When setting up my retirement IRA, I'll be 50/50 using Vanguard Index funds plus a Vanguard Money Market. When the portfolio gives dividends, is it better to just have the dividends put into the Money Market for easy access or back into the funds? By going the MM route I wouldn't have to be rebalancing the fund percentages at the end of the year.TIA,Jim
The very low interest rate you get on Money Markets these days make me think you want to minimize the funds in a Money Market. But if you need the funds to cover your living expenses, you do not want to be forced to sell Index Fund shares in a down market.The Motley Fool recommendation to deal with this problem is to put five years of living expenses into a laddered maturity bond portfolio. Then you live off the maturing bond each year and in normal times sell Index Fund shares to buy another five year bond. If the market is down, you defer replacing the maturing bond until after the market has recovered.The dividends from the Index Fund give you some flexibility. Reinvesting them in the Index Fund can be best if you use the bond ladder. Or you can calculate the amount you expect from the index fund dividends each year and reduce your living expenses number and the size of the bond portfolio by an appropriate amount. I see no real advantage either way. Reinvesting the dividends in the index fund is a bit more conservative as dividends might get cut in a down market.The bond ladder approach also has the problem that interest rates are very low just now. But the Fed seems to be thinking about raising rates in a few years. If you could wait a while to set it up, the better yields available then might make it more attractive.
I have capital gains reinvested and dividends go to Prime MM Fund. Yes, the MM return is zilch but that's the money I'll withdraw to live on during the year. Beyond what I need for the current year I've been keeping the excess in Short Term Bond Index, although there is some interest rate risk there. that is money to fund any extra withdrawals I need for unexpected expenses. This year I withdrew my planned distribution from MM Fund and deposited it in a MM account at my bank in January. Pays 0.3% vs .01%. Every little bit helps.
Sounds like you have a well thought out plan, Billiam. Good for you.With interest rates so low, some people put part of their reserve funds in dividend paying stocks. They are equities and somewhat more risky than say money markets or bonds, but yields of 3 to 5% are possible with stocks of good quality.The thought is that their nice yields should support their price if markets crash. Rising interest rates might hurt a bit, but the yield is still attractive compared to money markets--probably for years to come.
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