I have been fairly agressive with my investments in the past, but am planning to retire in 4-5 years. I have decided that I want a certain portion of my investments to be in fixed income. I want to have 5 years of living expenses in fixed income. I had thought I would start a 5 year CD ladder and move money from my agressive investments every year to always have that 5 year ladder in effect. I placed this years money in DBPIX (Scudder Preservation Plus Income Fund) which is available only for retirement accounts (where all my funds are). This fund invests in bonds and has an insurance wrapper which guarantees a FIXED NAV of $10 and distributes income on a monthly basis. I did this so I could start my ladder the 1st week of January, so that the yearly living expenses would always be available at the start of the year. The income distribution for the month of April was .3173% which compounds to 3.87% for the year. Current 5 year CD's are only 3.3% and the 1,2,3, and 4 year CD's are obviously lower.The question (I finally got around to it) is "Is a CD ladder still a better choice than just using a Fund like this". I want maximum return with pretty much NO risk.piranha1
"Is a CD ladder still a better choice than just using a Fund like this". I want maximum return with pretty much NO risk.In more normal times, a CD ladder would be more advisable.At a historical low point in yields, where we are now, I would keep it in a short-term bond fund for now.Of course, I'm betting that rate WILL go up sometime in the next couple of years, which would make you regret locking into the longer part of your CD ladder.
The question (I finally got around to it) is "Is a CD ladder still a better choice than just using a Fund like this". I want maximum return with pretty much NO risk.From what I can tell, this fund holds some lower grade debt, which means you will have losses if a number of them go bad. I don't know if the "insurance wrapper" you mentioned will cover such losses. Certainly this isn't the same as FDIC insurance, or any other guarantee from the government, though.In a nutshell, you're getting better returns mainly because you're taking on larger risk. This isn't necessarily a bad thing, especially as I understand the fund has a very short duration and thus limited risk of losses due to rising interest rates, but you should understand that this is not really a "no risk" investment.
I suspect most of those who suggest treading water with short term investments waiting for interest rates to go up, instead of holding one's nose and buying 5 year CDs (or EE bonds for those with more time), haven't done the arithmetic. If you get lower interest while waiting, the end result will likely be less. Since I do use a CD ladder approach, I've crunched the numbers, given how low rates have gotten, and I can find few scenarios, other than a quick jump in rates soon (which no one should expect) in which going for shorter terms and lower yields results in significantly better returns, and plenty of scenarios where interest rates stay down for a few years, where you'd wish you'd just gone with the 5 years.And, I'm loking at rolling over into 5 year CDs. If you actually want your first CD to come due for spending, not rolling over (at least not completely) in 5 years, you'd have to follow up this period of treading water with a shorter term CD. So, I'm afraid you probably are stuck with low interest for 5 years.I would suggest not looking for once a year. Spread it out, maybe every three months (I'm hoping to have 60 CDs coming due one a month), so you don't have to have the money sitting in a money market most of the year. That will also help you catch a range of interest rates.The rate you quote sounds low. My credit union, which has always been on the high end, has 3.9% APY this week, the lowest it has gotten. Sometimes the rate has been as much as .25% higher than anywhere else, but usually somewhere like Ing has been with .10%. Shop around.The Preservation plus income fund sounds like a similar idea to the TIAA Traditional I have for my retirement account, but from Foobar's description, not as conservative. TIAA Traditional is basically like a bond ladder, holding to maturity, with treasuries and high investment grade corporates. It's NAV does not fluctuate, so you don't get the capital gains benefit of a bond fund when the stock market in down the tubes, but you don't have to worry about interest rate risk. In principle, it should have a slightly better yield than 5 year CDs, because it holds longer term and corporate bonds. Currently, it is paying 4% for the account without tight restrictions, 5% in the restricted account (the part with employer match). I presume Scudder is more concerned with its own take than TIAA-Cref, so it has to go for higher risk and still will probably get you a lower return. (If you happen to have a non-profit affiliation or have a spouse who does, you can switch to TIAA.)
A couple of years ago I had several brokered-CDs in my self-directed IRA. I was quite happy with them. Are they a good way to go for building a ladder of CDs these days?rlbar
"A couple of years ago I had several brokered-CDs in my self-directed IRA. I was quite happy with them. Are they a good way to go for building a ladder of CDs these days?rlbar"Maybe it's just good timing, but I'm fairly satisfied with the CD ladder I've built in my traditional IRA using Charles Schwab's brokered CDs. I started it a couple of years ago and I've got rates ranging from about 3.65% to 4.95%. When this year's CD matured, though, I replaced it with an investment grade corporate bond yielding 7%. I suspect more bonds will creep into my ladder if interest rates don't start to rise again soon. This may be more risk than you want in your fixed income ladder. I've set mine up to fund a SEPP even though I'm not yet retired. YMMV.-drip
Best Of |
Favorites & Replies |
Start a New Board |
My Fool |