Author Topic: Vanguard account for shorter term saving?  (Read 4125 times)

Bookworm

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Vanguard account for shorter term saving?
« on: March 22, 2014, 07:19:56 PM »
In 7 years, my husband will start receiving a reserve military retirement that, when combined with other cash flows, will bring in enough for him to retire.  However, he would ideally like to retire sometime before that, and we'd like to start aggressively saving to make it happen earlier.  Is it still a good idea to start a Vanguard index fund, when we might start taking it out in such a short time?  We don't have years and years to weather the ups and downs of the market, and obviously don't know how it will look when/if he does decide to retire.  If not Vanguard, where would you put the money?  We don't have any just sitting around to invest all at once, either, so this would be going in in modest amounts monthly as we get it, not as an immediate lump sum.

MDM

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Re: Vanguard account for shorter term saving?
« Reply #1 on: March 22, 2014, 07:49:06 PM »
In 7 years, my husband will start receiving a reserve military retirement that, when combined with other cash flows, will bring in enough for him to retire.  However, he would ideally like to retire sometime before that, and we'd like to start aggressively saving to make it happen earlier.  Is it still a good idea to start a Vanguard index fund, when we might start taking it out in such a short time?  We don't have years and years to weather the ups and downs of the market, and obviously don't know how it will look when/if he does decide to retire.  If not Vanguard, where would you put the money?  We don't have any just sitting around to invest all at once, either, so this would be going in in modest amounts monthly as we get it, not as an immediate lump sum.
The two bolded phrases might take you in opposite directions - or not, but it is difficult to say without more details.

For "aggressively saving" you would do things such as
 -  contribute the maximum allowable to 401k and Roth IRA investments in index funds
 -  divert remaining after-tax income away from "frills" and toward getting debt free

For "taking it out in...a short time" you would do things such as
 -  invest after-tax in savings accounts and CDs earning a few percent interest
 -  divert remaining after-tax income away from "frills" and toward getting debt free (yes, there are some common themes)

See http://www.mrmoneymustache.com/forum/ask-a-mustachian/how-to-write-a-'case-study'-topic/ for thoughts on the type of information that is helpful to know.  Of course, trust your judgment on what you want to share.

Bookworm

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Re: Vanguard account for shorter term saving?
« Reply #2 on: March 22, 2014, 08:16:23 PM »
Our only debts are mortgages:

$26,500 at 5.5% on an investment property (worth about $75,000, positive cash flow)
$120,600 at 4.375% on an investment property (worth about $165,000, positive cash flow)
$218,000 at 4.25% on our personal residence (worth about $350,000...will be sold prior to retiring)

We have been making extra payments on these, especially the one at 5.5%, but I am thinking we should stop doing that and build up some money.  It just seems like it won't be working very hard, though, if we put it in bank savings accounts and CDs that earn practically nothing.

We have $28,XXX in the TSP, which I believe can't be accessed until he's 59.5, which is 3.5 years after he starts receiving his pension, so it won't help him retire early.  We also have ~ $20,000 in the bank, which is a lot for an emergency fund, but he works contract positions that are always threatening to end, so we need to have a cushion.  He is also 90% disabled according to the VA and receives a large monthly compensation payment (~ $1,800) that will always contribute to our cash flow.  Once the pension kicks in, our expenses will be completely covered by the VA compensation, rental income, and the pension.  When Social Security starts later, that should just be extra.  So what we are saving for now is enough for him to stop working before he reaches 56 and starts collecting the pension (he is almost 49 now).  Even if we can only save enough for him to retire one year early...hey, that's a year!

MDM

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Re: Vanguard account for shorter term saving?
« Reply #3 on: March 22, 2014, 08:38:34 PM »
...
$218,000 at 4.25% on our personal residence (worth about $350,000...will be sold prior to retiring)

We have been making extra payments on these, especially the one at 5.5%, but I am thinking we should stop doing that and build up some money.  It just seems like it won't be working very hard, though, if we put it in bank savings accounts and CDs that earn practically nothing.
...
So what we are saving for now is enough for him to stop working before he reaches 56 and starts collecting the pension (he is almost 49 now).  Even if we can only save enough for him to retire one year early...hey, that's a year!
If you make extra payments on the personal residence, you are getting a guaranteed 4.25% return and are indeed building up money in that investment. 

What will you do with the net gain on the sale of that residence?  In other words, will that be available to cover living expenses, or will you use it to buy another residence, or...?

From the perspective of "reduce interest expense" it does make more sense to prepay the 5.5% note.  But from the perspective of "get the highest safe return on money you can access to accelerate retirement", the residence you are planning to sell seems best.

Bookworm

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Re: Vanguard account for shorter term saving?
« Reply #4 on: March 22, 2014, 09:15:40 PM »
Yes, we will probably buy another house, but that will probably be about the right time for our empty-nest downsize adjustment.  The next house should be smaller and hopefully less expensive.

Bookworm

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Re: Vanguard account for shorter term saving?
« Reply #5 on: March 22, 2014, 09:17:18 PM »
...which suddenly makes me realize that if we downsize and it liquidates some equity, we will have to figure out what to do with that money as well.  We are probably at least 3 years from making that change, though.

ThermionicScott

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Re: Vanguard account for shorter term saving?
« Reply #6 on: March 23, 2014, 12:54:31 AM »
No reason not to open the Vanguard account and start socking away money in an index fund like VTSMX.  Even if you plan to retire soon, you won't be spending all the money right away, right?  Stocks are key for preserving and growing the unspent money for the long term.

Flaneur

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Re: Vanguard account for shorter term saving?
« Reply #7 on: March 23, 2014, 01:31:38 AM »
You can purchase low fee bond index funds and bond ETF's . Create a portfolio of various ultra short, short, and medium term bonds; the ultra short term bonds give you liquidity, and by mixing between domestic & foreign, government & corporate, etc. short & medium term you can beat checking account yields without a lot of risk.
« Last Edit: March 23, 2014, 01:38:45 AM by Flaneur »

RobertBirnie

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Re: Vanguard account for shorter term saving?
« Reply #8 on: March 23, 2014, 02:19:36 AM »
No reason not to open the Vanguard account and start socking away money in an index fund like VTSMX.  Even if you plan to retire soon, you won't be spending all the money right away, right?  Stocks are key for preserving and growing the unspent money for the long term.

This. You should check out the safe withdrawal rate. http://www.bogleheads.org/wiki/Safe_withdrawal_rates. This help make assurances that this money is going to be available in the future.

justchristine

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Re: Vanguard account for shorter term saving?
« Reply #9 on: March 23, 2014, 05:54:12 AM »
It doesn't really matter if your time frame is 4yrs or 40 yrs.  you should follow your investment plan and invest according to your asset allocation.  If you plan on having a couple year cash buffer as part of your withdrawal strategy, then parking your savings in a bank may make sense.  If you just plan on selling off some stocks/bonds in retirement, then invest as normal.

MDM

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Re: Vanguard account for shorter term saving?
« Reply #10 on: March 23, 2014, 09:36:21 AM »
...
We have $28,XXX in the TSP, which I believe can't be accessed until he's 59.5, which is 3.5 years after he starts receiving his pension, so it won't help him retire early.
...
Once the pension kicks in, our expenses will be completely covered by the VA compensation, rental income, and the pension.  When Social Security starts later, that should just be extra.  So what we are saving for now is enough for him to stop working before he reaches 56 and starts collecting the pension (he is almost 49 now).  Even if we can only save enough for him to retire one year early...hey, that's a year!
Bookworm family in particular (but anyone else with a good eye also), is the following correct?

"Once the Bookworm family gets to the point 
    (Liquid Savings) = (56 - Husband_age_to_retire) * (annual expenses in retirement)
they stop working, and the sooner the better for them.  Their withdrawal rate for those Liquid Savings becomes 100%/(56 - Husband_age_to_retire).  The withdrawal rate also equals 100%*(annual expenses in retirement)/(Liquid Savings).

For example, with (annual expenses in retirement) = $35,000 and (Liquid Savings) = $150,000:
   Husband_age_to_retire = 56 - 150000/35000 = 51 years 8.5 months.  Their withdrawal rate becomes 100%/(56 - 51.7) = 23.3 %/yr. 

They don't want these funds to lose value at all because they are needed as a bridge to when VA+rental+pension covers expenses."

If the summary above is correct, that's a scenario different from "normal" retirement accumulation strategies.  Still much to consider (e.g. the reliability of the rental income stream) but accumulating liquid savings ASAP seems to fit Bookworm's needs best.  Thus the discussion about liquidating the principal residence and how that might change both savings and expenses.