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When I sold my business and retired last year, I decided to keep two years of expenses in cash to avoid thinking about portfolio withdrawals immediately. I’ve worked through most of the first year’s buffer, and with recent strong equity returns, I’ve moved some gains into a money market fund to replenish my cash reserves.
Since this cash is earmarked for spending 24 months from now, I was initially planning to just leave it sitting in the money market fund—rates are still around 4% at the moment. But I’ve been reconsidering given that the Fed has been cutting rates and appears likely to continue. Money market funds adjust to rate changes very quickly.
With that in mind, I’m considering moving the funds into a 24-month fixed-rate CD at around 4.0%. Yes, I’d be giving up a slight amount of current yield, but I’d lock in protection against further rate cuts over the next year and a half.
My question for the community: Has anyone else been thinking about shifting cash from money market funds into fixed-term CDs in the current rate environment? Are you locking in rates now, or staying flexible? What factors are influencing your decision?
Yesterday’s post on Can I Retire Yet? titled What to do with a Windfall and a current baker’s dozen comments addresses many of the same concerns you ask about in this HD forum post. You may find David Champion’s post interesting.
The what for and when funds will be used seem to be key and would be particular to the specific decisions each of us each of us makes with a windfall of cash. I expect liability matching and liquidity will be key to my decisions along with having a sufficient cash cushion for when my planning turns out wrong.
The major factor I am concerned with is future unexpected inflation so my decision is to build out a rolling 10 years Treasury Inflation Protected Securities (TIPS) ladder for a large part of the fixed asset portion of my retirement portfolio while keeping a money market balance for our primary emergency / annual known lumpy expenditures fund and keeping a mostly unused large HELOC I could draw if needed.
I am 18 months out of having the TIPS ladder built and will roll the ladder rungs into our Roth accounts as circumstances make sense tax wise.
William, at retirement I purchased a collapsing UK equivalent of a TIPS ladder to fund my first ten years of expected discretionary expenses. I have to admit, I’m coming around to your way of thinking for my main fixed income exposure regarding a rolling TIPS equivalent, I can’t really see much downside compared to other options, particularly if it’s combined with a reasonable money market buffer. I also have the structural advantage that in the UK TIPs are entirely exempt from capital gains tax.
Ive been doing the same MM to CD shift this year, mostly because Ive grown quite tired of watching the money market rate drift down every time the Fed moves. For a 24 month bucket thats really just earmarked spending, locking in the low 4s makes sense to me. My advice to you though is dont just take whatever your current bank offers. The rates can vary a suprising amount between institutions and so shopping around has actually been worth real money for me over the years.
I use CD Valet for shopping around for better CDs now. Its basically a CD marketplace, tens of thousands of CDs listed, and all of them are federally insured. It makes it easy to compare CD terms and rates without having to open a dozen browser tabs. And I have often found rates above 4%, if youre willing to explore lesser known credit unions and banks. It’s also free to use btw.
In my experience the flexibility of a money market isnt worth much once you already know the date you need the cash.