Author Topic: CD's safest bet for security?  (Read 3048 times)

kevj1085

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CD's safest bet for security?
« on: July 11, 2017, 04:49:18 PM »
Currently I have a rental property bringing us $11500 a year. Our house is going to be paid off in 5 years and our rental is paid off. I noticed cd rates for 10 years are at 2.4%. I'm not a genius investor, I'm just a elementary teacher and not super aware of nor willing to take all the potential risks involved in other methods of investing. That said, if we could live overly luxurious for our family off 30-32k a year, would it be a good idea once we pay our house off to accumulate 300-450k and put it all in a 10 year cd? Assuming it's around 2.4%, that should bring us in about $10k extra a year, which means we would have about 21k in passive income a year. If my calculations are correct, that'd mean we would really only NEED about 10k in paycheck money for the rest of our lives each year to live our lifestyle. Is this correct? If so, I believe this can be attained by the time my wife and I are 40.

I'm just inquiring to see if my calculations are right or off?

kevj1085

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Re: CD's safest bet for security?
« Reply #1 on: July 11, 2017, 05:49:14 PM »
This isn't a plan to retire by 42, just a plan to have a good sized passive income to incorporate into our work pay. We would still have money in savings and would be making enough by work. I'm just curious if my math is correct and if CDs are considering safe in the long run I guess.

bobechs

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Re: CD's safest bet for security?
« Reply #2 on: July 11, 2017, 06:05:55 PM »
CDs issued by FDIC insured banks are also insured, up to $250000. (not the 300-400K you want to sock away but you can split the money among multiple accounts)

So, if the issuing bank fails, the depositor is fully protected against loss up to that amount.

Very safe against that one kind of risk.  Inflation? As noted, no protection and some risk of losing money via that event.

Total zombie outbreak?/nuclear war?/ giant meteorite strike?/super volcano-tsunami-triffid event?

At that point you have more to worry about than extra money each year off in the future.

Safe? sure.  Safe against everything you can imagine?  There is nothing that meets that criterion.

« Last Edit: July 11, 2017, 06:08:21 PM by bobechs »

JohnWC

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Re: CD's safest bet for security?
« Reply #3 on: July 11, 2017, 07:19:47 PM »
I noticed cd rates for 10 years are at 2.4%.
This is actually not a bad rate in this economy. Historical long term inflation is about 3.2% so your principal is only losing value at .8%, if we're estimating inflation over a 10 year window. A CD is safe only if you're not concerned about losing purchasing power to inflation.

I'm not a genius investor, I'm just a elementary teacher and not super aware of nor willing to take all the potential risks involved in other methods of investing. That said, if we could live overly luxurious for our family off 30-32k a year, would it be a good idea once we pay our house off to accumulate 300-450k and put it all in a 10 year cd?... I believe this can be attained by the time my wife and I are 40.

A better low risk instrument than a CD for this time horizon is a fixed indexed annuity, which is offered by boring old life insurance companies. It will at the very least exceed inflation and a conservative one is returning in the range of 4-5.5%. The principal is backed by an insurance company and is very safe, along the same lines as a CD. Typically they track a market index and returns are capped (that's how the insurance company makes money). A good fixed indexed annuity will also have a floor of 0% return for down markets which is part of the guarantee. I'm licensed and work with annuities as part of my job and we sometimes recommend them as part of re-positioning assets approaching retirement, which is also usually 55+. If you're going to retire or just want to safely lock away some of your assets in your early 40s you could consider a fixed indexed annuity, or you could look at ways to take on additional risk in a controlled fashion you're comfortable with which will give you better returns between age 40-ish and 79-ish (life expectancy).

You didn't say if this $300-450k is your main nest egg or just part of it, but I would never recommend that you lock away the majority of your liquid assets at age 40, be it CD, fixed annuity, or whatever. You're already making a lot of money illiquid by paying down your mortgage early (a bit of a mistake, but a topic for another thread probably) - don't compound that by locking away the remainder. You put yourself at financial risk by not being able to deploy cash as needed, making you rely on costly forms of debt like credit cards, bank loans, or a HELOC which can be called by the bank when they decide they want their money back.
« Last Edit: July 11, 2017, 07:25:09 PM by JohnWC »

kevj1085

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Re: CD's safest bet for security?
« Reply #4 on: July 11, 2017, 08:56:10 PM »
I'm not sure if I clarified too well. I want to work some form of work as long as I can even if it's 20 hrs a week somewhere when I'm old. I believe we were made to work and use our bodies for such so assuming nothing gets in my way physically from that, I plan to always have work income and enjoy that idea. I'm just curious if this would be a good easy route to have a passive 20-23k coming in yearly. My wife and I will yearly be bringing in an additional 100k pre tax for many years after 42 so yes we will have plenty more than that 3-450k in investments, I was just thinking of putting that away and say keeping 40k in the bank to pull out from as needed.

Radagast

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Re: CD's safest bet for security?
« Reply #5 on: July 11, 2017, 09:02:57 PM »
Currently I have a rental property bringing us $11500 a year. Our house is going to be paid off in 5 years and our rental is paid off. I noticed cd rates for 10 years are at 2.4%. I'm not a genius investor, I'm just a elementary teacher and not super aware of nor willing to take all the potential risks involved in other methods of investing. That said, if we could live overly luxurious for our family off 30-32k a year, would it be a good idea once we pay our house off to accumulate 300-450k and put it all in a 10 year cd? Assuming it's around 2.4%, that should bring us in about $10k extra a year, which means we would have about 21k in passive income a year. If my calculations are correct, that'd mean we would really only NEED about 10k in paycheck money for the rest of our lives each year to live our lifestyle. Is this correct? If so, I believe this can be attained by the time my wife and I are 40.

I'm just inquiring to see if my calculations are right or off?
You are on the right track, you just chose the wrong vehicle. You forgot that you pay taxes on that 2.4%, which probably cuts it to 2% or 1.8% or even less depending on your tax rate, which leaves you with less money every year. As the others point out, you also didn't account for inflation. At 2% after tax return (which you spend all of) and 2% inflation you would have 2% less money to work with every year, so you would be slowly creeping your way towards poverty.

If you instead used Vanguard Total World Stock Index you would receive 2.2% per year, plus 2% inflation, plus 2% growth. So every year you would be inching your way to extreme wealth. If you are in the bottom two tax rates you pay no tax at all.

If you can't avoid looking at your money often, the Vanguard Lifestrategy Moderate Growth fund has 60%stocks, 40% bonds from around the globe and you would receive 2.1% per year, plus 2% inflation, plus ~1% growth which would put you on a slightly slower path to extreme wealth with some taxes (but less than the CD).

Even though they might not look like it on the surface, both choices are simpler, safer, and lead to more money than CD's. Just set yourself up with automatic investments into one of these:
https://personal.vanguard.com/us/funds/snapshot?FundId=0628&FundIntExt=INT
https://investor.vanguard.com/mutual-funds/lifestrategy/#/mini/holdings/0914

Real estate is a great investment too! I have a duplex myself.

Car Jack

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Re: CD's safest bet for security?
« Reply #6 on: July 12, 2017, 07:19:24 AM »
For "safe" investments, you can do multiple things to make somewhat of a ladder of investments.  For example:

Ally 5 year CD.  2.25% interest and 150 days of interest penalty for early withdrawal.  Once you get beyond a year, you've beat the savings rate.  I just broke one of these myself (need tuition money) and it was easy and painless.

US Savings Bonds.  iBonds get interest state and local tax free.  If you have to pay college expenses, keep the bonds in the parents names only and then when you cash them, the interest is also federal tax free.  They are cashable at 1 year with 3 months of interest penalty and no penalty beyond 5 years.  I have recently cashed a bunch of smaller denomination bonds (again for tuition) and my credit union instantly makes the money available.  New bonds are only electronic so will be slower to cash in comparison.

Fixed Index Annuities are a great deal for the issuing insurance company.  Not so much for you.  They promise a ton of benefits but in the end your costs make them look like you should have just put the money in a 1% savings account.


JohnWC

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Re: CD's safest bet for security?
« Reply #7 on: July 12, 2017, 09:17:59 AM »
Ally 5 year CD.  2.25% interest and 150 days of interest penalty for early withdrawal.  Once you get beyond a year, you've beat the savings rate.  I just broke one of these myself (need tuition money) and it was easy and painless.
Losing money to inflation in this way is relatively easy and painless. The banks love when you loan them money at such a low rate - they loan it out 5 more times at double or triple the cost! It's a pretty sweet deal for the investor if they also own a lot of shares in Wells Fargo.

US Savings Bonds.  iBonds get interest state and local tax free.  If you have to pay college expenses, keep the bonds in the parents names only and then when you cash them, the interest is also federal tax free.  They are cashable at 1 year with 3 months of interest penalty and no penalty beyond 5 years.  I have recently cashed a bunch of smaller denomination bonds (again for tuition) and my credit union instantly makes the money available.  New bonds are only electronic so will be slower to cash in comparison.
US savings bonds?? It's not the 1970s anymore - newly issued savings bonds pay under 2%. Series EE bonds are paying 0.1% today. Definitely shouldn't be considered unless safety is the ONLY thing that matters.

Fixed Index Annuities are a great deal for the issuing insurance company.  Not so much for you.  They promise a ton of benefits but in the end your costs make them look like you should have just put the money in a 1% savings account.
An annuity is a financial tool just like any other - there are good ways to use them and bad ways to use them. They can be mis-used just like any other tool. A hammer can be used to build a house, pull a nail, or smash a car window... just because it can be used for ill purposes I wouldn't say that a hammer is wrong. If you compare an annuity to a CD typically the annuity is going to bring a better value. If you compare the annuity to ETF index investing in a low fee brokerage account over a 10 year period, you'll see higher yields with the brokerage account but with NO guarantees or safety. The "right thing" for this situation all depends on the complete financial profile of the person as well as their risk tolerance. In this case a fixed indexed annuity is a plausible solution to the problems proposed by the OP and the guaranteed returns would exceed the guaranteed return of the CD.

Yes, the insurance company will make some money for offering their financial guarantees... boo hoo nothing's free. If in the end it exceeds the return on the CD while offering a very safe risk profile, what's the problem?
« Last Edit: July 12, 2017, 09:36:22 AM by JohnWC »

Mighty-Dollar

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Re: CD's safest bet for security?
« Reply #8 on: July 13, 2017, 04:36:26 AM »
That said, if we could live overly luxurious for our family off 30-32k a year, would it be a good idea once we pay our house off to accumulate 300-450k and put it all in a 10 year cd? Assuming it's around 2.4%, that should bring us in about $10k extra a year, which means we would have about 21k in passive income a year.
Are you aware that stocks are not the only option besides CD's. Ever heard of bonds, or better yet a combination of bonds and stocks?

Lobo

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Re: CD's safest bet for security?
« Reply #9 on: July 13, 2017, 09:21:39 AM »
Kev.....your calculations are correct.  If you are looking for the safest place for your money with a predictable and reliable stream of income CD's will provide that.  As others have said - CD's will not protect from inflation, and historically do not provide max long term returns.  They will provide a smooth reliable risk free stream of income.

seattlecyclone

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Re: CD's safest bet for security?
« Reply #10 on: July 13, 2017, 10:14:15 AM »
Yep, CDs will securely and predictably erode your purchasing power at a slow rate over time. If you'd rather have your money slowly trickle away rather than be subject to the ebbs and flows of the market, be my guest. That's not the type of "safety" I seek, but to each their own.

JohnWC

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Re: CD's safest bet for security?
« Reply #11 on: July 13, 2017, 11:55:19 AM »
Yep, CDs will securely and predictably erode your purchasing power at a slow rate over time. If you'd rather have your money slowly trickle away rather than be subject to the ebbs and flows of the market, be my guest. That's not the type of "safety" I seek...
That's what I'm saying, "safety" is relative. You simply guarantee your losses with a CD at today's rates. There are better guarantees out there than a guaranteed loss of 1%.

I know annuities get all kinds of hatred around here but looking at one makes sense if safety is a major priority. Here is one basic example using real numbers: If Kevj is 38 and he puts $100k into a fixed indexed annuity and takes income at the earliest possible point, age 56, it will pay him a projected $8278/yr with income guaranteed for life (plus a death benefit if he dies before life expectancy).
*  If he lives 20 years beyond his 56th birthday (age 76) he will have collected $165,560. His simple annual ROI is 3.28%, basically keeping pace with inflation
*  If he lives 30 years beyond his 56th birthday (age 86) he will have collected $248,340 returning 4.94%.
There is a lot of fine print with these things and the guarantees only go so far, but for a "risk off" portion of a portfolio it can make a lot of sense to explore annuities.

So in this case if we're looking at a $350k nest egg, setting aside $100k in a fixed indexed annuity for safety allows you to take more risk with the remaining $250k potentially further extending your returns with index investing or something more bond heavy/dividend heavy if generating income is the priority with this $350k. If it were me I'd be looking at all three... something like a $100k annuity, $100k low fee bond fund, $150k high dividend blue chip fund.
« Last Edit: July 13, 2017, 12:00:31 PM by JohnWC »

kendallf

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Re: CD's safest bet for security?
« Reply #12 on: July 13, 2017, 12:15:01 PM »
What everyone's been dancing around with this discussion of CD rates vs. inflation is the obvious: why wouldn't you want to learn about other types of investments, especially easy to understand and implement ones such as mutual funds (basically just a broad basket of stocks)?  Especially if you plan on continuing to work and would like to save and supplement your income later in life, you should consider it. 

Go read JL Collins' Stock Series and decide for yourself.  You don't need a fancy advisor to learn the basics and invest in low fee, index mutual funds such as those offered by Vanguard.

http://jlcollinsnh.com/stock-series/