Best conservative non-retirement investment options?
November 16, 2020 6:20 PM   Subscribe

I am about to be gifted what is for me a large sum, about $60-$65k. I am not employed right now and this is unearned income so I cannot put it into a retirement account. However, that is what I will hopefully eventually use it for. In the meantime, I want to keep it safe and at least match inflation.

I'm 47. For Reasons (TM), my life and work trajectories from here on out are very unpredictable, so I need to treat this money very conservatively. I hope to migrate it into my retirement account over the course of years when I'm working again. But it's also possible that I will need to tap some of it in 1-5 years when my living situation changes.

What is my best option? CD ladders? Savings bonds? T bills? Something else?

Any options that require a great credit score are out. I did look into a high-yield savings account, but I did not qualify for it.

Thanks!
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posted by Flock of Cynthiabirds to Work & Money (21 answers total) 8 users marked this as a favorite
 
Best answer: It sounds like you need this money to be safe and at least semi-liquid in the short term, so a savings account or no-penalty CD would probably be best. I'm not sure about the credit score requirements for the online banks that are often recommended (Ally, Marcus, Capital One 360, etc.).

That being said, current rates are so low that you would not be losing much, relatively speaking, by just parking it in whatever checking or savings account you have right now while you figure out your longer-term plan. My Capital One account is paying 0.50% annual percentage yield. If I kept $65,000 there for a year, it would get me $325.
posted by AndrewInDC at 6:47 PM on November 16, 2020


Best answer: Vanguard offers offers a number of options at different levels of safety, all of which have a very low cost and competitive returns.

You might split your money into one part which represents what you think you might need in 1-3 years where you want zero risk that you will lose anything. For that, the Federal Money Market Fund might be a good choice and comparable in return your Capital One account but invested more conservatively in only federally backed investments.

I would also put a share into an Intermediate Bond Fund. If you don't pay much taxes, you might like the investment grade intermediate term bond fund. If you look at the performance details, you will see it earns much more than a money market fund (average 4.9% over the past five years) If you look at the graph, you will see some small blips when it falls a little but most of the time it does much than a money market fund with only a little more risk.

Finally for the part that you are saving for retirement, that you think you probably won't need in the next five years, I would invest all of that in the stock market like the S&P 500 Index. Over the last five years, the stock market did twice as well as the bond market (13%) but there have been more ups and downs that might make you nervous if you don't have time to wait for it to go back up.
posted by metahawk at 7:53 PM on November 16, 2020 [4 favorites]


Best answer: It sounds like you want this pool of money to serve a couple of different purposes. That's wise.

You want some to remain pretty available in the short term, and you want some to earn interest to match or beat inflation in the medium term.

Long term, you may want to direct it to a retirement account, where going for a little more aggressive growth (and the accompanying risk) would be appropriate.

I would echo AndrewInDC's advice and keep a nice chunk, say 25K, of it in a FDIC-insured checking or savings account. Boom! Instant emergency savings fund. If you think you're going to need some cash in the next year or so for a particular purpose (car, down payment, wedding, etc...) add that on top of the 25K or open a second account just for that chunk.

For medium term, Series I Savings Bonds would be an excellent choice. The only catch with those is a purchase limit of 10K/yr. Those will match or beat inflation. They are locked up for the 1st year, but liquid after. There is a small interest loss if you cash out before 5 yrs, but it's negligible. One of my favorite things about I Bonds is that taxes are deferred on them until you cash them out. A lot of other attractive bond investments, including mutual funds, will require you to pay taxes annually if held outside a retirement account. You can buy I Bonds through treasurydirect.gov .

Financial writers I've read from a lot of different philosophies (liberal, conservative, biblical, academic, wall st, main st) pretty much uniformly endorse sitting on a pile of new money for a while (6 mos. - 1 year) before really going hard in any direction with it. I wouldn't be surprised if insurance agents, real estate people, financial advisors, etc... get in touch with you right before or after your gift. They may be nice, mean well, might even be related or a friend, but politely tell them to pound sand for a while.
posted by eelgrassman at 8:28 PM on November 16, 2020 [2 favorites]


Unemployed and no short term prospects in sight? I agree you should keep all of this in a combination of savings accounts and CDs. When your circumstances change, you have a job or a plan, come back again for further advice.
posted by JackFlash at 8:42 PM on November 16, 2020


Response by poster: JackFlash: The "come back when you have a job and a plan" bit sounds flippant and presumptuous. Not everyone can work whenever they want, nor even make a plan.

I avoided putting too much backstory into my question, but I'll give some of it here for those interested: I am spending much of my time caring for an elderly family member, and for their house and pets. I am maid, cook, chauffer to medical appointments, nursemaid, handywoman and companion.

To be frank, I don't know when this person will die. It could be tomorrow, it could be 5 years from now. I suppose they could surprise everyone and it could even be 10. They are terrified of Covid (the numbers here are skyrocketing at the moment), which means the only way I could possibly work right now would be 100% from home.

When they do die, I will be responsible for selling the house, but it has a reverse mortgage on it and there likely won't be much (or possibly any) profit. I will want to move across the country to where I used to live and where I have good friends.

I have health problems of my own (that I am seeking treatment for) that cause fatigue among other things, which means that I am pretty much at my limit most days with what I already have on my plate.

So, I cannot "have a plan" because I don't know how long my family member will live, what will happen with Covid, what the real estate market will do, or whether my own health will improve or deteriorate. I could be working again in a month or I may not work again for years.
posted by Flock of Cynthiabirds at 8:58 PM on November 16, 2020


Best answer: Truly sorry, wasn't intended to be flippant at all. Why you don't have a job is irrelevant and I was making no judgement about it. A lot of people don't have jobs now. Simply stating the facts from the given information. In this situation you shouldn't be taking risk with money you may need to maintain your living situation with no other income on the horizon. Hence savings account and CDs.

When your circumstances have changed, then it is time to make plans about any money remaining but not now.
posted by JackFlash at 9:48 PM on November 16, 2020 [2 favorites]


Best answer: Were you employed at all during 2020? You can save in a Roth IRA an amount equal to your earned income (up to the yearly cap); the dollars you deposit into the Roth don't have to be literally earned themselves. You have until April 2021 to set up the 2020 Roth.
posted by mahorn at 10:19 PM on November 16, 2020 [4 favorites]


Keep it simple and just put it in an FDIC insured savings account that earns at least 0.5% interest. If you really need to keep the money liquid, you shouldn't be investing it, and interest rates are so low right now that the difference between putting your money in a savings account that earns 0.5% vs. a CD that earns 1.05% would be only a few hundred dollars in interest (and you could lose all or some of that to early withdrawal penalties if you need to withdraw from the CD early).
posted by mskyle at 3:00 AM on November 17, 2020


According to the Bureau of Labor Statistics, over-all consumer price index inflation is 1.6%. FYI
posted by tmdonahue at 5:14 AM on November 17, 2020


EE Bonds are actually a decent option right now IF you can stand to sit on them for 20 years. This is because even though their posted interest rate is very low, they're guaranteed to double in value after 20 years, which works out to an effective 3.5% interest rate--impossible to find in CDs, etc today. Even I Bonds, which are guaranteed to match inflation, are only at 1.68% right now. Here's a good timely article that goes into detail about these options.
posted by gueneverey at 5:51 AM on November 17, 2020


EE Bonds are actually a decent option right now IF you can stand to sit on them for 20 years. This is because even though their posted interest rate is very low, they're guaranteed to double in value after 20 years, which works out to an effective 3.5% interest rate--impossible to find in CDs, etc today. Even I Bonds, which are guaranteed to match inflation, are only at 1.68% right now. Here's a good timely article that goes into detail about these options.


3.5% over 20 years is terrible. You should not do this unless you are super wealthy. They even have redemption penalties if I am reading correctly. 20 years is a super long time horizon. The suggestions of Vanguard and the Total StockMarket fund are much better over a similar time horizon. Like 3X as much.
posted by The_Vegetables at 7:57 AM on November 17, 2020 [2 favorites]


The Roth IRA contributions can be withdrawn without penalty, too, so it's the best possible Emergency Fund. If you need the money, it's there (the contributions are yours free and clear, but if you withdraw the growth/earnings I think there's both paperwork and some penalty, so avoid that).

So if you earned $2k in January 2020 and receive $60k in February 2021, do open a $2k Roth IRA for 2020 (in something like a Target Retirement if you meet the minimums, or a Total Stock Market Index, or if you're conservative a Bond Index).
posted by mahorn at 8:07 AM on November 17, 2020


If the $60k is somehow related to your caregiving, you can legally classify that as employment income. You'd have to look up what forms/taxes would be involved, but it's common.
posted by mahorn at 9:24 AM on November 17, 2020


Best answer: If the $60k is somehow related to your caregiving, you can legally classify that as employment income.

And pay FICA and income taxes on it? A gift incurs no taxes on the recipient.
posted by JackFlash at 10:00 AM on November 17, 2020


Yes, JackFlash, but it would open up the retirement accounts of the self-employed. The OP's framing seemed to indicate first a wish for retirement accounts.
posted by mahorn at 10:13 AM on November 17, 2020


Best answer: Two things that I feel aren't getting enough play here. One is that it doesn't make a huge difference over a decade whether your retirement funds are in a tax-advantaged account or not. Taxes on dividends (which you do have to pay immediately) are very low, and capital gains only have to be paid when you sell. Index funds (and the target date funds that hold them) are suprisingly tax-efficient, since they don't "churn" their holdings. Far better to invest something, even absent the tax benefits of a retirement account. Whatever fraction of the money you know you won't need for at least 5 years should be in a target date fund, even in a taxable account. What will make a huge difference is not investing at all. There is essentially no way to beat inflation in the current environment except the stock market.

The other is that a CD ladder is a nice way to get a reasonable interest rate. Yes, you'll lose the interest for a period if you do have to cash it out. Obviously not a good choice for money you know you'll need soon.
posted by wnissen at 11:54 AM on November 17, 2020


Inherited money may simply be tax-free, so you don't have to worry about an IRA, the point of which is to defer taxes on income. A Roth IRA defers tax on earnings from the income. If you have low earnings now, that tax stuff may not matter much.

Figure out how much you need for the next 6 months; that goes in an account that's available. The rest, if any, can go into an account that is invested.

If you haven't had money to invest before, ask more questions, here and elsewhere. You're obviously making the smart choice to save for retirement, keep that in mind.
posted by theora55 at 2:14 PM on November 17, 2020


Best answer: theora55 errs with this: A Roth IRA defers tax on earnings from the income.

A Traditional IRA is tax-deferred, effectively reducing your income now in exchange for paying taxes at withdrawal. (If one is low-income when they withdraw and the tax rate is lower than now, that pays off.)

Roth IRA is post-tax, keeping your income what it is, in exchange for paying no taxes later. (If one has lots of savings or growth when they withdraw, or the tax rates go up, that pays off.)

Of course this is all immaterial if Flock of Cynthiabirds has no earned income for 2020.

The type of account to use is a separate question from how to invest. A Roth IRA account has liquidity and a tax-advantage, which is why I'm a fan of it as the emergency fund built during low-income years.

Within any account, F.o.C. could invest conservatively by buying CD's or I-Bonds, moderately with Bond Index Funds, reasonably with Target Date funds, aggressively with SP500 or Total Stock Market Indexes, riskily with stocks, or ludicrously with bitcoin or whatever.
posted by mahorn at 5:57 PM on November 17, 2020


I should have made it clear that I think eelgrassman's framing is excellent and my advocacy for Roth is gilding the lily.
posted by mahorn at 6:07 PM on November 17, 2020


Best answer: One note. If you have any debt with an interest rate of >4% py (or frankly, any debt that has a variable APR close to this that could change with short notice), you should pay that off first (assuming there aren't any onerous early payment penalties).

Given your need for safety, it's extremely unlikely that you'll beat 4% annualized return; therefore you're losing money by keeping debt. In addition, usualy debt servicing has reguar payments associated with it; that's money in your pocket.


Caveat: This is a purely financial analysis. Thee are lots of ppl who write about the psychology of what to pay off first, having a cushion etc

posted by lalochezia at 8:09 AM on November 18, 2020


Response by poster: Thanks, everyone. I've decided to put some in a CD ladder that starts at one year, and some in the Intermediate Bond fund. I would not have considered that latter option if it weren't for this thread. I already have a Roth IRA (in addition to my 401k from a previous job), so am planning to funnel the money in gradually whenever I start having income again.
posted by Flock of Cynthiabirds at 9:31 AM on November 18, 2020


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