Last week at Thanksgiving dinner, I got peppered by family members wondering what the best short-term investments are. I answered them once and for all in this episode, so all I have to do in future family gatherings is to tell them to download this episode and call me with any questions.
I also covered 7 common holes in retirement plans. Do you need to fill any of these holes?
Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and elder law attorney and Certified Financial Planner™. Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.
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Announcer: Welcome to “Make It Last,” helping you keep your legal ducks in a row and your nest egg secure, with your host Victor Medina, an estate planning and elder law attorney, and certified financial planner.
Victor J. Medina: Hey, everybody, welcome back to Make It Last. Thank you for joining us for another episode. I am your host Victor Medina. I am joined this morning by a strong cup of coffee and some mood lighting, I don’t know. [laughs] Having the lights down low as I record this episode.
For some reason, I do like the atmosphere that’s created when we take off the office lights, and we just put on something soothing to record the episode of Make It Last.
In any event, we’re just getting back from Thanksgiving. While it was a great time with my family, I got an opportunity to eat way too much as we tend to do on that day. Watched plenty of football, which is my second favorite thing to do. My first favorite thing to do, of course, is to watch the parade in the morning.
I was happy to see that my high school marching band was featured. If you watched the Trumbull High School marching band from Trumbull, Connecticut, I was actually not only a student of that high school but I was a member of that marching band, the Golden Eagle Marching Band. I was absolutely a band geek growing up.
Although I did not get to march in the Macy’s Day Parade, they did that once when I was not a member, I was happy to see them out there.
I know how much time it takes to prepare for that. It’s really a special event when you get to go to the Macy’s Day Parade, because you have to hit the marks at certain times, and there’s a whole show that you put on. Anyway, it was really nice to catch them and see a little bit of nostalgia on the screen.
Anyway, I love the parade, and then I go right into about half an hour of the dog show before [laughs] I have to switch over to football. I was joined by a bunch of my family members.
I happened to have a lot of them as clients managing the money for them. A few of them showed up that were not clients of mine, which is OK, but they always like to pepper me with questions. [laughs]
One of the questions came up, “I’ve got about $60,000. I don’t want to invest it in the market. What’s something good I can do? What’s something good in the short term?”
That, actually, makes for a great podcast episode, a radio show episode. We’re going to cover today six fantastic short‑term investments. I’m going to give you six things that you can do with your money in the short term.
We’re going to discuss the pros and cons of that, what’s going to be risks that are involved. We’re going to try to keep them as risk free as possible. It may not be completely possible in all of those cases, but I will talk to you a little bit about what you can do with that money. Now is the opportunity to go grab a pen and pad so that you can follow along with us.
The other thing that we’re going to do is, I take that opportunity when somebody asks me a question to ask questions back. I find that there are probably about seven things that people are missing in their retirement plan.
I take a little devious tactic of asking all of these questions in a small delight, and knowing that most of these people don’t have it done. At least, I enjoy letting them know that it’s not done so that they can figure out what to do going forward. Maybe it’s with me, maybe with somebody else, but we’re going to go over seven common holes in your retirement plan.
We’re going to do sixes and sevens [laughs] for this show, and we’ll try to cover all of them as thoroughly as possible in the 30 minutes that we have here today.
Let’s jump right in to the six best short‑term investments. One of the things that I find from time to time is that people have unrealistic expectations for what’s possible in terms of investing in the short term.
They don’t like seeing money sit there dormant. At the same time, they believe that there is something that can be done. Often the answer is, there is something that can be done with that money, but you’re not going to get rich off of bit.
It’s not going to be the kind of rewarding event, as if you’d hit the lotto, or made a great bet at the casino, or something like that. It doesn’t work that way. We do actually have a few things that we can recommend as a great short‑term investment.
Again, I’m trying to get you to temper your enthusiasm for how much you’re going to make, especially as you see this stock market continue to rise as crazy out there, interest rates are low again.
It’s a weird place to be. You see, a lot of people are making money around you, but these are people that were investing in the stock market before the rise began in 2009, at least the people that are doing that.
We want to jump in and out of investing like that, but we do have a few things that we would put in a category of, I guess, investment, things you can your money on. We’re going to try to keep them risk‑free. They really are about the short term. One of the first things you can do is take a look at online savings account.
Now, if you want a guarantee that your money is not going to go anywhere, while generating a little bit of return, there are online high‑yield savings accounts that fit well into that. As long as you keep the principal below $250,000, you’ll be covered by FDIC insurance.
There are a number of rules to that. There is different FDIC insurance that applies whether you are owning it jointly with another person, whether it’s a IRA account versus an individual account. These are across each of the institutions. You can have $250,000 of coverage at each of the high‑yield online savings accounts.
The idea is you can just deposit your money and walk away knowing that it will be there when you’re ready to cash out. It’s a great short‑term investment in terms of security.
There’s a small amount of interest rates that will be paid out on that. Now, interest rates are very low, and because they’re low, it means that you won’t earn a lot of interest in the short time that you’ll have the money there.
I would say that, based on the interest rates, you are not keeping pace with inflation. What they’re paying out doesn’t even match with the increased cost of goods are overtime, but this is risk‑free, and you’ll never have to lose any sleep over that.
The other good thing about it is that there’s an incredible amount of liquidity in the online savings account. Essentially, when you invest in that, you can take the money right back out with no penalty, and most of them will allow a certain number of withdrawals over the course of a month.
You can’t use it really like a checking account, but they’ll permit you to take maybe even up to six withdrawals every month, which is a lot, I think. You can transfer even to the checking, but basically you can cash out your funds whenever you want. That’s a great way to think about using this fund as just immediately accessible, I guess.
What you’re going to miss out on is, of course, high returns. It’s just not going to be possible with that. You’re going to be trading off for a smaller amount of return for this liquidity, but an online savings account is a good place to go. Now, the next level of that is to think about certificates of deposits or CDs.
CDs are basically deposits with banks. They can have various lengths. You can go three, six months, a year, five years, and depending on how long your investment horizon is, you can select which term will work best for you, paying slightly more than the online savings accounts.
Again, you’ll have great security over that, but what you trade off is a penalty for liquidity. If you need to bring your money out sooner than the maturity of that CD, you typically have to pay a penalty. You won’t lose all of the interest, but you may lose anywhere between three months to 50 percent off of what you have made off of that.
That’s definitely something to consider because I would look at CD as more of a, I wouldn’t say a long‑term investment, but a mid‑term investment for your money.
Finally, before we take a break, within the bank world, you might think about a money market account.
Now, a money market account is basically an investment that’s equivalent to CDs in terms of their yield. Many times, the money market accounts have a lot of the bells and whistles of savings account or a checking account ‑‑ you can get an ATM, checks, and deposits slips.
Basically, the amount that you get is not based on the length of term. Obviously, the longer you hold it there, the more money you’ll get, but it’s really based on the amount of money that you have, putting it in for five years or something like that.
Again, you have increased liquidity. Is there a slight risk with the money market account?
Victor: Theoretically, the answer is yes, but most people don’t lose any money ever with the money market account. They’re typically very, very secure. Those are the first three ‑‑ online savings account, CDs, and money market accounts. I think a lot of people know those.
When we come back from the break, I’m going to share with you three more ideas on short‑term investments and things you can do with your money, and maybe you haven’t considered these. Let’s get to a break. When we come back, we’ll go to the three next best short‑term investments. We’ll be right back.
Victor: All right, everybody. Welcome back. We are talking about the six best short‑term investments that people can do with their money. I told you a little bit about my Thanksgiving and people trying to pick my brain on what to do with this money.
The first three we went over were an online savings account, CDs, and money markets. Now, I’ve got three other ideals for you. One of them I think might surprise you. I’ll save that one for last. [laughs] One thing you can do is you can do a short‑term bond fund.
Now, this is an interesting concept. We include these in the portfolios that we have. I’ll have all of the disclaimer about no guarantees of better return on any of these securities so that we stay on the right side of the ethics stuff with it.
The idea behind a short‑term bond fund is usually it’s a form of a product, typically a mutual fund, that is managed by a professional money manager. The idea on it is that it’s meant to return money in the short term.
One of the ones that we used is got a sub‑name to it like a one or two‑year real return, but the idea that it’s really been designed to optimize returns just in the first couple of years in just a short‑term investment.
Now, all of the caveats come along with this type of a mutual fund. The actual value of the fund could go up or down. The amount that it pays out is not guaranteed.
Because bonds do offer payout on debt ‑‑ that’s basically what the bond is ‑‑ you can get a higher yield than in a money market or a savings account. You’ve flipped around the investment.
Instead of giving people money that they can lend out, you get the smaller percentage because they have to lend it out at a higher rate than they pay you. That would be a deposit. You are on the lending side where you are receiving the interests. You’re getting a slightly higher yield.
It’s going to pay out stuff on a fluctuating basis based on interest rates, the bonds that are purchased, things like that. There is a an opportunity to get some money back on a one or two‑year basis if you’re willing to take a little bit more risk on that the actual value of the bond itself will decrease as interest rates change.
That’s a chance. The next one, number five off of that, are Treasury Inflation‑Protected Securities, or what we call TIPS. What these are are government bonds. They are indexed to inflation.
The interest rate that these TIPS pay is fixed, but the underlying value of it rises with inflation basically measured on CPI, or the consumer price index.
Let’s illustrate this hypothetically. You might only get a half of a percent in interest paid twice a year, because bonds pay twice a year every six months. Over the course of the five years, the value of the bond might increase two and a half percent per year because inflation is increasing.
At the end of that period, the end result is that your initial investment will be worth as much as when you first invested it in terms of it’s protected against inflation. The dollar amount is higher. Does this make sense?
It makes the dollar amounts higher. Because it’s been indexed for inflation, your purchasing power remains equal as what you had five years ago, plus the interest that you’ve made.
You can always buy TIPS directly from the government at treasurydirect.gov, I think it is. Because the interest is taxable, most investors prefer to invest in a TIPS ETF or a mutual fund, basically a collection of those.
If you hold them long enough, the actual increase in value will be capital gains even though the interest that it pays out is ordinary income. You might think about a five‑year TIPS purchase with some of this money if you don’t need within your five‑year period.
If you purchased a mutual fund, well, it will increase in value. You get a little bit more liquidity than you will by actually owning the security. Now, the last one ‑‑ it’s my most interesting one ‑‑ thing you can do is actually use that money as a micro‑lending for cash back rewards on credit cards.
This is pretty interesting. The rewards that are available for sign‑up bonuses are extremely lucrative. You have to have a certain amount of spending in a short period of time in order to earn them.
If you get 55,000 points in there at about one percent each, that might be $550 worth of money immediately on your investment as long as you hit the minimum amount. Sometimes, it’s $5,000 of spending within three months or $10,000 of spending.
You already have the bank. You’ve got the $65,000 sitting there. You can pay off these credit cards immediately at the end of the month and basically be able to get that out.
Let’s illustrate this. There’s one out there called the Chase Sapphire Preferred. They’ve got a sign‑up bonus of about 50,000 points. That’s worth $500 ‑‑ because it’s about one percent of that ‑‑ if you spend $4,000 within the first three months.
Now, they have an annual fee on that. It’s 95 bucks. It’s waived for the first year. You can earn this bonus without paying anything on it so far.
You’re going to want to use this money spending on stuff that you already were spending on before ‑‑ groceries, gas monthly bills, basically anything that you are going to pay with your other credit card, you do with the sign‑up bonus.
You pay it off immediately at the end of the month, so you avoid any interest. There are other ways that you can spend those $50,000 points. You can use it as cash. That’s worth cash.
You could book up to $625 in air travel. That’s more than enough for a round‑trip flight. You can turn those $50,000 into gift cards. That is essentially the cash. You’re going to want to take a look at that as a way to have a short‑term investment.
After you’ve met the minimum spending requirements, you can go ahead and closeout that card and try it again with a different card and rear in those bonuses. You can have this rotating one.
My favorite provider of advice for credit card reward stuff, I live vicariously through this guy. He’s somebody called the Points Guy. The Points Guy creates a website where he shows you how he’s utilizing his mileage points to travel and all those crazy stuff.
Now, to understand the deal, you go to the website. He’s got the advertisers for the credit card companies. If you click through on the links, he gets a percentage of the amount of credit cards that he opens up or helps people open up.
That’s how he’s making money and having all these credit cards to fly around, do crazy stuff. He takes some awesome trips. If you just want take a look at how he visits the inside of lounges and all that crazy stuff, I totally recommend it.
Victor: We have taken up the first two segments just on my six short‑term investments. When we come back, I’m going to speed through the seven common holes in your retirement plan.
We won’t have a lot of time to spend on it. We’re going to go a minute per hole going in.
Stick with us. When we come back from the break, I do want to talk about the seven common holes in your financial retirement plan. We’ll be right back after this break.
Victor: Welcome back. We have had a lot of fun today so far taking about six short‑term investments to put your money, all a result of my Thanksgiving experience with having people at my ear about what they should be doing with their money and their planning.
I got to turn that around on them. They asked me for my advice in short‑term investments, because nobody wants to wait to make any money.
I got to turn around and say, “What are you doing with the financial planning, your retirement planning?” and be able to poke holes in that. Most people have a plan with holes.
Let’s go through the seven holes that we commonly see on them. You can use this as a barometer in your own lives. You can take a listen to these and write them down.
If you had to grade these from A to F, where you would be, because what you really need in your life is all As ‑‑ this is a time to perform in school. You need all As.
If you figure out that you don’t have As and A‑pluses in this area, you need to be working to correct that. You could have some good grades. Be falling asleep in class to some of those other ones. I’m going to be like teacher and say, “Wake up and pay attention.”
The first one, for me, even for people that are in retirement, have to do with emergency savings. You’d be shocked about how people have not planned for the use of their money in a short‑term for emergency savings.
You’re going to want to be looking at anywhere between three to six months of available liquid cash resources. This number can climb in financial planning theory when you are dual income, single income, still earning, if you’ve got kids, that type of stuff.
For you in retirement, if you’re listening to this, three to six months of cash available to meet your monthly expenses is a good idea. Again, you don’t want to be coming out of the market in a particular need to raise cash.
If you have kids that are still working, grandkids that are starting out, they’re going to want to look closer to six to nine months of those expenses and have that as an emergency fund, again, depending on whether or not there is a sole wage‑earner, the bread winner, or multiple on there.
If one of them loses their job, the other person is going to earn the money. If there’s only one person making money, and that person loses their job or get sick, then it becomes a problem. You do want to take a look at having that.
Again, those short‑term investments that we talked about, the highly liquid ones are probably good places for that to be. The next one after that is what I call a straying asset allocation. I have often reviewed people’s investment statements, taking a look at what they’re invested in.
In fact, a recent client comes to mind where she had set up a particular allocation within her investments. When we review how she was actually invested ‑‑ because these things perform different ways ‑‑ it didn’t match the allocation. She was too top‑heavy in one area and not enough in another area for good diversification.
There were other issues about not actually been diversified, which is a whole other discussion. This straying asset allocation problem really comes about, because too many people take to heart. They set it and forget it passive investment style.
It’s nice not to be actively managing it, but the diversified portfolio really is a balanced portfolio. What you want to make sure is that you have right percentages of the things that you need to own. You could have a hodgepodge of stuff that you just randomly selected.
We didn’t keep things on that path, if that was the idea. If it’s too much of a hodgepodge ‑‑ it’s not really smartly done ‑‑ you’re going to have to make sure that you get that diversification.
A couple of ways you can cure that problem. You can get half way there by thinking about a target date fund. This is less effective for people in retirement, because that target date fund tends to be, in my opinion, improperly weighted towards fixed income and bonds.
If you look at a target date that might be 15 or 20 years down the road, the manager of that money is actually going to keep the allocation accurate for where you need to be on your course of retirement. That’s like a good safety net to catch.
It’s not really what I would consider to be best diversification, but you can do that. You’re going to have to watch out, because I actually look for a client on two different…We were helping them manage their 403(b). We were managing other stuff for them.
When we looked at the allocations that were available inside of that, what you found was there were two target date funds with exactly the same date of maturity. It’s in 2050 or 2055. The expense ratios were completely different.
One was over one percent, one‑and‑half percent. The other was less than 0.08. Same conceptual idea about what the fund manager is going to be doing but hugely different fees, which gets me to the next retirement hole, which is paying too much in investment fees.
Most people have no idea how much they’re paying. I’ve had lots of shows on this in the past. Most people believe they’re not paying anything from their investments, which I would challenge them. How do you think that that company has got real estate, an office, and pens that they want to give away to you and pay for dinner?
They’re making money somehow. They only thought that it was the $30 maybe on their annual statement fee. The hidden cost, they’re inside mutual funds, expense ratios, trading cost, plus advisory fees, it usually adds up to a few percentage points per year.
That would be OK if they were paying for higher returns than an average. If you look at any of the evidence on this, you’ll figure out really quickly that active management…You just can’t beat the market.
There are very discreet ways that you can edge out a slight advantage, but you’re not going to crush it and certainly not to the extent of three percent or more in fees per year. You want to be taking a look at making sure that you are not paying high management or performance fees.
One of the things you can do is go to Morningstar and put in things like mutual funds to try to figure out that out. There is a recent report that was put together by a company that wants to sell you robo‑advising. I don’t really believe in that portion of it.
If you go, I think, to personal capital and you look at their advisor fee report, you’re going to get a good sense of what the largest organizations are doing with their fees, the ones with the big logos and taking out all the advertisement during football time.
Next after that is holding up to too much company stock. What I’ve seen a lot is that people will receive money in the form of stock for a company that they worked on for 30 or 40 years. They’ll have a big belief in that company. Of course, that company kept them employed for all of that time.
When you actually take a look at it, you see that’s way too weighted in that area. You’ve got too much waiting in that. It’s one of the most dangerous investment moves that you can make.
If anything was going to happen to the employer, not only you might lose your job, if you’re still working, but a good percentage of your nest egg at the same time.
Make It Last is all about ensuring your nest egg goes around as long you are. One of the things that you want to do is probably cap that at 10 to15 percent even if you’re still working on that. You’re going to have to pay taxes, but I liken that to having gone to the casino.
You’ve got a big pile of chips there. They want to keep some of those chips for you to take them off the table, but there’s a risk that they’ll take them all away from you if you keep betting with them.
We’ll let them take a few of those chips so that we can take the rest off the table and cash them in. We do want to make sure that we’re getting out of highly concentrated positions in company stock.
Three more, really quickly. One is a lack of estate planning. If you just have a will and a power of attorney and you haven’t revisited in the last 5 to 10 years, that’s a problem. It’s a problem, because things could’ve fallen out of alignment.
It’s a problem because if those are the only three documents, you don’t have a comprehensive estate plan. You just paid for a bunch of paper where they replaced your name at the top and your kids’ names in the middle.
What you really need is a comprehensive plan with somebody that focuses on comprehensive planning. Related to that is a failure to consider long‑term care expenses. Not just in terms of buying insurance for long‑term care, which is one step, but also thinking about what would happen to you as you get older, if somebody gets sick and has to go to the nursing home.
Beyond the long‑term care insurance policy, what risk of that is to your personal home? What risk of that is to your other assets? How does it affect the quality of life of the healthy spouse, especially if you start to lose some of that money being paid out to the nursing home in terms of income? You want to take a look at that.
Finally, not only making a retirement calculation but revisiting it on a regular basis. Retirement planning is a dynamic concept. The planning is about making changes and not just a set‑it‑and‑forget‑it‑and‑never‑look‑at‑it‑again.
It’s part of the reason why you would hire an advisor to help you with retirement planning so that you had somebody else who’s a professional looking at this with you on a regular basis.
Those are the seven things. Let’s go real quick ‑‑ emergency savings, straying asset allocation, high investment fees, too much company stock, not having good estate planning, failure to do long‑term care planning, and the retirement calculation. Those are the seven.
I am out of time for today. [laughs] I want to thank you for joining me with Make It Last. We’re here every Saturday, putting out the best show that we can to help you with your retirement planning, both in the legal and the financial side. If you like what you hear, please share this with a friend.
Let them know that it’s something if you listen to it, you get a lot of value from it. If it’s something that you do like and you want other people to like it, one of the best things you can do is go on to iTunes and give it a high rating and let other people know about it. Apple will promote it to other folks, “Hey, you might want to listen to this, too.”
Victor: This has been Make It Last this Saturday. We will join you every Saturday. Make It Last, helping you keep your legal ducks in a row and your financial nest egg secure. We’ll catch you next time. Bye‑bye.
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