Now that the smoke has cleared....

[Duchesse]

Finally I closed on the sale of my house.

I think I did pretty well, 300+k.

But now I must generate income with this money. I don't have any illusions that I will get the income that I was receiving with the tenants but I do have another small income and I have alot of ingenuity. I also have "peeps" here at savingadvice.


5% of 300k is 15k. Even with my other income this is not enough. I'm willing to take a little more risk than this but not much more. I have already availed myself of the HSBC 6% offer (good until 4/29/07). This gives me some time to think. I'm considering AGG, TIP, VNQ, XLE, DVY, and PID because I have no ETF's in my individual portfolio except for my IRA which contains SPY, DIA, and QQQQ.


What would be the best way to generate "safe" or should I say "low risk" income with this money other than CD's and T-bills both a waste of time at this time.

I feel that I am already fully diversified, my plan is to spread the funds over the vehicles I already have (MM, CD, T-bills, I bonds, stocks, ETF's, index fund, mutual fund,) and add the ETF's mentioned above. Anymore suggestions.

Help!

[kv968]

Originally Posted by Duchesse

I feel that I am already fully diversified, my plan is to spread the funds over the vehicles I already have (MM, CD, T-bills, I bonds, stocks, ETF's, index fund, mutual fund,) and add the ETF's mentioned above. Anymore suggestions.

Help!

First off, congratulations on selling your house. Now for the "problem" of investing the money

As long as you feel you're fully diversified and plan to spread some of the funds over what you already have, the ETF's you've chosen to enhance your portfolio would be good ones for you to add. I know in past postings I've had with you I tried to steer you away from ETF's with our DCAing but this is the type of investing style ETF's are made for...larger money amount purchases. Although I don't have any individual picks for you, the type of ETF's you're looking at are good for your situation. You want something that has high dividend yields since I assume you'll be taking the dividend payouts to live on. Another aspect of your situation I didn't realize until later on in a different thread.

[kv968]

Me again. You may also want to look into a balanced mutual fund that focuses on producing current income with a nod towards capital apprecitation. PRSIX, PRGIX, VASIX, VSCGX, VWINX are a few examples of those. Although you'll experience some overlap in your holdings since you own those other investments they may still fit in.

[Scanner]

I am not sure where exactly you are at - you sold your house free and clear for 300K or did you have a mortgage to satisfy?

300K is probably enough money that I would consider using municipal bonds or a municipal bond fund that's germane to your state. T.RowePrice has them for the populous states like mine but if you live in Racoon Butt, Montana, you may have to search harder for a Montana muni bond fund.

Here's why - there's a formula I used to know that calculates the additional yield you get when you avoid taxation - something like the %age minus something over 1 - X, LOL.

Anyway, with most tax brackets figure about an additional 1-1.5% yield by getting a tax-free vehicle.

I checked out the T.RowePRice NJ Muni Bond fund and it averages near 5% - well, taking that formula, that's about 6.5% yield. And you can't beat them for safety, other than maybe MMA's - just have the dividends and interest paid to you if you need the income and don't worry about taxes.

The only other income vehicle that I would suggest is maybe a utility stock fund. . .but you are going to have taxes and capital risk there. . .not sure if you want to go there.

By the way, my chiropractic mentor over 17 years built his entire portfolio on insured municipal bonds. By the time he retired, he probably had over a million dollars in muni investments generating tax-free income. Think about that for a second. . .yeah, couild have he done better by doing S&P 500 over 17 years? Probably, but the problem is you have to wait until 65 before you can touch your money.

That is where kv and I are maybe butting heads a little on the tax sheltering obsession the investment community has (more specifically - the Roth obsession).

He was 52 years old and getting probably 50K/year tax free that he could either reinvest or just live off of (he lived modestly) because that was like a 85K/year salary. So, even if worked another job of $60K/year, well, you do the math.

Really makes a case for "income investing" vs. "growth investing", which has ruled the psyche of the market for 30+ years (only my grandfather used to think about dividends).

Anyway, I don't invest this way but it goes to show you how much psychology goes into it - he wanted safety and no-worry tax situation vs. yield and built a much different retirement than the "grow your egg in a Roth and then retire strategy" that rules.

[bjl584]

Just a side note: To find the after tax yield of an investment the formula is:
Yield(converted to a decimal) * (1 - Tax Rate). For example: If a MMA is offering 5% and you are in the 23% tax bracket, then: .05 *(1-.23) = .0385 or 3.85%. So, after taxes you are getting 3.85% on the MMA. If you look at current rates, there isn't much advantage to the tax sheltered accounts such as muni bond funds unless you are in a high tax bracket.

[kv968]

Originally Posted by Scanner

That is where kv and I are maybe butting heads a little on the tax sheltering obsession the investment community has (more specifically - the Roth obsession).

I don't know that we bump heads so much with tax sheltering. My view on it is that taxation should always be taken into consideration when choosing investments and what accounts they should be held in. For example, I've see people with a Roth, a 401k and a taxable account all going towards retirement and they end up holding all their bond allocation in the taxable account. You should try to use the other accounts to shelter the most tax-inefficient funds. Same is the case when investing in a mutual fund within a taxable account for whatever reason. If you have a fund that basically mirrors say the S&P 500, I feel you'd be better off just owning an index of the S&P 500 instead. That way you won't have the turnover rate nor the capital gains distribution that you would with the fund.

Now if the fund that happens to fit your criteria (ie. you want a balanced fund for a future house downpayment) isn't the most tax-efficient but has to be held in a taxable fund then so be it. I'm just saying minimizing taxes is something that some people don't take into consideration and not doing so can really eat into your returns. Even your chiropractor mentor practiced this. Albeit it wasn't in a "tax-deferred" account he still added taxes into the equation.

[humandraydel]

Originally Posted by Scanner

That is where kv and I are maybe butting heads a little on the tax sheltering obsession the investment community has (more specifically - the Roth obsession).

I will be the first to suggest a "taxable" portfolio. But at the same time I will be the first to suggest a tax advantaged account. Over time taxes will hit a portfolio hard enough to worry about. I know you understand the power of compound interest. Well, what do you think that extra 1.5% tax bite does to you over 30-40 years? It's not pretty!

As for the Roth, there are two reasons it's so great:

1. Tax FREE growth.
2. You can withdraw the contribution at any time, penalty and tax free.

So imagine this:

From age 20-35 you contribute $4,000 to a Roth IRA and it grows at an (inflation adjusted) rate of 8% per year. At age 35 you will have contributed $60,000 and your investments will be worth $117k. Withdraw the $60k contribution free and clear (for a house down payment?) and let the remaining $57k earnings grow (at 8%) for 25 years (age 60) and you will have 392k. That's 392k TAX FREE dollars from an initial investment of 60k.

[sweeps]

Originally Posted by bjl584

Just a side note: To find the after tax yield of an investment the formula is:
Yield(converted to a decimal) * (1 - Tax Rate). For example: If a MMA is offering 5% and you are in the 23% tax bracket, then: .05 *(1-.23) = .0385 or 3.85%. So, after taxes you are getting 3.85% on the MMA. If you look at current rates, there isn't much advantage to the tax sheltered accounts such as muni bond funds unless you are in a high tax bracket.

This is a bit overstated. Your effective tax rate is usually much smaller than your official tax bracket. I was in the 28% tax bracket in 2006 but my effective tax rate was 12%. The effective tax rate is the number that should be used in the calculation.

[Scanner]

Yeah, I know, you guys are looking at this in terms of pure numbers and calculations - it's my beleif that the philosophy of money goes way beyond finding a way to get the most effective yield.

I am not knocking the Roth - my wife and I have Roths.

I am questioning more perhaps the relationship with money we are supposed to have over our lives. I just wonder if we are living too much like squirrels, squirreling it all away for someday and not enjoying what life has to offer.

Somewhere in the middle lays the balance - a balance between being squirrelly and the investing philosophy of "Die Broke."

As a side note, I was looking for the formula that determines the yield if you shelter your investments, not if you don't.

[Duchesse]

[quote=Scanner]I am not sure where exactly you are at - you sold your house free and clear for 300K or did you have a mortgage to satisfy?

300K is probably enough money that I would consider using municipal bonds or a municipal bond fund that's germane to your state. T.RowePrice has them for the populous states like mine but if you live in Racoon Butt, Montana, you may have to search harder for a Montana muni bond fund.

I live in NYC

Here's why - there's a formula I used to know that calculates the additional yield you get when you avoid taxation - something like the %age minus something over 1 - X, LOL.

Anyway, with most tax brackets figure about an additional 1-1.5% yield by getting a tax-free vehicle.

I checked out the T.RowePRice NJ Muni Bond fund and it averages near 5% - well, taking that formula, that's about 6.5% yield. And you can't beat them for safety, other than maybe MMA's - just have the dividends and interest paid to you if you need the income and don't worry about taxes.

Sounds good, I must check this out. Can you give me more info?

The only other income vehicle that I would suggest is maybe a utility stock fund. . .but you are going to have taxes and capital risk there. . .not sure if you want to go there.


I'd like to go here, generating tax-free income.

"income investing" vs. "growth investing", (only my grandfather used to think about dividends).



Anyway, I don't invest this way but it goes to show you how much psychology goes into it - he wanted safety and no-worry tax situation vs. yield



You understand!

I'm just like your chiropractor mentor or should I say I aspire to be like him. I'm a newbie at handling my finances(4 years ago I started personally investing in stocks and bonds ). The last time I let anyone handle it for me (my husband ), I lost my shirt. I lost him too!lol

Now it's me and my 14yo son and I can no longer work but I can manage.

I sold my house because it had become a white elephant, I was losing money. I had no choice. I received 300k free and clear of taxes and existing mortgage.

This 300k represents my life savings. I also have a few other investments which are long term, I don't want to liquidate them. I have another 30k in my IRA/TDA , I contribute the max $4k per year automatically to my IRA. I started late. Don't ask, that DH again.

I have a $1500 month income, a $825.00 per month payment on my home and no other debt. I cannot afford to pay off my mortgage (108k) right now.

My son is in high school and doing well. I can't move now.When my son is grown I hope to sell my primary residence appraised at approx. 400K ($250k is tax free). I want to move and buy a less expensive home in another state. I live in NYC now.

[sweeps]

I hope I'm not crashing the party, but taxes should never be the primary factor when selecting an investment. 300k is a nice size portfolio, but $1500/mo income is not very high. I just don't think lowering your taxable income is a high priority -- even including your state taxes. Only choose the muni bond fund if you truly come out ahead.

Also -- investments in any bond fund, including muni bond funds, can lose money from time to time. Your principle is not guaranteed.

[Scanner]

Sweeps is right and I guess I get tired of saying that disclaimer, even though I should - "any non-FDIC insured investment does have prinicipal risk" - but in the case of muni bonds, you can buy insured muni bonds, get a lower yield, and now you have the prinicipal protected.

Expect to pay about 1% difference for the insured vs. non-insured bonds.

I'm sure T. Rowe Price has a muni bond fund for NY - check that one out or call a bond broker for muni bonds that are insured for your state. But there, you do have "market risk" and interest rates could move thereby lowering your yield. If you could tolerate some swings in your income, you could consider that.

(btw, is "dh", damn husband?)

Again, I can't figure the return but if you don't make much money per year, and it sounds like you don't - your "effective" yield might only be 1% with the tax savings.

That is, if your bond fund or bonds return 5%, your after tax yield would only be 6%, or maybe even 5.8%, if you are only making 18K/year.

Still, muni bonds are some of the only bonds that you can get a form of insurance on your principal. It sounds like safety is very important to you, and that's cool with me (even though I'm a risky bugger) so skip the idea of a utility stock fund.

If I was in your shoes, and thinking like you - protecting my principal is paramount and I want income, I think I would buy insured muni bonds and have the interest delivered to me tax free, esp. with 300K - you could spread the bonds out over different insured municipalities.

I went to my Scottrade account and looked up a bond just for the heck of it - to see what it was yielding. 4.4% for an insured bond in NY. I'll admit I'm a little out of my element - it may pay to go through a full service broker the first time and learn about the coupon amounts, maturity dates, callables vs. non-callables, etc. Or you could try a discount broker and maybe customer service can help you sort through the terminologies.

[Duchesse]

I see I'm going to have to do some municipal bond research. Talk to you later.

[Duchesse]

Originally Posted by sweeps

I hope I'm not crashing the party, but taxes should never be the primary factor when selecting an investment. 300k is a nice size portfolio, but $1500/mo income is not very high. I just don't think lowering your taxable income is a high priority -- even including your state taxes. Only choose the muni bond fund if you truly come out ahead.

Also -- investments in any bond fund, including muni bond funds, can lose money from time to time. Your principle is not guaranteed.

Hey Sweeps I agree, the income I receive from this 300k along with the 1500/month should not push me into a higher tax bracket but I do want to factor in the taxes when investing if it will help. As you can see I need all the help I can get. lol My primary factor in my investment strategy is preserving my capital and current income. I heard about muni's but thought they were only for rich people.

[sweeps]

If you're really interested in tax-exempt, consider:
Vanguard New York Tax-Exempt Money Market Fund (VYFXX) <-- Lower risk but lower return
Vanguard New York Long-Term Tax-Exempt Fund Investor Shares (VNYTX) <-- Higher risk but higher return

[Fern]

Hope i'm not repeating what others have said, didn't have time to read all replies, but while you've got $$ invested in in the index fund and mutual funds generally, why not take a closer look at what your annual fees are, which can really erode your returns. With all that cash, you might also want to focus on tax-efficient mutual funds, those that typically do not throw off a lot of taxable gains.

[kv968]

These are NY tax-frees from T Rowe Price:
T Rowe NY Tax-Free Money Money Market
T Rowe NY Tax-Free Bond

[kv968]

Originally Posted by sweeps

I hope I'm not crashing the party, but taxes should never be the primary factor when selecting an investment.

I agree, they shouldn't be the primary factor. All I'm saying is that they should most definately be taken into consideration when chosing funds and where to place them as the situation dictates.

[humandraydel]

Originally Posted by Scanner

Yeah, I know, you guys are looking at this in terms of pure numbers and calculations - it's my beleif that the philosophy of money goes way beyond finding a way to get the most effective yield.

Somewhere in the middle lays the balance - a balance between being squirrelly and the investing philosophy of "Die Broke."

I agree with you that there is a balance. In fact, tax advantaged accounts HELP you find that balance, because you don't have to save as much!

Duchesse, how old are you? What are you really trying to do with this money? You say "generate income" but 5% (15k) isn't enough. How much net income do you want in a year? The Vanguard NY municpal bond fund is only yielding 3.8% right now. If you aren't going to be in a very high tax bracket then munis are probably not for you.

If you need more than 5% then I suggest sticking some into a tax efficient fund like Vanguard Total Stock Market Index. Investing a decent amount into equities is the only way you are going to generate much more than 15k a year. There are several options for high yield investments, but I think they are all too risky for you.

[Duchesse]

Originally Posted by humandraydel

I agree with you that there is a balance. In fact, tax advantaged accounts HELP you find that balance, because you don't have to save as much!

Duchesse, how old are you? What are you really trying to do with this money? You say "generate income" but 5% (15k) isn't enough. How much net income do you want in a year? The Vanguard NY municpal bond fund is only yielding 3.8% right now. If you aren't going to be in a very high tax bracket then munis are probably not for you.

If you need more than 5% then I suggest sticking some into a tax efficient fund like Vanguard Total Stock Market Index. Investing a decent amount into equities is the only way you are going to generate much more than 15k a year. There are several options for high yield investments, but I think they are all too risky for you.

To answer your questions: I'm 43yo and I am trying to "stay afloat" in NYC until my youngest child (14yo) learns to fly. I already know that 15k is not enough LOL. I don't think muni's are for me I don't have enough moola.


I believe that two heads are better than one, that's why I'm trying to get as much info and suggestions as I can. Ultimately the decision is up to me but I am open to the suggestions of more experienced investors. I know my limitations.

As for net income? I can function comfortably with $3500/month. I guess it's wishful thinking to believe I can generate this much.