more risk.

[VagabondMD]

I am likely a few years closer to retirement than you and currently carry a very similar amount in cash as my emergency fund/cash bucket. I paid off my house in 2010.

I have my cash allocated as follows:

1/3 in money market and CDs at local bank where I have a relationship, serve on a board, and get excellent service and rates.

5/12 at Ally in savings and CDs

1/6 at Vanguard in the Municipal Money Market fund

1/24 at Capital One 360 Money Market Account

1/24 in I Bonds at Treasury Direct

(I think that adds up to 24/24 or 100% )

I did not plan it to be this way (was originally mostly in Vanguard Municipal MMF), but over time, some interest rates improved and others dropped, and, like an amoeba, I gradually move my money to where it gets treated the best.

[Zaphod]

You will still lose money in a CD similar to a bond fund for similar duration, though of course you wont "see" it.

You could pay off your house, but if planning to move in a couple years I wouldnt do that only because the transaction costs eat any benefit you may have received.

There are no guarantees in anything, even if you get your principal back in a CD its not likely to have kept its purchasing power.

[Tabaxus]

Baseballmom94 wrote:

I have gone back and forth with the idea of paying off the mortgage and still considering the idea, however, my thinking is that because the CDs are only 12 months in duration, they could be flipped into higher yielding CDs as interest rates rise while keeping a very low interest rate mortgage. Would like to keep cash available to buy a lot and build a home. We will probably still itemize as we are in a high property tax area (ironically, not one of the well-known high tax areas) and have 1099 income as well.

 

For those who have paid off their mortgage, does this change your asset allocation/risk tolerance in regards to your investment accounts?

 

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How do you think you're going to get to itemizing in your situation?  Property taxes are capped at $10k.  Your interest doesn't add much.  Not sure what you expect to be itemizing in connection with your 1099 income that wouldn't constitute an above the line business deduction?  You ought to double-check this.  Not to say that buying 12 month optionality to lose a few bps of return is a terrible idea, but make sure you're making it properly informed.

[Baseballmom94]

I have gone back and forth with the idea of paying off the mortgage and still considering the idea, however, my thinking is that because the CDs are only 12 months in duration, they could be flipped into higher yielding CDs as interest rates rise while keeping a very low interest rate mortgage. Would like to keep cash available to buy a lot and build a home. We will probably still itemize as we are in a high property tax area (ironically, not one of the well-known high tax areas) and have 1099 income as well.

 

For those who have paid off their mortgage, does this change your asset allocation/risk tolerance in regards to your investment accounts?

 

[jhwkr542]

With the added info, I like the house idea too.  The only reason to keep it would be to invest in something that could potentially yield more, especially since you'll likely not be itemizing under the new tax reform rules.

[Donnie]

Investing $600k in CDs yielding 2% while borrowing $200k at 2.75% is not a terribly wise choice. Are you concerned about liquidity when you say you don’t want to tie up cash in the house? You are already in the hook for the remaining mortgage, so you have tied yourself to the value of the home in that regard.

Why are you looking for fixed income? Where are your other assets (taxable, 401k, Roth, etc.) and how much is in each place?

[Baseballmom94]

Edited to add a little more info.

jhwkr542, We have an IPS which resides in my head and then I have to remind hubby of it all the time when he wants to throw more money into the market   Thank you for the reminder that " we" I need to work on a written IPS!