HELP! Need $170,000 Financial Planning Advice

[needadvice]

I have $170,000 to be used for all my expenses during 5 years of school and am looking for a safe, hands-free place to invest it. I have worked out my budget for the next 5 years and this money should be enough to cover my expenses if it grows above inflation. I am not interested in purchasing real estate, owning a business, or managing a large stock portfolio, so I would be grateful for any ideas regarding the best way to invest this money for the next 5 years. I will need to be able to withdraw 20% of the money each year to cover my expenses. Money-market savings accounts and certificates of deposit do not appear to have high enough interest rates to be viable options. The only option that I have found so far are Treasury Inflation-Protected Securities (TIPS) and Vanguard Inflation-Protected Securities (VIPSX) looks to be the best TIPS, but I don’t know enough about inflation, diversification or investing to know if putting the entire $170,000 in a TIPS for 5 years is the best option. I would greatly appreciate any financial planning advice regarding my situation. If you could map out the specific investment vehicles or sketch a composite portfolio for the $170,000 I would be very thankful. This would be easier for me if I was investing for the long term, but my 5 year window, expense requirements, and the current inflation outlook and bear market make my situation very confusing. Thanks for your help.

[gijoe9]

You can't live on 34k a year? I know tuition is harsh (canadian here) but what is the break down of your expenses? Housing cost food ETC... School costs Tuition books ETC do you have an income part of the year? If you can drop us a few more details maybe we can come up with some stuff you have not considered. TIPS Sounds interesting.

[Airelon]

Well, I'm not a licensed financial planner, nor am I an investment adviser. But when ones find out this is what I do for a living? They usually ask advice. As I always tell folks when they are first starting out?

The very, very first rule:

Never risk any money within any investment in which you cannot afford to lose every single dime.

[gijoe9]

Originally Posted by Airelon

Never risk any money within any investment in which you cannot afford to lose every single dime.

Amen to that.


That said if you do not understand TIPS stay away.

[Fredledingue]

I would say part of TIPS, part corporate bond.

[aquaswim47]

Although you are going to need this money over 5 years, since it is not being spent tomorrow, it is my opinion that you can take a little risk with it. Not much, however. The following portfolio is highly conservative in nature and should do okay. More importantly, the TIPS investments also carry a risk of loss due to interest rate risk. If interest rates rise rapidly, you will see a loss in your portfolio!

Total Asset Allocation in $170K portfolio:

7.71% stocks; 15.68% bonds; 76.61% cash

Here's a portfolio that I would consider investing in if I had that money to pay for something like engineering school:

$45,000 in Savings at FNBODirect = 3.5%
$15,000 in an AmTrust 1 year CD = 4.15%
$15,000 in an OnBank 2 year CD = 4.3%
$15,000 in an Discover Bank 3 year CD = 4.6%
$15,000 in an E-Loan 4 year CD = 4.8%
Contribute $5,000 to I-Bonds; it's money that absolutely cannot be withdrawn "for any reason" for a minimum of one year. It's thus highly illiquid thus I indicated only to put $5,000 towards it at TreasuryDirect.gov.
$10,000 in 5 year TIPS

Source: BankRate.com

$25,000 in FASIX = 20% stocks; 50% bonds; 30% money-market
$20,000 in VASIX = 25% stocks; 65% bonds; 10% cash
$5,000 in VALIX = 62% stocks; 23% bonds; 15% cash

Total Asset Allocation in $50K portfolio:

26.2% Stocks; 53.3% bonds; 20.5% cash


The portfolio suggested above is a suggested portfolio only and you are solely responsible for your investing/savings decision. I am merely suggesting it in the general sense and don't know the specifics of your situation. With $170,000, it might be best to sit down with a Certified Financial Planner; a fee-only planner who can sit with you and discuss a plan. This, as any other investment, has a risk of loss.

The markets have an incredibly good valuation, but it's important not to have too much greed drive your decisions. Chasing yield on the TIPS may not be the best strategy since if interest rates rise, the prices of your bonds will fall.

Good luck and happy investing. Investing is a lifelong process, thus it's a good idea to get your feet wet and have a little bit of risk. It is my hope that the above portfolio is highly conservative, but there is no guarantee of that. Wish you well.

[needadvice]

Wow, this was by far the most detailed reply that I have received to any of my posts. It has been very education, enlightening, and helpful. I thank you very much. I need to start making moves next month, so if you have any other thoughts or ideas before that time, they would be greatly appreciated. A question regarding purchasing the mutual funds that you suggested. Do I buy them directly from the mutual fund provider? Also, it looks like you suggested that I buy a TIPS directly from the government and not through Vanguard Inflation-Protected Securities (VIPSX), is this the best move? Once again, thanks for your advice.

[aquaswim47]

Originally Posted by needadvice

Wow, this was by far the most detailed reply that I have received to any of my posts. It has been very education, enlightening, and helpful. I thank you very much. I need to start making moves next month, so if you have any other thoughts or ideas before that time, they would be greatly appreciated. A question regarding purchasing the mutual funds that you suggested. Do I buy them directly from the mutual fund provider? Also, it looks like you suggested that I buy a TIPS directly from the government and not through Vanguard Inflation-Protected Securities (VIPSX), is this the best move? Once again, thanks for your advice.

I try to provide detailed information. I tried to come up with a conservative portfolio since I noticed that 1) you really need this money to be secure, but 2) that you are a conservative investor. Since it is a lot of money, I beg you to sit down with a CFP and discuss your plans.

The CPA or CFP might believe that the method I discuss is too complex and that it's best to get 5% in a CD. You can find a CFP near you by going to NAPFA.org. It's under the tab of consumer information. You may also want to consider one of Dave Ramsey's Endorsed Local Providers. You really want objective advice and you really cannot get that with a free consultation. I would set up an appointment and pay for 2 hours time to make sure you get everything in order.

Again, paying for a consultation is better than getting a free one!

Going to a professional and paying $200 to $500 is worth the weight in gold. You have all this money and you want to make sure it's safe, but you are spending it over a 5 year period, thus it doesn't have the same risk requirement as money you would spend today (i.e. you use the cash to buy a house outright because your a retiree who cannot have a mortgage is an example).

You want to buy mutual funds directly from the mutual fund provider. So that means, you would invest $25,000 in FASIX at Fidelity, $20,000 in Vanguard with VASIX, and $5,000 in VALIX with Scottrade. I'm hoping that's low risk since it hopefully has less than 8% equities. Fidelity has a six-month hold on VALIX or you get charged a significant fee of $75, which is why to consider Scottrade.

I think buying a 5 year TIPS has two benefits: 1) you don't pay an expense ratio or commission if you buy directly from TreasuryDirect.gov and 2) you are buying individual issues and thus the volatility should decrease as you near the term of your bonds. Owning a 5 year TIPS mutual fund means that since the fund is constantly rolling it over to get it to a 5 year maturity means that you will or might have the same risk as a 5 year government bond. The fact that it is an inflation-protected bond may provide additional benefits and reduce volatility.

I also suggest I-Bonds. You now can only invest $5,000 thru TreasuryDirect and $5,000 thru your bank to buy paper I-Bonds. The current rate is 4.875% for the first 6 months if you buy by October 31st. The major problem is the fixed rate is 0% so that means if inflation where to go away, you would have a rate of around 2.5% average for the year. Also, if you hold less than 5 years, you will forfeit the last three months interest. Lastly, you CANNOT take the money out FOR ANY REASON, thus it is illiquid. Because they are illiquid non-marketable bonds, however, they aren't subject to interest rate risk. It is one of the very few illiquid investments that will protect your principal. In years 1 thru 5, you can take the money out as needed. If you find it to be a good product and hold it a couple of years, selling at the penalty won't be a big deal particularly if you sell them in a time period when the last three months interest have been very low.


Good luck!