Author Topic: How would you invest 700K in cash?  (Read 25247 times)

TomTX

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Re: How would you invest 700K in cash?
« Reply #50 on: May 04, 2014, 06:26:27 PM »
I'm surprised nobody mentioned I-bonds (inflation adjusted savings bonds.) Sure, you can only buy $10k/year and have some other restrictions - but they are paying almost 2% right now (TIPS are paying effectively nothing), AND you are protected from inflation risk since they index with inflation, AND you can avoid taxes if you use the proceeds for qualified education.

beltim

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Re: How would you invest 700K in cash?
« Reply #51 on: May 05, 2014, 02:42:37 PM »
I'm surprised nobody mentioned I-bonds (inflation adjusted savings bonds.) Sure, you can only buy $10k/year and have some other restrictions - but they are paying almost 2% right now (TIPS are paying effectively nothing), AND you are protected from inflation risk since they index with inflation, AND you can avoid taxes if you use the proceeds for qualified education.

I-bonds are terrible for this purpose.  The biggest reason why is that an individual is only allowed to purchase $10,000 worth of I-bonds in a calendar year.  Second, there is no redemption of I-bonds in the first 12 months that you hold them, and if you redeem them before 5 years have gone by, you forfeit 3 months of interest.  And lastly, the almost 2% that you're claiming includes the term for inflation.  The actual "fixed rate" - the portion of the rate not corresponding to inflation - is only 0.10% right now.

http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm

TomTX

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Re: How would you invest 700K in cash?
« Reply #52 on: May 05, 2014, 07:59:02 PM »
I'm surprised nobody mentioned I-bonds (inflation adjusted savings bonds.) Sure, you can only buy $10k/year and have some other restrictions - but they are paying almost 2% right now (TIPS are paying effectively nothing), AND you are protected from inflation risk since they index with inflation, AND you can avoid taxes if you use the proceeds for qualified education.

I-bonds are terrible for this purpose.  The biggest reason why is that an individual is only allowed to purchase $10,000 worth of I-bonds in a calendar year.  Second, there is no redemption of I-bonds in the first 12 months that you hold them, and if you redeem them before 5 years have gone by, you forfeit 3 months of interest.  And lastly, the almost 2% that you're claiming includes the term for inflation.  The actual "fixed rate" - the portion of the rate not corresponding to inflation - is only 0.10% right now.

http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm

Apparently you didn't actually read my post before spewing. I mentioned the $10k limit. I said they're paying almost 2% right now - I didn't claim that was the base.

You have to go to a 5 year CD to get rates matching what you get from I-bonds - and after 12 months, the penalty is the same. Do you really think that someone with half a million dollars sitting around will need to cash in $10k in the first year? Really? Unlike CDs, you have a decent chance of upside adjustment in the interest rate.

AND, since the OP mentioned kids - the gain is tax free when used for education. Like college for the kids. Heck, you could get $10k for each kid every year, as the $10k limit is per SSN.

BFGirl

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Re: How would you invest 700K in cash?
« Reply #53 on: May 05, 2014, 09:07:28 PM »
I have been running some simulations in cFIREsim.  I set the inflation rate at 4% and the results were not quite what I expected.  I am now leaning towards a little more risk.  Probably 50/50...the missionary position as someone called it ;)  Still don't know exactly, but I won't have the money for probably another month and I don't have to make up my mind immediately, so I am going to continue exploring my options.

Also considering possibility of rental real estate, but not sure I am ready to jump into that yet.

Soooo many options :P

If the biggest risk to you is inflation (which I think is accurate), then you should examine TIPS or other inflation-protected bonds.  They have a lower interest rate, but adjust the value of the principal based on inflation.  Right now the difference between a 10 year treasury bond and a 10 year TIPS is about 2.2%, so if inflation exceeds that you would be better off invest in TIPS.

In looking at TIPS, you are taxed on the principal adjustment for inflation each year, even though you don't get paid that adjustment until maturity.  Therefore, I assume it would be better to hold these in tax deferred accounts like an IRA?

beltim

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Re: How would you invest 700K in cash?
« Reply #54 on: May 06, 2014, 12:46:16 AM »
I'm surprised nobody mentioned I-bonds (inflation adjusted savings bonds.) Sure, you can only buy $10k/year and have some other restrictions - but they are paying almost 2% right now (TIPS are paying effectively nothing), AND you are protected from inflation risk since they index with inflation, AND you can avoid taxes if you use the proceeds for qualified education.

I-bonds are terrible for this purpose.  The biggest reason why is that an individual is only allowed to purchase $10,000 worth of I-bonds in a calendar year.  Second, there is no redemption of I-bonds in the first 12 months that you hold them, and if you redeem them before 5 years have gone by, you forfeit 3 months of interest.  And lastly, the almost 2% that you're claiming includes the term for inflation.  The actual "fixed rate" - the portion of the rate not corresponding to inflation - is only 0.10% right now.

http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm

Apparently you didn't actually read my post before spewing. I mentioned the $10k limit. I said they're paying almost 2% right now - I didn't claim that was the base.

You have to go to a 5 year CD to get rates matching what you get from I-bonds - and after 12 months, the penalty is the same. Do you really think that someone with half a million dollars sitting around will need to cash in $10k in the first year? Really? Unlike CDs, you have a decent chance of upside adjustment in the interest rate.

AND, since the OP mentioned kids - the gain is tax free when used for education. Like college for the kids. Heck, you could get $10k for each kid every year, as the $10k limit is per SSN.

You mentioned the 10k limit but perhaps you didn't realize that it would take 70 years for an individual to invest 700k, 35 if married, and 14 years if there are 3 kids too - but when the kids turned 18 the parents would lose control of those funds.

And your claim was that TIPS were paying effectively nothing, while I-bonds were yielding 2%. This is only true if you count inflation adjustments on I-bonds but not TIPS.

milesdividendmd

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Re: How would you invest 700K in cash?
« Reply #55 on: May 06, 2014, 01:17:38 AM »
If you're looking for nearly risk-free income, at levels higher than current fixed income rates, one option worth  considering would be to invest a portion of your stash in a single premium immediate annuity.

The downside is that once you give your money to the insurance company it is no longer yours. You Essentially exchange a chunk of money for a guaranteed pension good for the rest of your life. So If you die young your heirs lose.

The upside is that if this SPIA and your pension can cover your basic needs, you can invest the rest of your money very aggressively (ie in low cost total market index funds,) with little risk of financial ruin.

For more see this excellent article from the white coat investor ...

http://whitecoatinvestor.com/spia-the-good-annuity/

Good luck.

Alexi


TomTX

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Re: How would you invest 700K in cash?
« Reply #56 on: May 08, 2014, 07:24:06 PM »

You mentioned the 10k limit but perhaps you didn't realize that it would take 70 years for an individual to invest 700k, 35 if married, and 14 years if there are 3 kids too - but when the kids turned 18 the parents would lose control of those funds.

And your claim was that TIPS were paying effectively nothing, while I-bonds were yielding 2%. This is only true if you count inflation adjustments on I-bonds but not TIPS.

I must have misread on TIPS and only seen the base - I don't have any, so I am less familiar. I should have checked more closely. What are TIPS currently paying out?

I can do simple math. I wouldn't put a ton in I-bonds anyway.

beltim

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Re: How would you invest 700K in cash?
« Reply #57 on: May 09, 2014, 11:33:46 AM »

You mentioned the 10k limit but perhaps you didn't realize that it would take 70 years for an individual to invest 700k, 35 if married, and 14 years if there are 3 kids too - but when the kids turned 18 the parents would lose control of those funds.

And your claim was that TIPS were paying effectively nothing, while I-bonds were yielding 2%. This is only true if you count inflation adjustments on I-bonds but not TIPS.

I must have misread on TIPS and only seen the base - I don't have any, so I am less familiar. I should have checked more closely. What are TIPS currently paying out?

I can do simple math. I wouldn't put a ton in I-bonds anyway.

10 year TIPS are paying 0.4% plus inflation, 30 years about 1.1% plus inflation.  The inflation adjustment has been about 2.2% annually over the last 10 years, and about  1.5% over the last year.

DoctorOctagon

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Re: How would you invest 700K in cash?
« Reply #58 on: May 09, 2014, 12:56:26 PM »
As you expand your time horizon out further and further, cash and CDs will lose you more and more and more money relative to stocks.

You guarantee a rate of loss equal to (inflation x time) with cash.  Over the next 5 years, your cash and CD investments will lose somewhere between 3-10% value.  Over, say, 30 years, you can plan on losing 80-90% of the principal's value.  Sounds like a SHITTY investment to me.  Cash should be used as a medium of exchange, not as an investment!!!

Conversely, your risk of loss gets lower and lower holding safe blue chips and index funds over a long period of time.  Over the next 5 years we might see a recession that decreases value 50%.  However, over 30 years the growth rate of the stocks(businesses) you own will negate any temporary volatility and you could see growth of 1,000-2,000%.  Sounds like a GREAT investment to me.

If your time horizon is less than 10 years, hold a mix of cash and stocks that's 50/50.  If there's a really bad recession you can buy more stocks with the cash you have to multiply your future earnings.  Longer than that, mostly stocks.  Blue chips & passive index funds would be ideal.