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Retirement Savings: How Much Should I Save Each Month?Washington Post Article: Investors Opting for Cash
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POSTED
ON BY Ken Tumin
With the recent volatilty of the stock market, many are seeking safer returns in cash. This Washington Post article has an overview of this trend. If the Fed continues to raise rates, stocks will continue to be hurt while savings accounts, CDs, money market funds will continue to look better.
The article describes the common types of cash savings including bank savings accounts, money market mutual funds, tax-exempt money market funds, certificates of deposit, Treasury securities. It mentioned one other alternative: the bank-loan mutual fund. Although it's more risky, it should also do well as rates rise.
Those in high tax brackets and in states with income tax, it's hard to beat tax-exempt money-market funds. The article gave an example of a DC resident in the 35% federal tax bracket with a 8.7% DC tax. A tax-exempt money market fund yielding 3.79% would be equivalent to a 6.73% taxable return.
Treasury bills can also be a good choice for those with high state or local income taxes since T-Bills are exempt from those. A 13-week T-bill is paying around 4.95%. This FW thread has a good summary and discussion on these. Similar to T-Bills, Series I Savings Bonds can be a good alternative. Not only are they exempt from local and state income taxes, they also have the advantage that federal income tax can be deferred until they're redeemed. Due to the inflation component being so low this term, the current yield is only 2.41%. However, I Bonds have done well over the last 7 years since the Treasury introduced the I Bonds. The Savings Bond Advisor shows how they've out-performed the Vanguard 500 Index Fund during this time for someone saving an equal amount each month.
For CDs, A financial planner interviewed in the article recommended sticking to terms no longer than 90 days. The idea is to stay liquid so you can take advantage of longer term CDs when the Fed stops the rate hikes. Plus, with the current inverted to flat yield curve, you don't get much if any premium for longer terms.
Should long term investors be heavily in cash? And how long is a long term investment? The financial planner interviewed in this article recommended that if you need the money in less than 3 years, the money should be in cash and not the market. For longer term investors, be careful about bailing out of stocks. If the market goes back up, you may never see another good time to get back in.
Money Magazine had a similar article several months ago describing various cash choices. See my commentary here..
The article describes the common types of cash savings including bank savings accounts, money market mutual funds, tax-exempt money market funds, certificates of deposit, Treasury securities. It mentioned one other alternative: the bank-loan mutual fund. Although it's more risky, it should also do well as rates rise.
Those in high tax brackets and in states with income tax, it's hard to beat tax-exempt money-market funds. The article gave an example of a DC resident in the 35% federal tax bracket with a 8.7% DC tax. A tax-exempt money market fund yielding 3.79% would be equivalent to a 6.73% taxable return.
Treasury bills can also be a good choice for those with high state or local income taxes since T-Bills are exempt from those. A 13-week T-bill is paying around 4.95%. This FW thread has a good summary and discussion on these. Similar to T-Bills, Series I Savings Bonds can be a good alternative. Not only are they exempt from local and state income taxes, they also have the advantage that federal income tax can be deferred until they're redeemed. Due to the inflation component being so low this term, the current yield is only 2.41%. However, I Bonds have done well over the last 7 years since the Treasury introduced the I Bonds. The Savings Bond Advisor shows how they've out-performed the Vanguard 500 Index Fund during this time for someone saving an equal amount each month.
For CDs, A financial planner interviewed in the article recommended sticking to terms no longer than 90 days. The idea is to stay liquid so you can take advantage of longer term CDs when the Fed stops the rate hikes. Plus, with the current inverted to flat yield curve, you don't get much if any premium for longer terms.
Should long term investors be heavily in cash? And how long is a long term investment? The financial planner interviewed in this article recommended that if you need the money in less than 3 years, the money should be in cash and not the market. For longer term investors, be careful about bailing out of stocks. If the market goes back up, you may never see another good time to get back in.
Money Magazine had a similar article several months ago describing various cash choices. See my commentary here..