HELP! Need $170,000 Financial Planning Advice

[need advice]

I have $170,000 to be used for all my expenses during 5 years of school and am looking for a safe, hands-free place to invest it. I have worked out my budget for the next 5 years and this money should be enough to cover my expenses if it grows above inflation. I am not interested in purchasing real estate, owning a business, or managing a large stock portfolio, so I would be grateful for any ideas regarding the best way to invest this money for the next 5 years. I will need to be able to withdraw 20% of the money each year to cover my expenses. Money-market savings accounts and certificates of deposit do not appear to have high enough interest rates to be viable options. The only option that I have found so far are Treasury Inflation-Protected Securities (TIPS) and Vanguard Inflation-Protected Securities (VIPSX) looks to be the best TIPS, but I don’t know enough about inflation, diversification or investing to know if putting the entire $170,000 in a TIPS for 5 years is the best option. I would greatly appreciate any financial planning advice regarding my situation. If you could map out the specific investment vehicles or sketch a composite portfolio for the $170,000 I would be very thankful. This would be easier for me if I was investing for the long term, but my 5 year window, expense requirements, and the current inflation outlook and bear market make my situation very confusing. Thanks for your help.

[jIM_Ohio]

You make two contradictory statements (IMO)

I have worked out my budget for the next 5 years and this money should be enough to cover my expenses if it grows above inflation.

I don’t know enough about inflation, diversification or investing to know if putting the entire $170,000 in a TIPS for 5 years is the best option.

If you don't know about inflation, but know CDs and money markets are not good enough, then solving the problem will be tough.

Could you outline the expenses you need to cover each year? It sounds as though $170k is what you have, and you need to cover about 200k of expenses (over 5 years).

Here are some thoughts:

find a way to reduce the period (5 years) to something around 4 or 4.5.
work part time to make enough cash to make the difference.

I assume a need between 60k and 80k of income each year. This income covers tuition, room, board and living expenses?

Have you looked at the tax implications of this? Maybe there is a tax deduction which could come into play which offsets some of the inflation.

If I needed to spend 270k over 5 years, first step I would do is put year 1's expenses in a cash account now. I would then open a 1 year CD, 2 year CD, 3 year CD and 4 year CD for the bills of years 2-5.

2 different ways to do this- you might get a GREAT return on the 4 year CD, such that you put less into 4 year CD and come away with more money in the end, and put more money into the shorter term CDs because compounding is working less for you.

But until you outline the expenses the 60-80k needs to cover, some of this is a wild guess on my part.

[terry1156]

We need more specific information. We know you ahve $170k, but what are your estimated yearly expenses. It seems to me that you probably have a better chance of meeting you goal by reducing expenses rather than through interest, although a combination of both should work out well.

[disneysteve]

this money should be enough to cover my expenses if it grows above inflation.

Money-market savings accounts and certificates of deposit do not appear to have high enough interest rates to be viable options.

That's a tough situation with only a 5-year timeline, and really less than 5 years since you'll be pulling out 20% of the money each year. I would not invest in anything not guaranteed because you can't afford to lose principle. If MMAs and CDs aren't good enough, I think you need to find some additional income source, like a part-time job, and/or trim your expenses.

[maat55]

A high yield savings account and a job is the best I can figure.

[Like2Plan]

I agree with Disneysteve.
1. I would not do anything to risk the principle. At most, your time horizon is probably just under 4 years. You may not have enough time to recover from a downturn in the market.


2. You have to be really careful about tying up your money.
I assume you are starting with 20% right now. You may need part of next year's 20% in less than 12months from right now.
The reason I say this is because DS had to put down an $300.00 deposit for 2008/09 college a few months ago. His tuition and fees and room and board for fall term are due 1 Aug or he is charged a late fee. You may have to buy airline tickets (?) way in advance (I don't know where you are and where your school is or if you plan to stay near your school 12 months out of the year.) I bring up some of these scenarios because some of your expenses are incurred prior to the school year starting.

3. Right now, I wouldn't tie up more than 3/5's of the money. You are going to have to shop around, but the rates I have seen do not really reward you for tying up your money for longer periods of time. I would probably do a maximum of 12 months at most. If the certificates were not any better than the interest on a high yield savings account, I would not tie the money up.

4. If you do the high yield savings account make sure you have the money in less than 100,000 increments in different banks so that it is FDIC insured.
Link to FDIC insurance web site

"Single Accounts
These are deposit accounts owned by one person and titled in that person’s name only. All of your single accounts at the same insured bank are added together and the total is insured up to $100,000. For example, if you have a checking account and a CD at the same insured bank, and both accounts are in your name only, the two accounts are added together and the total is insured up to $100,000."

Insuring Your Deposits for more information.

[Like2Plan]

Another question for you:

With your expenses, I am assuming you are attending a private university. Does your school participate in this prepaid co tuition program?

link to Independent 529 plan


This program will not help you for the first 3 years because you have to hold the certificates for 36 months, but it would lock in your costs for the last two years (assuming you can get enrolled in time to meet the 36 month requirement for your 4th year).

Another idea is to invest part of your money (the part that would be used for tuition and fees, room and board and books) in your state's 529 plan (or another one, if you find a better deal). At least your earnings would not be taxed and you might get a write off from your state's income taxes (if you have any). There are loads of options available. Some with less risk than others.

[disneysteve]

If the certificates were not any better than the interest on a high yield savings account, I would not tie the money up.

The advantage of the CD is that the interest rate is fixed for the term. The MMA yield can change - could go up, could go down. The CD could be the better deal and you'd know exactly how much income to expect.

[Scanner]

I would put it in a Vanguard Retirement Income Fund.

https://personal.vanguard.com/us/funds/holdings?FundId=0308&FundIntExt=INT

That would put you near 70% bonds and 30% stocks and then gives you the confidence that you don't need to actually manage your money.

You could also as an alternative pick Retirement 2010 or 2015, depending on your risk tolerance.

[QueenOphelia]

Since you absolutely cannot afford to lose any principal don't even think about stocks and mutual funds.

Zero coupons, CDs, Tax free munis, MMA....are some ideas