“I am retired and would like to put half of the bond side of my portfolio in CDs. My total retirement IRA is now at Fidelity. I also like to take the ‘lazier approach.’ So my question: What do you think about new or secondary market CDs from Fidelity?”

CDs purchased via a brokerage firm are known as “brokered CDs.” While brokered CDs can sometimes play a useful role in a portfolio, it’s important to understand that they’re meaningfully different from CDs purchased directly at a bank or credit union.

Interest Rate Risk

A major drawback of brokered CDs relative to directly-issued bank CDs is that brokered CDs cannot be redeemed with the issuer. Instead, they must be sold on the secondary market. As a result, they will experience the same sort of interest rate risk (i.e., price volatility) that other bonds do. That is, if you need to sell your brokered CD prior to maturity and rates have increased significantly since the time at which you bought the CD, it’s likely that you’re going to take a loss on the investment (due to the price decline and the bid/ask spread).

In contrast, it’s possible to find directly-issued bank CDs that have almost no interest rate risk because they have low penalties for early withdrawal. (Ally Bank’s CDs continue to be my best example of CDs like this, but it’s possible that you could find a better deal if you shop around.)

Call Risk

A second potential drawback is that some brokered CDs are callable, meaning the bank has the option to “call” (i.e., force redemption of) the CD at certain times, stated in the CD contract’s terms. This becomes relevant in scenarios in which rates go down after you buy your CD. In such cases, the bank will often call the CD, forcing you to reinvest the money at the new lower rates (if you want to keep the money in some sort of fixed-income investment, that is).

When Can Brokered CDs Make Sense?

Despite their drawbacks, brokered CDs do have one advantage: convenience. Buying brokered CDs is less work than moving money from bank to bank as your CDs mature, in order to get the best rates around. As a result, even though it’s unlikely that you’ll find as good of a deal on brokered CDs as you could find on directly-issued bank CDs, non-callable brokered CDs can still be worth considering if:

1. You’re the type of investor who places somewhat more emphasis on convenience rather than absolute maximization of portfolio results,
2. The yield (after subtracting any relevant costs such as commissions) on the brokered CD in question is meaningfully greater than the yield on Treasury bonds with a similar duration, and
3. You stay under the FDIC limit.

What is the Best Age to Claim Social Security?

Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less Click here to see it on Amazon.

Treasury Circular 230 Notice: Any U.S. tax advice on this blog is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed on this blog.

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

An article in the NYT’s Bucks blog shared a similar message this week:

• What You Don’t Know About Your Portfolio May Help You from Carl Richards

Investing Articles

• Wishing Upon a Star Manager Doesn’t Work from Rick Ferri
• How to Handle a Windfall from Financial Ramblings
• Sequence of Returns Risk from Monevator
• Ambiguous FINRA Financial Literacy Quiz Trips Up The Public from The Finance Buff
• How Being Scared of Leverage Affects Stock Returns from Larry Swedroe
• Why Bonds Lose Value When Interest Rates Rise from Allan Roth
• Chile’s Annuity Puzzle from Moshe Milevsky

Other Money-Related Articles

• The “Perfect” Retirement Calculator from Darrow Kirkpatrick
• 15 Affordable Care Act Provisions That Will Take Effect in 2014 from LifeHealthPro
• Everything You Ever Wanted to Know About Obamacare State-Run Health Exchanges from Sean Williams

Thanks for reading!

What is the Best Age to Claim Social Security?

Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less Click here to see it on Amazon.

Treasury Circular 230 Notice: Any U.S. tax advice on this blog is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed on this blog.

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

“Several friends have purchased the Prudential Defined Income Variable Annuity. The illustration we were given shows a guaranteed 5.5% growth rate, meaning $100,000 invested for 12 years would be almost $200,000. But everything I read says to stay away from variable annuities. Have you published anything that explains why this isn’t a good deal?”

Typically, what’s going on with illustrations like the one mentioned is that the illustrated value (e.g., $200,000 after 12 years) isn’t exactly real money. That is, it’s not the same as having $200,000 in mutual funds, stocks, bonds, CDs, or cash.

Generally speaking:

• If you were to cash in the annuity all at once, you wouldn’t get the full $200,000, and
• If you instead choose to turn on the income stream, it would typically pay out at a rate significantly below what you could get with an ordinary fixed lifetime annuity. (That is, it doesn’t buy $200,000-worth of annuitized income either.)

A reading of the actual prospectus for the Prudential Defined Income Variable Annuity shows that this is indeed what’s going on here. In this particular case, there are two important terms to understand:

1. The annuity’s “account value” and
2. What’s referred to in the annuity’s promotional literature as the “protected withdrawal value.”

What Do You Get if You Cash It In?

The account value is the amount that you would receive if you were to cash in the annuity. (Although if you cash it in within the first 7 years, you will actually get somewhat less because a “contingent deferred sales charge” will apply.)

The account value does not grow at a guaranteed 5.5% per year. Instead, the account value grows (or fails to grow) based on the performance of the underlying “sub-account.” In the case of this annuity, the sub-account invests in a bond fund (Advanced Series Trust AST Long Duration Bond Portfolio) with a 0.83% expense ratio, to which an annual insurance cost of 1.9% is added.

Suffice to say, a bond fund facing annual costs of 2.73% is likely to grow at a rate much slower than 5.5% per year. (In fact, with rates as low as they are, I would be surprised to see any noticeable growth over the next several years from a bond fund with such high expenses.)

How Much Income Can You Get?

The amount that is growing at a guaranteed 5.5% annual rate is the “protected withdrawal value.” This is the amount upon which the lifetime income benefit is based. That is, if/when you turn on the stream of guaranteed lifetime income, the amount you’re guaranteed to receive per year is the protected withdrawal value multiplied by a rate that’s based on your age.

But, as it turns out, that age-based rate is not anything to write home about. For example, a 65-year old would receive a 5% payout (regardless of gender). In contrast, by shopping around online, a 65-year old female could get a fixed lifetime annuity paying 6%, and a 65-year old male could get an annuity paying 6.54%.**

In addition, the age-based rate is based on your age as of the date the annuity was issued (i.e., when you first bought it) as opposed to your age when you decide to begin taking income from the annuity.

Let’s look at an example.

Sue is 65 years old. She puts $100,000 into this annuity, then waits 5 years (until age 70), at which point she begins taking withdrawals per the defined income benefit. Her “protected withdrawal value” has grown at the guaranteed 5.5% annual rate, from $100,000 to $130,696. Sue’s guaranteed annual lifetime income will be calculated as her “protected withdrawal value” of $130,696, multiplied by the 5% payout ratio for somebody age 65 (i.e., her age when she purchased the annuity). Result: She’s guaranteed to receive $6,535 per year for the rest of her life.

But guess what? Given her age of 70, if she went online and searched for annuity quotes, she would find that she could get a fixed lifetime annuity paying 6.65% per year.** In other words, she could get that $6,535 of guaranteed lifetime income for just $98,271 using a fixed lifetime annuity.

In short, the enticing 5.5% guaranteed growth rate isn’t anything like a guaranteed 5.5% rate of return. The “protected withdrawal value” that’s guaranteed to grow at that 5.5% rate cannot be cashed out, and the income it provides is worth less than it appears to be worth once you actually compare it to simple fixed lifetime annuities available elsewhere.

**These annuity quotes are for fixed lifetime annuities with a 10-year period certain guarantee, because the Prudential annuity’s defined income benefit comes with such a guarantee. If you have no interest in such a guarantee, you could find higher-paying quotes for simple fixed lifetime annuities.

What is the Best Age to Claim Social Security?

Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less Click here to see it on Amazon.

Treasury Circular 230 Notice: Any U.S. tax advice on this blog is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed on this blog.

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

Two-Fund Portfolios Using Total World Stock ETF

Several readers wrote in to say that they like the idea of a simple portfolio, but are not especially enamored with the Total Bond Market Index Fund that is included in Vanguard’s funds-of-funds. One reader wanted to shift toward corporate bonds in order to get the slightly higher yields. Another wanted to shift in precisely the opposite direction, using exclusively Treasury bonds. Still other readers said they wanted to stick to short-duration bonds in order to minimize interest rate risk.

Any of these desired allocations could be satisfied while still keeping things very simple by crafting a two-fund portfolio consisting of Vanguard’s Total World Stock ETF and the bond fund of your choosing. (While I don’t usually have a strong opinion on the mutual-fund-vs-ETF question, I think with Vanguard’s Total World Stock fund it makes sense to use the ETF, given that there is no Admiral Shares version of the traditional index fund.)

LifeStrategy Plus Tilt

A few readers wrote in to say that they like to keep things simple, but they also like the idea of tilting toward a specific category of stocks (either REITs or small-cap/value stocks), so they’ve created two-fund portfolios consisting of a LifeStrategy fund plus Vanguard’s Small-Cap Value Index Fund or a LifeStrategy fund combined with Vanguard’s REIT Index Fund.

Personally, I think it’s very neat that so many different diversified portfolios can be created using just two mutual funds. That said, as usual, a list of caveats applies:

• Funds-of-funds (such as the LifeStrategy funds) are tax-inefficient, which is relevant if some of your assets are in taxable brokerage accounts.
• Even Vanguard’s funds-of-funds have slightly higher expense ratios than the expense ratios you could have if you built a portfolio using the underlying funds.
• Depending on how happy you are spending time in Excel, once you’ve moved beyond a portfolio that automatically rebalances itself, two funds might not be a heck of a lot easier than three, four, or even more funds.

What is the Best Age to Claim Social Security?

Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less Click here to see it on Amazon.

Treasury Circular 230 Notice: Any U.S. tax advice on this blog is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed on this blog.

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

This week, however, the topic has been getting a lot of attention. The Motley Fool published an article criticizing Ramsey’s frequent statement that investors should expect 12% returns from their portfolios. Investment-related social media groups have been awash with discussions of the problematic nature of his advice. And Wade Pfau wrote an excellent article explaining the danger in Ramsey’s suggestion to use an 8% inflation-adjusted withdrawal rate in retirement.

I’m hopeful that Ramsey will change his tune someday. But, if he doesn’t, perhaps more people will at least come to recognize that his advice about investing leaves much to be desired.

Investing Articles

• U.S. Government Annuity for Sale from Allan Roth
• Pens, Trinkets, and Mutual Funds from Roger Wohlner
• IPOs Are for Idiots from Financial Ramblings
• Whole Life Insurance vs. EE Bonds vs. Muni Bonds from The Finance Buff
• Investing for Beginners: Why Do We Invest? from Monevator
• How Chasing Yield Affects Expected Returns from Larry Swedroe
• More Unconventional Failure from Rick Ferri

Other Money-Related Articles

• Money Lessons Every Graduate Should Know from Kathy Kristof
• The Qualified Terminable Interest Property (QTIP) Trust from Financial Ducks in a Row

Thanks for reading!

What is the Best Age to Claim Social Security?

Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less Click here to see it on Amazon.

Treasury Circular 230 Notice: Any U.S. tax advice on this blog is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed on this blog.

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

The prior edition presented a “buckets” method for determining how much of the portfolio to put into cash, how much in bonds, and how much in stocks. In place of that discussion, the new edition includes a discussion of various factors affecting the risk level of your portfolio (e.g., stock/bond breakdown, credit quality of your bond holdings, and duration of your bond holdings), making the case that for any given investor, rather than one perfect asset allocation, there is a whole spectrum of reasonable asset allocations.

Buckets: A Mental Accounting Method

The point of the buckets concept is simply to make it easier to decide how much money to have in each asset class — that is, to give people an intuitive way to settle on an asset allocation.

There is not, however, any economic significance to the mental partitioning of the portfolio into three separate “buckets.”  It’s akin to the way in which some people have separate savings accounts for specific goals, or the way in which some people use a cash budgeting system with separate envelopes for each part of the monthly budget (e.g, gas, groceries, entertainment). The money doesn’t care which savings account, envelope, or bucket it’s in. There’s no economic point to separating the money. But, for various reasons, it can make things mentally easier.

Unfortunately, based on reader feedback, it appears that I did not make that sufficiently clear in the first edition of the book, and a significant number of readers got the impression I was making the case that there is something inherently preferable about a bucketed portfolio to a non-bucketed portfolio.

In the end, I decided to eliminate the bucket discussion completely and replace it with something that is, I hope, more difficult to misconstrue.

Avoiding Analysis Paralysis

As we’ve discussed several times here on the blog, without the use of a crystal ball, there’s no such thing as a perfect portfolio. The best we can do as individual investors is create a portfolio that is in the right general ballpark for our personal level of risk tolerance.

Yet, almost everyday, I hear from investors who are fretting about small changes (e.g. carving out a 5% allocation to REITs at the expense of other stock holdings) or who have a portfolio that they know is a mess but that they can’t bring themselves to change until they figure out the perfect asset allocation for their new, updated portfolio.

So the goal with the rewritten section on asset allocation is to help investors avoid (or overcome) “analysis paralysis” by being as explicit as possible about the point that “good enough” really is good enough. Or, as Jack Bogle once wrote (quoting a Prussian general, apparently), “The greatest enemy of a good plan is the dream of a perfect plan.”

What is the Best Age to Claim Social Security?

Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less Click here to see it on Amazon.

Treasury Circular 230 Notice: Any U.S. tax advice on this blog is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed on this blog.

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

First, the 2013 edition of my book Can I Retire? is now available, and from now through Wednesday, the Kindle version is available free of charge, and the print version is just $5 on Amazon.

In addition, fellow blogger Darrow Kirkpatrick’s new book Retiring Sooner is available free as a Kindle book (and $5 as a print book) through Wednesday.

About Darrow’s Book

For those of you who haven’t yet come to recognize the name from my weekly roundups, Darrow Kirkpatrick is one of my favorite personal finance bloggers. He’s not a financial professional. Rather, he’s simply a normal guy who did all the right things to retire early (at age 50).

Darrow’s new book is a very nuts-and-bolts guide for how to follow in his footsteps and retire well ahead of the typical schedule.

Click here to see Darrow’s book on Amazon and download the free Kindle version.

About the New Edition of Can I Retire?

The changes to Can I Retire? include:

• Updates to reflect changes in tax law,
• Brief discussions throughout the book of how today’s low interest rates affect various retirement planning decisions,
• An additional section (originally shared here on the blog) about how to decide how much of a portfolio to devote to an annuity and when to do so, and
• A reworking of the discussion of asset allocation to place more emphasis on the idea that there is no single best allocation for a given investor, but rather a range of perfectly reasonable allocations. (Wednesday’s article will discuss the reason behind this change in a bit more depth.)

Click here to see the new edition of Can I Retire? on Amazon and download the free Kindle version.

Answers to Questions

I don’t own a Kindle. Can I still read the Kindle edition somehow?

Yes. There’s no need to own a Kindle to read a Kindle book. They can be read using free software on a regular PC or Mac.

I’ve already read the prior edition. Should I buy this one too?

Overall, it’s the same book with the same message, so there’s probably no need to buy it again. (On the other hand, for a price of zero, there’s little reason not to pick up the Kindle version.)

Can I tell other people about the promotion?

Please do.

I already have the old edition on my Kindle. How do I update it to the new edition?

Before buying the new one, you’ll have to delete the old edition from your Kindle and from your Kindle account on Amazon. To delete an item from your Kindle account:

• On Amazon go to the “Your Account” page,
• Click on “Manage Your Kindle” in the “Digital Content” section, and
• Click the “actions” drop-down menu for the book in question and choose “delete from library.”

I hope you find the books helpful! Here are the links one more time:

• Can I Retire? on Amazon
• Darrow Kirkpatrick’s Retiring Sooner on Amazon

What is the Best Age to Claim Social Security?

Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less Click here to see it on Amazon.

Treasury Circular 230 Notice: Any U.S. tax advice on this blog is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed on this blog.

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

• The Only Investing Pattern That Matters Is Behavioral from Carl Richards

Investing Articles

• Avoid Awkwardness in the Afterlife: Confirm Your Beneficiary Designations from Financial Ducks in a Row
• What is Tax-Equivalent Yield? from Financial Ramblings
• The Heavy Toll of Investment Fees from Rick Ferri
• Could There Be a Good VUL Policy? from The White Coat Investor
• Index Funds: Low Fees Aren’t the Only Advantage from Bill Schultheis
• A Statistical Look at Jim Cramer’s Skill Level from Allan Roth
• Should I Buy In Now? from Canadian Couch Potato
• Where Are the Benefits of International Diversification? from Larry Swedroe

Thanks for reading!

What is the Best Age to Claim Social Security?

Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less Click here to see it on Amazon.

Treasury Circular 230 Notice: Any U.S. tax advice on this blog is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed on this blog.

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

“I’m curious if you are still using the LifeStrategy fund? Are you satisfied or do you have second thoughts?”

Yes, we’re still using Vanguard’s LifeStrategy Growth fund for our retirement savings. And yes I am still quite happy with it — precisely because I don’t have second thoughts. I think about it roughly the same way that I think about a savings account — not in the sense that it has the same risk/reward profile, because it most certainly does not, but in the sense that it takes a similar amount of maintenance and mental energy (i.e., none).

I no longer spend any time or mental energy thinking about:

• Whether or not now is a good time to rebalance,
• Which fund(s) my monthly contributions should go into, or
• Whether my asset allocation is precisely right.

I know my allocation is not perfect. But by using an all-in-one fund, I forced myself to accept that ahead of time. And because it requires no maintenance, there is no longer the monthly temptation (which used to occur when making new contributions) to change something here or there in an attempt to make the portfolio slightly better in some way.

Not One-Size-Fits-All

Of course, all-in-one funds are not a perfect fit for everybody. There are plenty of reasons why any given investor might be better off taking the DIY-allocation approach. For example:

• The fund-of-funds structure is tax-inefficient, which is relevant if you have assets in a taxable brokerage account.
• Some people will not be able to find an all-in-one fund with an asset allocation that suits their needs (e.g., because they need to underweight U.S. stocks in their IRA in order to make up for the fact that they’re overweighting U.S. stocks in their 401(k) because their retirement plan’s only decent choice is a U.S. stock fund).
• Some people will prefer to implement a strategy that “tilts” the portfolio in some way (most commonly toward small-cap value stocks or REITs).
• Some people using an all-in-one fund would still worry about whether the allocation is good enough.
• And some people with DIY allocations don’t worry about whether their allocation is good enough.

But, yes, our all-in-one fund is continuing to work quite well for us.

What is the Best Age to Claim Social Security?

Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less Click here to see it on Amazon.

Treasury Circular 230 Notice: Any U.S. tax advice on this blog is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed on this blog.

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

“You linked recently to an article saying long-term CDs are now a better option than bonds altogether. How do you feel about that? Part of my problem here is that my cash reserves are not very large (about 1.5% of my total assets), and also there’s no way to rebalance within a Vanguard IRA into CDs.”

I do think CDs are relatively attractive right now. For example, Ally’s 5-year CD has roughly twice the yield of Admiral shares of Vanguard’s intermediate-term Treasury fund, despite the fact that the Ally CD has less interest rate risk and (assuming you stay under FDIC limits) the same credit risk. And if you shop around, you might even be able to find a CD that’s better than Ally’s.

You Can Do a Partial Account Transfer

The two issues that people run into when trying to figure out how to use bank (or credit union) CDs in a mutual fund portfolio are that:

1. Banks don’t offer any good options as far as stock holdings (so you don’t want to move everything to the bank), and
2. It’s impossible to rebalance with CDs.

Fortunately, neither of these is a problem given that you can do a partial account transfer, even with an IRA. That is, you can keep your current IRA and simply do a direct trustee-to-trustee transfer, moving a portion of the money into a new IRA with the bank or credit union.

For instance, if you decide that CDs offer a good risk/reward ratio, you might choose to transfer an amount equal to just half of your fixed income allocation. This way your stock holdings would be unaffected, and you would still have some traditional bond fund holdings with which you can easily rebalance.

CDs Are More Work

But moving money from one custodian to another does require some effort. And, depending on what happens with interest rates down the line, you might end up wanting to move it back — or to yet another custodian. And even if you leave the money at one bank/credit union, there’s a bit of ongoing work involved in buying new CDs when the current ones mature.

So it’s a question of whether the additional yield is worth the additional effort. (Admittedly, when given the choice between two options, I tend to go with the lazier approach with my own portfolio.) There’s no right answer here. It will depend on:

• Your personal tolerance for administrative hassle, and
• The size of your fixed income allocation (the larger the allocation, the greater the dollar value of the additional yield).

What is the Best Age to Claim Social Security?

Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less Click here to see it on Amazon.

Treasury Circular 230 Notice: Any U.S. tax advice on this blog is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed on this blog.

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).