Author Topic: $100K - Invest or Save?  (Read 4847 times)

ascZend

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$100K - Invest or Save?
« on: June 01, 2014, 02:47:19 PM »
I'm 26, no kids, with a stable full-time job in addition to currently being a full-time student (although this will likely change to part-time status for the foreseeable future after Spring quarter ends in a few weeks).  I receive monthly compensation from the V.A. for service-connected disabilities and educational benefits.  I have been working for my current employer since March 2013, and my goal is to (hopefully) continue working through 2019.  Beginning around 2020, I would like to purchase a home and consider starting a family with my girlfriend, whom I plan on proposing to later this year.  I am currently on pace to maximize my 2014 Roth IRA and my 401(k), which I aim to do every year that I am working.  Since March, I have been saving and investing (into tax-advantaged retirement accounts) around 75-80% or more of my gross income each month.

My dilemma is this:  I have about $103,000 in a high-yield savings account, of which I would like to invest $100K and keep the remaining $3K as an emergency fund, but I'm not sure if that's the wisest course considering I plan on using this money to purchase a home in about 5.5 years or so.  The general consensus from what I have read is that money which might be needed within 5 years should not be invested.  Given that I don't anticipate needing this money until just a bit beyond that, should I consider investing it, or stick with something safer like CD's or high-yield savings/money market accounts? 

I'd appreciate any suggestions or advice.
« Last Edit: June 01, 2014, 02:57:43 PM by ascZend »

boarder42

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Re: $100K - Invest or Save?
« Reply #1 on: June 01, 2014, 04:28:21 PM »
invest it in SOMETHING.  EIther buy the house you want now or put it into an index fund.  you're losing money to inflation with it sitting in a savings account.  People dont understand the market and therefore are scared.  Look if the market 100% crashes you have other things to worry about like anarchy in the world.  i just had this conversation with a coworker the otherday.  The market is a risk but its probably less risky than your current 100% chance to lose money to inflation savings account. 

Cpa Cat

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Re: $100K - Invest or Save?
« Reply #2 on: June 01, 2014, 04:46:26 PM »
The logic behind not investing money that you need short-term is that you will NEED it.

Ultimately, you don't really NEED to buy a house in 5.5 years - it's just what you plan on doing. If the market tanks and you decide you can't buy a house until year 7, it's not the end of the world. Nothing horrible happens to you if the worst case scenario occurs and it turns out not to be a great time to withdraw the money in 5.5 years.

In fact, in 5.5 years, you'll probably have amassed even more money with which to purchase a home, so you won't even need this particular 100k for that.

Invest it.

ascZend

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Re: $100K - Invest or Save?
« Reply #3 on: June 01, 2014, 06:09:32 PM »
Thanks for the replies.  I appreciate the good, honest advice. 

I originally posted my asset allocation and investment strategy here that I've been thinking about for the last few months, but thought it would be better suited in the "Investor Alley" sub-forum.
« Last Edit: June 01, 2014, 07:17:06 PM by ascZend »

Joel

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Re: $100K - Invest or Save?
« Reply #4 on: June 01, 2014, 07:46:15 PM »
The logic behind not investing money that you need short-term is that you will NEED it.

Ultimately, you don't really NEED to buy a house in 5.5 years - it's just what you plan on doing. If the market tanks and you decide you can't buy a house until year 7, it's not the end of the world. Nothing horrible happens to you if the worst case scenario occurs and it turns out not to be a great time to withdraw the money in 5.5 years.

In fact, in 5.5 years, you'll probably have amassed even more money with which to purchase a home, so you won't even need this particular 100k for that.

Invest it.

This is exactly what I was going to recommend.

mrmanhattanmustache

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Re: $100K - Invest or Save?
« Reply #5 on: June 01, 2014, 09:37:31 PM »
Uh oh! Your "little green employees" (the money you've saved) are in serious danger of being underpaid!

> The general consensus from what I have read is that money which might be needed within 5 years should not be invested.

That's terrible advice.

There is a popular myth (banks profit from it) that there are only two kinds of investments, (1) totally riskless bank accounts (that give you crap interest) and (2) the confusing, risky, but maybe profitable world of "investing" BUY BUY BUY SELL SELL SELL BULL BEAR PUT CALL RAH RAH

This is bullshit.

Investing and saving are two words for the same thing.

There are many kinds of investment aka savings vehicles. You have a lot of choices you don't yet seem to know about, that fit any level of risk and any level of expected duration till you need the money.

In your case, you have a bunch of money that you need for a specific period of time, but the period of time is long (more than a year).

Learn about bonds and other fixed income instruments.

Bonds are not like stocks. The interest rate is guaranteed. It's important, though, that you pick bonds whose "duration" matches the amount of time you plan to keep the money before you need it. That way, the interest rate is effectively guaranteed. Just like a CD, you may have to pay a penalty if you sell early. Unlike a CD, the penalty is fairer -- you can actually make money if you sell early and interest rates fell. Like a CD, the penalty is relatively small, and fear of this penalty should never be a reason to avoid investing in bonds. It should, however, be a reason to always select the duration you actually need, not be stupid and pick a longer duration because of attractive rates. (Those rates are attractive for a a reason.)

The only risk in bonds, therefore, is from credit risk -- risk of the bond issuer going bankrupt. So if you want absolutely no risk, pick someone who can't go bankrupt because they can legally print as much money as they want: the government.

If you want absolutely no risk, learn about US Treasury bills and such. Look it up. If you know you need the money in 5 years and refuse to accept any risk whatsoever, then don't waste your time on a CD from your merely FDIC insured bank. Go straight to the source of that risk-protection and deposit your money directly with the US government! Even plain old US Series I savings bonds are at about 1.9% right now, with just 3-months interest penalty for early redemption before 5 years -- and they include inflation protection.

If you are willing to bear a small amount of risk, then pick an issuer with a small risk of going bankrupt -- even better, diversify among several such issuers.
In other words, invest in a low-cost bond index fund whose average credit rating is quite high and whose duration matches your needs.

For example, VBMFX, Vanguard's total bond market index fund has an average duration of 4.57 years and returned almost 4% over the last year.

Over 5 years, that difference would add up to....

$100,000 in a 1.5% 5-year CD will become 107,728
$100,000 yielding 4% in a bond index fund  will become 121,665

That extra $14k could feed, clothe, and house a Mustachian for a whole year in some locations.

And I haven't even mentioned tax implications -- The interest earned on US treasury instruments is state/local-tax free. (If you live in NYC like me, with high state and high city income taxes, that's nothing to sneeze at)

And municipal bonds can be free of federal, state, and local income taxes. Depending on where you live and how much you will be making over the next 5 years, this could make a big difference. Plain old CDs are fully taxed at state, local, and federal levels.

You also could probably stand more risk than that, and make and even higher return, while still keeping the overall risk quite low. Remember, if you're saving to buy a house, you have no idea _exactly_ what it will cost in 5 years. If there's a tiny chance you'll end up with 90,000 instead (or rather, with "only" $101,000 say, instead of the expected $135,000....) that's just not that bad a risk, and is probably worth the much higher rewards, no?

Oh, finally -- how about putting it in a Roth IRA? Then you don't have to pay ANY taxes on the interest!
Wait, but you say you need the money in 5 years, not at age 59 (or as early as you want to retire with the 72(t) rule), right?
No problem, you can withdraw the principal in a Roth IRA after 5 years! So put your $100k in, invest it, after 5 years you take out the principal
but the few dozen thousands you earned in interest have done so tax-free and can continue to grow tax free (and as you earn them you can shift them into higher-return, riskier investments since you only need the $100k principal to be safe in 5 years)

So you really have a lot of options that let you choose any risk and duration level you need and are comfortable with, and just sticking it in a CD is basically the worst option. 5 years isn't the minimum horizon for "investing", 2 months is.

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Disclaimer:
I don't really know anything. I just might have read something, somewhere, sometime.
Look up the facts for yourself. You may regret it if you don't.
My liability for you hurting yourself with my advice is limited to what you paid me for it, which is zero.

BFGirl

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Re: $100K - Invest or Save?
« Reply #6 on: June 02, 2014, 06:25:30 AM »
You can get 5 year CD rates for 2.3% right now. Not great but better than 1.5%.   Check www.bankrate.com

Eric

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Re: $100K - Invest or Save?
« Reply #7 on: June 02, 2014, 11:45:56 AM »
Nice post mrmanhattanmustache.

No problem, you can withdraw the principal in a Roth IRA after 5 years! So put your $100k in, invest it, after 5 years you take out the principal
but the few dozen thousands you earned in interest have done so tax-free and can continue to grow tax free (and as you earn them you can shift them into higher-return, riskier investments since you only need the $100k principal to be safe in 5 years)

Slight clarification here.  You can withdrawal Roth IRA contributions immediately, even the day after you initially contribute, with zero penalties.  There is no 5 year waiting period on basic contributions.  (currently maxed at $5500.00 per year)  The 5 year waiting period only applies to rollover funds. (or earnings withdrawn after 59.5, but that's usually outside the scope of this retire early crowd)

nereo

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Re: $100K - Invest or Save?
« Reply #8 on: June 02, 2014, 12:01:25 PM »
I'll add one other factoid for perspective.

Over the last 140 years, the US market has beat inflation about 80% of the time for five year periods.  The total real annualized returns during five year periods is -13.5% to +23.5%, with the median being +9.8%.

In contrast in 5 years you have an almost 100% certainty of loosing to inflation in your savings account, with a annualized loss most likely in the -1 to -2.5% range.

You have to choose what's right for you, but since you don't absolutely *need* that money in 5.5 years (you just would "like" to use it) my preference would be to put it into the market. 

ascZend

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Re: $100K - Invest or Save?
« Reply #9 on: June 02, 2014, 06:28:22 PM »
I appreciate all of the suggestions and feedback here.

You have to choose what's right for you, but since you don't absolutely *need* that money in 5.5 years (you just would "like" to use it) my preference would be to put it into the market. 

I already have.  I opened a taxable account with Vanguard and placed a transfer of $100,000 into it last night.  I also deposited another $2,000 into my Roth IRA to maximize my contributions for 2014 (just as I did for 2013).  I am on pace to maximize my 401(k) as well.

I've settled on a 90/10 asset allocation to start, with 60% domestic and 30% international stock holdings.  I intend to increase my percentage of bond holdings to half my age each year.  I may in the future consider tilting toward a Small-Cap Index fund (10% or so), but for now, I think the Total Stock Market Fund will give me adequate exposure to Mid-Cap and Small-Cap stock.

My Roth (for now) will hold bonds for optimal tax efficiency.  My 401(k) is 100% into the BlackRock S&P 500 Index fund as it is the only good option available with a low expense ratio.  I am keeping the International Index Fund in my taxable account for the Foreign Income Tax Credit.

U.S. Stocks - 60.7%
International Stocks - 30%
Bonds - 9.28%


401(k) ($7,436.82 / 6.3%)
6.27% - BlackRock S&P 500 Fund

Vanguard Roth IRA ($11,000 / 9.3%)
9.28% - Vanguard Total Bond Market Index Admiral Shares (VBTLX)

Vanguard Brokerage ($100,000 / 84.4%)
54.43% - Vanguard Total Stock Market Index Admiral Shares (VTSAX)
30% - Vanguard Total International Stock Index Admiral Shares (VTIAX)

Total Balance - $118,436.82 (100%)

viper155

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Re: $100K - Invest or Save?
« Reply #10 on: June 02, 2014, 08:27:39 PM »
At your young age and relatively low responsibilities I'd invest in index funds like the S&P 500 or Total Market fund. I'd also have a higher E fund. Perhaps 15k. When you marry, diversify more. But one thing is for sure. You have a great jump on life. Get those funds and keep adding to them!! Check out Bogleheads.org. Learn

ascZend

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Re: $100K - Invest or Save?
« Reply #11 on: June 02, 2014, 08:55:40 PM »
At your young age and relatively low responsibilities I'd invest in index funds like the S&P 500 or Total Market fund. I'd also have a higher E fund. Perhaps 15k. When you marry, diversify more. But one thing is for sure. You have a great jump on life. Get those funds and keep adding to them!! Check out Bogleheads.org. Learn

Thanks viper. 

60.7% of my combined investments will be in the U.S. Total Stock Market Index and an S&P 500 Fund. 

I will definitely want to increase my emergency fund as you mentioned, but I also receive nearly $2,000 a month in V.A. disability compensation and my living expenses are around $800 a month.  Thus, I feel a slightly less-conservative amount might be suitable for me.  I also have a vehicle which I own that I plan on selling in a few weeks for somewhere between $12-15K, which would go a long ways toward helping to re-establishing my emergency fund.