|
Posted by louise on February 18, 2007, 12:38 pm
I have a good deal of cash from a life insurance policy,
most of which, (about 400,000), I am investing in safe
instruments to insure a small but reliable income flow which
I need for living expenses.
The the rest of my investments, mostly in retirement
accounts, are much more aggressively invested. I am 63
years old. I want to keep the life insurance money separate
from my more aggressive/growth oriented Keo and IRA
accounts. It is my "safety" money.
So, I have been using this 400,000 to purchase CDs, Treasury
Bills and Govt Agency bonds which are state tax free (or
city and state tax free). I live in NYC where state and
city taxes are pretty high. I am in about the 20% tax bracket.
I would like to understand what would be the best balance
between CDs, which are taxable, and Treasury Bills and
Agency Bonds which are partially taxable, so as to minimize
the tax burden on the interest I'm earning.
I am under an impression that I have to be concerned about
the alternative minimum tax and that this could be affected
by how much of my investments are in partially tax free
instruments.
TIA
Louise
|
|
Posted by Rich Carreiro on February 18, 2007, 1:04 pm
> So, I have been using this 400,000 to purchase CDs, Treasury Bills and
> Govt Agency bonds which are state tax free (or city and state tax
> free). I live in NYC where state and city taxes are pretty high. I
> am in about the 20% tax bracket.
>
> I would like to understand what would be the best balance between CDs,
> which are taxable, and Treasury Bills and Agency Bonds which are
> partially taxable, so as to minimize the tax burden on the interest
> I'm earning.
You don't want to minimuze the tax burden. You want to maximize the
after-tax return. To give an example of what I mean, a NYC muni bond
paying 3% will be triple tax-free. So your tax burden will be zero,
and your return will be 3%. Now pretend you were able to find a CD
paying 6%. If your combined tax bracket was 40%, your tax burden
would be much higher than on the NYC bond, but since the CD would
still be yielding 4.8% after taking all taxes into account, you'd
still be better off the with the CD even though you'd be paying a
bunch of taxes.
What you need to do is work out your combined effective tax bracket
for each of these kinds of investments and then figure out the
after-tax returns of those investments -- this will let you compare
apples to apples -- and then you can see which ones give you the
best returns.
> I am under an impression that I have to be concerned about the
> alternative minimum tax and that this could be affected by how much of
> my investments are in partially tax free instruments.
No. In the context of fixed income, AMT has the potential to come
into play if lots of your tax-exempt interest came from so-called
"private activity bonds", which are muni bonds that finance a private
enterprise. Interest from such bonds is taxable under the AMT.
But CDs, Treasuries, and Agency/GSE bonds aren't going to cause AMT
liability.
--
Rich Carreiro rlcarr@animato.arlington.ma.us
|
|
Posted by on February 19, 2007, 9:11 am
> I have a good deal of cash from a life insurance policy,
> most of which, (about 400,000), I am investing in safe
> instruments to insure a small but reliable income flow which
> I need for living expenses.
>
> The the rest of my investments, mostly in retirement
> accounts, are much more aggressively invested.
My apologies, in my earlier reply I missed this point, which makes
some of what I posted irrelevant.
If this is only about safety, then you want to look at:
- credit rating of the assets in the fund - higher is better
- duration of the fund (longer = more risky if interest rates rise)
- after tax yield of the fund
(apologies if you know all the verbiage below)
In general, the safest assets from a credit point of view are US
federal government securities, then some state governments and
municipalities (but not all) as well as revenue bonds tied to
particular pieces of infrastructure.
Less safe are mortgage backed securities, corporate bonds and bonds of
foreign countries, especially so called 'emerging market' bonds, and
the securities known as 'high yield' or 'junk'.
Those seeking fixed income and safety should avoid most of the latter
categories, and be mindful of more than say 40-50% exposure in their
portfolio to mortgage-backed securities and/or corporate bonds. There
are specific sets of economic conditions which can cause corporations
to get into financial trouble at the same time*, and which can cause
mortgage backed securities to do poorly as a group**.
There are some foreign governments (France, Switzerland, UK, Germany,
Canada, Australia) which have excellent credit records, if not quite
(except for the UK) the 230 year record of the US Treasury. However
an investor in these bonds is taking on the risk that the US dollar
will appreciate relative to those currencies, wiping out any gains
from a higher rate of interest. There aren't many stable countries
now, whose securities pay a lot more in interest than the US
government.
High yield and emerging market bonds you are effectively playing with
fire. They are subject to periodic 'crises' and waves of default
which can leave investors with little or no return of their capital.
* conversely, if there is a big fall in interest rates, many (perhaps
most) corporate bonds are 'callable' by the issuers, and the owner of
the bond is left with their money back, and the problem of reinvesting
at much lower rates of interest.
** mortgage backed securities have a particular role to play in the
current US 'housing bubble' and unwinding that may be very painful for
bond holders. Additionally, when interest rates fall, householders
tend to refinance, inflicting the same problem as a 'bond call' on the
holders of mortgage backed securities.
======================================= MODERATOR'S COMMENT:
Darkness please consider submitting this post to the FAQ Editor whose email is
mifp_faq at pacbell dot net
|
|
Posted by rick++ on February 19, 2007, 10:14 am
Some people consider it "unsafe" to invest too conseravtively, i.e.
especially for for inflation. Thats why they advise some equities
which over long periods time perform much better than bonds.
|
|
Posted by on February 20, 2007, 5:02 am
> Some people consider it "unsafe" to invest too conseravtively, i.e.
> especially for for inflation. Thats why they advise some equities
> which over long periods time perform much better than bonds.
I had a longer post, which the moderator didn't let through.
My basic thought was the OP should consider that at 3% inflation of
typical senior's costs (eg nursing home, medical costs not covered by
insurance, rent, home care), which is only 1% above published CPI,
$400k becomes $165k over 30 years. I believe those sorts of costs
rise *much* faster than CPI in the long run.
My suggestion was that, depending on total size of portfolio, the OP
consider:
- an index dividend fund (such as the Vanguard offering) which is
likely to produce stable income, growing with inflation, even if the
NAV will be volatile
- a conservative balanced fund with an income tilt (again Vanguard
offers one)
I also suggested looking at the Vanguard offering for New York
municipal bond investors, and the Nuveen Closed End fund which invests
in New York tax exempt securities. Both have the duration risk (ie
the sensitivity to interest rates) as they are relatively long run
funds.
|
| Similar Threads | Posted | | Fixed Income Products | June 27, 2008, 4:59 pm |
| Financials in a fixed income account | July 26, 2008, 10:15 am |
| Good Alternative Funds? | October 15, 2006, 1:51 pm |
| Question about re-investing returns... | November 26, 2006, 5:35 pm |
| Basic Investing Question | March 1, 2007, 5:00 am |
| IRA Minimum Distributions ? | May 24, 2007, 8:31 am |
| Minimum attorney fees for settling estates in PA | August 5, 2008, 7:45 pm |
| Age 70.5 and Required Minimum Distribution Affecting Retirement Accounts | October 5, 2008, 11:00 am |
| Re: Options for fixed payouts | September 22, 2006, 6:46 pm |
| Mortgage - fixed versus interest only | April 10, 2007, 3:24 pm |
|
|
Yahoo! 
Google 
Windows Live 
del.icio.us 
digg 
Netscape 
XML Sitemap