Author Topic: Where to put emergency fund for returns + no early withdrawal penalty?  (Read 8317 times)

MacGyverIt

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Hey folks,

In thinking about the high deductible health plans (HDHP) aspects of early retirements, looks like many HDHPs can run up to a 5/7/10k deductible. Coupled with a Health Savings Plan (HSP) limit (for 2012, anyway) of $3100 for a single person that leaves thousands of dollars difference between the HSP and the HDHP deductible ceiling. I've been thinking about options to leave that 2/4/7k difference immediately accessible should disaster strike and here are the options I've come up with, would appreciate your thoughts and ideas as well:

- no early withdrawal penalty CDs (ex: http://www.ally.com/bank/no-penalty-cd/)
- just park it in my money market account (last quarter was at a whopping .25%)
- ?????

There's got to be some better options than the two I've come up with! Any bizarre and interesting ideas out there?

Thanks,
Mac

Chris

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Re: Where to put emergency fund for returns + no early withdrawal penalty?
« Reply #1 on: February 15, 2012, 10:21:01 PM »
I wouldn't let early withdrawal penalties scare you off. In the unlikely event that you'll need to cover a major medical expense, is a couple months' interest going to matter that much?

You could also consider savings bonds. There is a penalty for early redemption (5 years) and you can't cash out at all for the first 11 months*, but the rates are more attractive (Series I: 3.06% variable, Series EE: 0.6% fixed).  For your first year, buy $5k in bonds and keep $5k in cash; after the first year, the bond will be redeemable and the cash can be invested elsewhere (or go straight into the HSA).


*if you do it right
« Last Edit: February 15, 2012, 10:22:48 PM by Chris »

MacGyverIt

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Re: Where to put emergency fund for returns + no early withdrawal penalty?
« Reply #2 on: February 16, 2012, 07:01:15 AM »
Chris, that's fantastic and far better than the two options I found. Thanks!

Can you recommend any websites/resources where I can learn more about savings bonds and the 11 month window, so I can learn the "*if you do it right" part :-)

Chris

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Re: Where to put emergency fund for returns + no early withdrawal penalty?
« Reply #3 on: February 16, 2012, 07:13:32 AM »
General information on Series I bonds at IBonds.info.

Information about both Series I and Series EE at TreasuryDirect

You can purchase them electronically at TreasuryDirect, or if you haven't filed your taxes yet, and are due a refund, you can have paper certificates mailed to you by using form 8888.

For the "do it right part".... officially you need to hold them for 1 year, but a year is considered to be 12 months, not 365 days. So you can buy the bonds on April 30, 2012, you are able to sell on April 1, 2013. The interest is also calculated that way, meaning that you get a full month of interest for any month you hold the bond, even if you don't purchase until last day of the month.

Mr Mark

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Re: Where to put emergency fund for returns + no early withdrawal penalty?
« Reply #4 on: February 16, 2012, 08:55:50 PM »

I was quoted medical insurance at about $300/mnth for a 10k (lowering to 5k after 3 yrs) deductable, no co-pay above that. There are other similar options around too.

So I figured I'd need a ring-fenced 'virtual portfolio' in my core stash that (1) throws off enough cash to pay the premium [$3600], plus (2) would pay for day to day care [assume $1500] & (3) allow for some repayment of capital if required for a few years when payments could be $5k+

Assuming a 7% growth rate, 5% dividend, $10k contingency, and 3% inflation, I recon that's a portfolio of ~$110k.

At FI this would just be a fraction of your total stash.

MudHut

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Re: Where to put emergency fund for returns + no early withdrawal penalty?
« Reply #5 on: February 17, 2012, 12:59:27 PM »
I just started using a Vanguard account for some of my emergency fund.  I keep about 3 months living expenses in my savings account earning all of .15% apy.  Beyond that I put it into the Vanguard GNMA fund (VFIIX). It has a historic return around 8% since 1980.  I don't expect to continue to get that kind of return, but I do hope to get ~4-5% after taxes to keep pace with inflation.  The biggest risk seems to be increased interest rates, which will eventually have to rise above these lows.

I have some money in other online accounts - savings and CDs, but the return I'm getting (1-2%) just dosn't seem worth keeping track of the additional accounts and will eventually transfer them over to Vanguard.

LBistro

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Re: Where to put emergency fund for returns + no early withdrawal penalty?
« Reply #6 on: February 17, 2012, 02:56:26 PM »
My credit union has a "Rainy Day Savings Account" that offers 1.5% APY for the first year and 3% after that: https://www.bcu.org/RainyDaySavings.aspx.

The catches are you have to build it slowly (max initial deposit of $1k and max monthly contribution of $500 afterwards) and you have to keep contributing at least $25 monthly to get the 3% rate, otherwise it falls to 1.5% for that month. I imagine the monthly contribution might be annoying for some, but you can set and forget an automatic $25 deposit from checking on the first of each month. You can withdrawal twice a year without penalty -- should be more than enough if you only have one catastrophe a year, not good if you anticipate withdrawing frequently.

I opened my account 8 months ago and have ~$4300 saved there so far, with the 1.5% rate. Looking forward to having a nice little pot when the 3% rate kicks in in July. As I am transferring over my emergency fund I keep the rest of it in a CU checking account (2% APY), but that wouldn't be great for a retired person as it requires $500 monthly direct deposit to get the good rate.

This might not be what you're looking for, but it is working for me. I've only ever been at this credit union, so not sure if this is a typical offering. Good luck!

MacGyverIt

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Re: Where to put emergency fund for returns + no early withdrawal penalty?
« Reply #7 on: February 20, 2012, 08:40:43 PM »
My credit union has a "Rainy Day Savings Account" that offers 1.5% APY for the first year and 3% after that: https://www.bcu.org/RainyDaySavings.aspx.

Of all the googling I've done on this question I never thought to search for higher than average savings rates. Hmm.... I'll poke around and report back if I find anything that rivals that 3%. Certainly better than the cash it out at anytime CD rates! Thanks!!

arebelspy

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Re: Where to put emergency fund for returns + no early withdrawal penalty?
« Reply #8 on: February 20, 2012, 09:32:59 PM »
My credit union has a "Rainy Day Savings Account" that offers 1.5% APY for the first year and 3% after that: https://www.bcu.org/RainyDaySavings.aspx.

The catches are you have to build it slowly (max initial deposit of $1k and max monthly contribution of $500 afterwards) and you have to keep contributing at least $25 monthly to get the 3% rate, otherwise it falls to 1.5% for that month. I imagine the monthly contribution might be annoying for some, but you can set and forget an automatic $25 deposit from checking on the first of each month. You can withdrawal twice a year without penalty -- should be more than enough if you only have one catastrophe a year, not good if you anticipate withdrawing frequently.

I opened my account 8 months ago and have ~$4300 saved there so far, with the 1.5% rate. Looking forward to having a nice little pot when the 3% rate kicks in in July. As I am transferring over my emergency fund I keep the rest of it in a CU checking account (2% APY), but that wouldn't be great for a retired person as it requires $500 monthly direct deposit to get the good rate.

This might not be what you're looking for, but it is working for me. I've only ever been at this credit union, so not sure if this is a typical offering. Good luck!

That's pretty amazing.  Unfortunately, I don't qualify as a member (as I'd imagine most here won't).

Membership requirements: https://www.bcu.org/PDFs/mbr_app_elig.pdf

Anyone know of a similar (or better) deal with open enrollment?
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KMB

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Re: Where to put emergency fund for returns + no early withdrawal penalty?
« Reply #9 on: February 21, 2012, 10:59:12 AM »
My bank has a high interest checking program. They pay 4% on up to 10k in deposit. We've used this for our 'emergency fund' for a couple of years and it works pretty well.

To open the account you had to have a direct deposit, swipe their debit card 7 times/month, and write less than 9 checks/month. However, my wife recently took a bunch of time off after giving birth to our first. During this time she didn't have a direct deposit and my employer never had one in the first place. I figured they would end the generous interest payments, but they did not. I finally went in and asked them when we would be kicked out of the program. The bank manager just shrugged and said as long as we keep swiping the debit card enough times we're fine.

My bank appears to have some affiliation with national program called 'points2u.' I'd suggest trying to find a local bank in your market with a similar affiliation. We've had this account for three years now and there doesn't appear to be any sign of this deal coming to an end.

judgemebymyusername

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Re: Where to put emergency fund for returns + no early withdrawal penalty?
« Reply #10 on: February 21, 2012, 04:56:01 PM »
I just started using a Vanguard account for some of my emergency fund.  I keep about 3 months living expenses in my savings account earning all of .15% apy.  Beyond that I put it into the Vanguard GNMA fund (VFIIX). It has a historic return around 8% since 1980.  I don't expect to continue to get that kind of return, but I do hope to get ~4-5% after taxes to keep pace with inflation.  The biggest risk seems to be increased interest rates, which will eventually have to rise above these lows.

I have some money in other online accounts - savings and CDs, but the return I'm getting (1-2%) just dosn't seem worth keeping track of the additional accounts and will eventually transfer them over to Vanguard.

+1 for VFIIX.

 I even consider VBIIX to be a worthy emergency fund substitute. Granted I'm ok with a little risk. Even in the market drop in 2008, you would have been fine with VBIIX and had a great return.

For instance, let's say you had $10,000 in VBIIX on 9/5/2008, just before the market dropped. VBIIX was at 10.40. Then it dropped to 9.49 on 10/31/2008. Your $10k would now be $9,125. By 12/26/2008 you would have been back up to $10,134. In the worst market drop in the past 10+ years you would have swung by less than 10% without taking dividends into account. For me that's fine. The odds of me having to use all $10k in the emergency fund at the same time as the worst 2 months in fund history is extremely low. For those who don't even want to take this risk, VFIIX is a great fund.

Bonus: For those using bond funds for emergency or general savings I suggest you consider tax efficient fund placement. Basically, put your bond funds into your Roth IRA. More here: http://www.bogleheads.org/wiki/Principles_of_Tax-Efficient_Fund_Placement

MacGyverIt

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Re: Where to put emergency fund for returns + no early withdrawal penalty?
« Reply #11 on: February 22, 2012, 04:16:59 PM »
I just started using a Vanguard account for some of my emergency fund.  I keep about 3 months living expenses in my savings account earning all of .15% apy.  Beyond that I put it into the Vanguard GNMA fund (VFIIX).

+1 for VFIIX.

 I even consider VBIIX to be a worthy emergency fund substitute. Granted I'm ok with a little risk. Even in the market drop in 2008, you would have been fine with VBIIX and had a great return.

Bonus: For those using bond funds for emergency or general savings I suggest you consider tax efficient fund placement. Basically, put your bond funds into your Roth IRA. More here: http://www.bogleheads.org/wiki/Principles_of_Tax-Efficient_Fund_Placement

So these Vguard funds don't have an early withdrawal penalty at all? I'm off to check out this link....

HumanAfterAll

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Re: Where to put emergency fund for returns + no early withdrawal penalty?
« Reply #12 on: February 23, 2012, 10:25:57 AM »
+1 for VFIIX.

 I even consider VBIIX to be a worthy emergency fund substitute. Granted I'm ok with a little risk. Even in the market drop in 2008, you would have been fine with VBIIX and had a great return.

Thanks for the tip, I just made the switch from 100% VFIAX to 66% VFIAX / 33% VBILX.  Should add a little more stability to the 'stache...