New Interest Rate Reality - Is it impacting your FIRE Strategy?

[MMMarbleheader]

With Bank CDs and Money Market Funds at 5% interest for the first time in most of our investing lives, has anyone changed their FIRE Strategy?

Personally, I always was in the pay off the mortgage camp. Now, I am thinking about putting my mortgage balance $175k in a money market fund and with 5% interest I can almost make my full mortgage payment of $750/mo. I feel like having the $175k liquid would remove the sequence of returns risk. The caveat is that this would still count as income, though probably would not be taxed if I stay below the 22% bracket. Also, it would impact my AGI for FASFA and the ACA.

Also, when I rebalance my pre-tax accounts I am thinking of putting the bond allocation into money market funds.

[jrhampt]

I have replaced bonds in taxable with money market and a 4.5% interest savings account.  Also about to take on a new mortgage and due to high interest rates will pay it off swiftly.  The existing mortgage with a 2.5% rate we had been in no rush to pay off.

[MMMarbleheader]

I have replaced bonds in taxable with money market and a 4.5% interest savings account.  Also about to take on a new mortgage and due to high interest rates will pay it off swiftly.  The existing mortgage with a 2.5% rate we had been in no rush to pay off.

Yea our current mortgage is 2.875%. I will need to do more digging into if the added $9,000 in income will push me over any ACA cliffs or make us not have a auto zero EFC/SAI on the Fasfa. Though we will be Fucked on the CSS Profile schools anyways.

[ChpBstrd]

I'm not FIRE'd but I'm shoving as much $ as I can into Roth IRAs and my 401k where interest can be earned tax-free.

In my brokerage accounts, SGOV has become my largest ETF holding. It's milking the rising peak of the yield curve and paying a monthly dividend while I safely wait for a Fed pivot. The five-one-hundredths of a percent ER is cheap enough not to bother trading my own treasuries, and is worth the tradeoff for minute-by-minute liquidity.

It might be smarter to buy an FDIC-insured one-year CD yielding 5.627% today (CUSIP: 46656MEX5) but you give up some liquidity in exchange for that slightly higher rate. I.e. if stocks flash crash the next day, too bad, you're locked in for a year.

There's also a case to be made that one should be locking in yields on long-duration bonds. There are A-rated non-callable bonds with yields just under 6% right now. If we're heading back to a 2-3% FFR like markets are predicting, it might not be a bad call to top off the fixed income portion of your AA fairly soon. I.e. if long-term inflation is around 2%, as markets predict, a portfolio full of 6% yields will cover your 4% WR plus inflation without as much SORR as a stock-heavy portfolio. 

I think the 60/40 portfolio looks more plausible now than it has for 20 years. The 60 part is easy - just VTI - but the 40 part requires some careful shopping.

[2300]

~5 years ago was planning to invest until had enough of what’s left in taxable to payoff mortgage.  Should reach that point this year.  Refinanced to a lower rate convinced me that don’t have to, but still considered it when safe investments returned next to nothing. 

Now I’m planning to do a 3 year ladder CD with extra in high interest savings account and money market to enable FIRE ~1 year from now (all in high interest savings/money market now). Not 100% certain will do so, but until a few weeks ago I had almost all taxable accounts in stocks that enabled growth, but I’m no longer willing to risk shorter term gains against a potential drop that “could” take FIRE off the table for a while. 

Never considered they personally as an option given such low rates, but at 5% or more I like having the option.  If I don’t then will do new 3 year CD with year 1 to preserve the “low risk exit plan.”   Is it the right thing to do, who knows, but 3 years of expenses could allow the rest to build and/or come back if falls. 

[mustachian816]

I have replaced bonds in taxable with money market and a 4.5% interest savings account.  Also about to take on a new mortgage and due to high interest rates will pay it off swiftly.  The existing mortgage with a 2.5% rate we had been in no rush to pay off.

Yea our current mortgage is 2.875%. I will need to do more digging into if the added $9,000 in income will push me over any ACA cliffs or make us not have a auto zero EFC/SAI on the Fasfa. Though we will be Fucked on the CSS Profile schools anyways.

I've heard anecdotal reports about some CSS schools still giving out near full rides to people with all their money in home equity ($500k) and retirement accounts ($2.5mm), but with very little income and taxable savings, so you might not be so screwed but of course YMMV.

[vand]

will absolutely impact us when we come off our cheap mortgage rate in a couple of months. Our repayments will quadruple on a very large mortgage. % income spent servicing debt will jump from about 4% somewhere closer to 20%.

In terms of the path to FIRE we are at stage where hopefully we have enough accumulated that a drop in our saving rate won't lengthen the time to FI too much, but its probably still going to turn a 3-5 year glidepath into more like a 6-7yr glidepath.

[daverobev]

will absolutely impact us when we come off our cheap mortgage rate in a couple of months. Our repayments will quadruple on a very large mortgage. % income spent servicing debt will jump from about 4% somewhere closer to 20%.

In terms of the path to FIRE we are at stage where hopefully we have enough accumulated that a drop in our saving rate won't lengthen the time to FI too much, but its probably still going to turn a 3-5 year glidepath into more like a 6-7yr glidepath.

Blows my mind, the difference between US + France and UK + Canada (as examples I know of). Fixed for the life of the mortgage vs 5 years.

[Ron Scott]

Already retired and I have always tried to keep my individual investment strategy separate from my asset allocation, asset location, and tax strategies. But I have been favoring short term instruments for my bond allocation in my deferred accounts. Hoping this isn’t a long term mistake but whatever. .

[Arbitrage]

I have replaced bonds in taxable with money market and a 4.5% interest savings account.  Also about to take on a new mortgage and due to high interest rates will pay it off swiftly.  The existing mortgage with a 2.5% rate we had been in no rush to pay off.

Yea our current mortgage is 2.875%. I will need to do more digging into if the added $9,000 in income will push me over any ACA cliffs or make us not have a auto zero EFC/SAI on the Fasfa. Though we will be Fucked on the CSS Profile schools anyways.

I've heard anecdotal reports about some CSS schools still giving out near full rides to people with all their money in home equity ($500k) and retirement accounts ($2.5mm), but with very little income and taxable savings, so you might not be so screwed but of course YMMV.

We'll have to look long and hard at our mortgage once our son hits 10th grade.  Guess I'm expecting to be done with our (now) part-time careers by then - hopefully well before then - and will definitely want to be using the ACA and auto-zero SAI.  It's of course quite possible that our 2.875% mortgage won't be so far below cash/bond rates at that point.  Lots of careful number crunching to come.  Our taxable investments are north of $500k, so there would be a huge difference between auto-zero and otherwise.  Unlikely that CSS will come into play for us.

[theninthwall]

Blows my mind, the difference between US + France and UK + Canada (as examples I know of). Fixed for the life of the mortgage vs 5 years.

When I moved to the USA, I didn't learn for a long time that mortgages are fixed here. You don't know what you don't know I guess. I certainly wish I had have known that back when the rates were crazy low, along with the house prices!

[Ron Scott]

I think it can be instructive to look at the historical Federal Funds Rate over time as a guide because this is controlled by the Fed, which has a specific mission and ultimately answers to the political establishment. This is MUCH different than relying on equity returns that are more market driven and unpredictable.

From 1960 - 2007 the average FFR was about 6% and from 2008 to date it averaged about 1.6%.So if you’re under 40 and have become used to investing at historically low rates, todays 5.5% rate seems batshit high, but it’s actually on the low side of normal.

Nobody has usable knowledge of what equities, bonds, and cash will return in the future—regardless what they returned in the past. I cannot fathom how we could return to a period like the last 15 years of wildly low interest rates but you never know.

Just know that the government will continue to put their finger on the scale—mostly for good purposes—as best they can. So while I have no faith in anyone’s predictions of equity returns, I assume the government will find it hard to tolerate overall portfolio returns dropping below real for too long.

[ChpBstrd]

Just know that the government will continue to put their finger on the scale—mostly for good purposes—as best they can. So while I have no faith in anyone’s predictions of equity returns, I assume the government will find it hard to tolerate overall portfolio returns dropping below real for too long.

Does this mean the government's priority is returning to ultra-low interest rates? Goosing the stock market will lead to higher overall portfolio returns than trying to prop up bond yields. Lower bond yields also boost GDP by making low-ROI projects and businesses profitable. Plus low rates allow each successive generation of politicians to run large deficits instead of raising taxes.

I suspect we'll see a combination of falling interest rates and continuing QT soon. QT will do the job of controlling inflation by reducing the money supply, while lower rates and expanding deficits will stimulate the economy and stock prices. In the end, this is essentially money printing hidden behind an accounting gimmick, but it's the answer to the question of "how to we maximize growth for the next 2-4 years?". That's what US voters are demanding of the politicians.

[Must_ache]

Personally, I always was in the pay off the mortgage camp. Now, I am thinking about putting my mortgage balance $175k in a money market fund and with 5% interest I can almost make my full mortgage payment of $750/mo. I feel like having the $175k liquid would remove the sequence of returns risk. The caveat is that this would still count as income, though probably would not be taxed if I stay below the 22% bracket. Also, it would impact my AGI for FASFA and the ACA.

Also, when I rebalance my pre-tax accounts I am thinking of putting the bond allocation into money market funds.

How does interest not end up getting taxed?  It's not the same thing as capital gains.

Also, I'm not sure you are reducing sequence of returns risk; stock returns aren't affected by your investment decisions.  What you are doing instead is changing your asset allocation toward fixed income, which results in your portfolio being less exposed to the market.   You are lowering the standard deviation - and probably the expected return - but 5% could be reasonably attractive.

Personally I am buying a bit more 5.5% CDs and reducing my exposure to the market at this point, it has run up pretty fast.  Aiming for 60-65% stocks, 30% fixed income @ 5% for 6 months to 1 yr and maybe 5% cash.  I'm asking myself if I should take a bit of the 20-yr now that it has crossed 4%.

[Ron Scott]

Just know that the government will continue to put their finger on the scale—mostly for good purposes—as best they can. So while I have no faith in anyone’s predictions of equity returns, I assume the government will find it hard to tolerate overall portfolio returns dropping below real for too long.

Does this mean the government's priority is returning to ultra-low interest rates? Goosing the stock market will lead to higher overall portfolio returns than trying to prop up bond yields.

No. A healthy market is fairly valued. I think the past 15 years actually demonstrate such low rates encourage over-valuations, which is more likely to create bubbles than stability. They will want a strong market, but don’t need outsized returns, just real ones.

Were we all surprised at how robust the US economy has turned out to be? We suffer an inflationary pop (which will ultimately spread and stick, so “personal inflation rates” lose meaning), the Fed jumps rates very fast, and the economy keeps chugging with historically low unemployment? God bless!

I would prefer the government keep the economy running a little hot but I am not an expert in any of this, nor am I in tune with the politics. I do think the Fed has learned good lessons over the years on how to stabilize the US economy.

Problem is, the current form of “the US economy” is not going to last our lifetimes. When machine learning finally starts making massive contributions to GDP and large numbers of jobs are lost, the government will need a different plan.

UBI anyone? Inflation might not be the problem because the machines should be able to meet demand. But just imagine the January 6 crowd without the burden of day jobs.

Buckle up.

[VanillaGorilla]

Personally, I always was in the pay off the mortgage camp. Now, I am thinking about putting my mortgage balance $175k in a money market fund and with 5% interest I can almost make my full mortgage payment of $750/mo. I feel like having the $175k liquid would remove the sequence of returns risk. The caveat is that this would still count as income, though probably would not be taxed if I stay below the 22% bracket. Also, it would impact my AGI for FASFA and the ACA.

Also, when I rebalance my pre-tax accounts I am thinking of putting the bond allocation into money market funds.

How does interest not end up getting taxed?  It's not the same thing as capital gains.

Also, I'm not sure you are reducing sequence of returns risk; stock returns aren't affected by your investment decisions.  What you are doing instead is changing your asset allocation toward fixed income, which results in your portfolio being less exposed to the market.   You are lowering the standard deviation - and probably the expected return - but 5% could be reasonably attractive.

Personally I am buying a bit more 5.5% CDs and reducing my exposure to the market at this point, it has run up pretty fast.  Aiming for 60-65% stocks, 30% fixed income @ 5% for 6 months to 1 yr and maybe 5% cash.  I'm asking myself if I should take a bit of the 20-yr now that it has crossed 4%.

I'm quite curious about these discussions, since few people seem to discuss taxes. I'm 100% equities at this point with no intention of changing that, so I've never looked at holding fixed income assets seriously.

From an hour of googling it seems that holding a CD in a tax advantaged account is tricky. You can find IRA CDs but the rates are lower than others (around 4% currently from Fidelity). Are people holding CDs in 401k or IRA accounts? How hard is it to buy inside those vehicles? The longest CDs I see advertised are 5 years. It seems you can find 10 year CDs but the yield is abysmal. So there's no guarantee that you can cover a multi-decade mortgage through CDs.

The obvious option is to buy medium or long term bonds that roughly match the duration of your loan, so a 30 year bond for a 30 year mortgage held in a 401k is the obvious choice. The caveat is that currently a 30 year Treasury is yielding under 4%, so the opportunity for arbitrage is pretty minimal, unless you're one of the lucky few who bought a loan between 2020 and 2022.

Money market yields cannot be locked in, so they're not interesting from a long term perspective.

It's an academic argument to me - I paid down my ARM over the last few years and have no need for fixed yield assets, but I'm very curious how people are actually approaching these strategies. Are people really holding CDs in tax advantaged accounts? Or are people neglecting tax implications?

[use2betrix]

We like having a big FU fund as well as saving for our first house down payment. With interest rates now, we’ll keep renting.

On the good side, we’re getting a 4.7% return from Vanguards new cash savings account on our $177k we have in there. $693/mo in interest.

[jrhampt]

We like having a big FU fund as well as saving for our first house down payment. With interest rates now, we’ll keep renting.

On the good side, we’re getting a 4.7% return from Vanguards new cash savings account on our $177k we have in there. $693/mo in interest.

Beat me to it!  I was just about to say no need for CDs with the 4.7% cash plus account at Vanguard.

[ChpBstrd]

From an hour of googling it seems that holding a CD in a tax advantaged account is tricky. You can find IRA CDs but the rates are lower than others (around 4% currently from Fidelity). Are people holding CDs in 401k or IRA accounts? How hard is it to buy inside those vehicles? ...

I'm buying brokered CDs and putting them in IRA accounts with a click of a button. My brokerage has a search screen that pulls up dozens (hundreds?) of options which I can sort by yield, duration, etc. Ten-year CDs can be bought today with yields around 5.4% and call protection up to two years. In the five-year range, one can get 4.692% non-callable. My understanding is that an "IRA CD" is a bank product where the bank opens an IRA for you and puts a CD in it. If you already have a brokerage IRA you can shop for anything your broker will sell you, just like with stocks and bonds.

The obvious option is to buy medium or long term bonds that roughly match the duration of your loan, so a 30 year bond for a 30 year mortgage held in a 401k is the obvious choice. The caveat is that currently a 30 year Treasury is yielding under 4%, so the opportunity for arbitrage is pretty minimal, unless you're one of the lucky few who bought a loan between 2020 and 2022.

Even if you are one of those with a sub-4% mortgage, the cash flows from a bond will not align with the cash flows to an amortized mortgage because the mortgage is also paying itself off. Thus a 4% mortgage costs more to service each year than a 4% bond pays out. This cash-flow-matching might work for an interest-only loan if we ignore the closing costs.

[VanillaGorilla]

From an hour of googling it seems that holding a CD in a tax advantaged account is tricky. You can find IRA CDs but the rates are lower than others (around 4% currently from Fidelity). Are people holding CDs in 401k or IRA accounts? How hard is it to buy inside those vehicles? ...

I'm buying brokered CDs and putting them in IRA accounts with a click of a button. My brokerage has a search screen that pulls up dozens (hundreds?) of options which I can sort by yield, duration, etc. Ten-year CDs can be bought today with yields around 5.4% and call protection up to two years. In the five-year range, one can get 4.692% non-callable. My understanding is that an "IRA CD" is a bank product where the bank opens an IRA for you and puts a CD in it. If you already have a brokerage IRA you can shop for anything your broker will sell you, just like with stocks and bonds.

Thanks for the explanation! I dug a little through Vanguard's options and found the CD options. Indeed a few 10 year CDs are available, certainly a good option for those with a decade or so left on a low rate loan.

The obvious option is to buy medium or long term bonds that roughly match the duration of your loan, so a 30 year bond for a 30 year mortgage held in a 401k is the obvious choice. The caveat is that currently a 30 year Treasury is yielding under 4%, so the opportunity for arbitrage is pretty minimal, unless you're one of the lucky few who bought a loan between 2020 and 2022.

Even if you are one of those with a sub-4% mortgage, the cash flows from a bond will not align with the cash flows to an amortized mortgage because the mortgage is also paying itself off. Thus a 4% mortgage costs more to service each year than a 4% bond pays out. This cash-flow-matching might work for an interest-only loan if we ignore the closing costs.

Of course, which illustrates the challenge.

[Chris Pascale]

With a 2.75% mortgage rate, paying it off makes a little less sense.