Short term holding cell

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Topic Author
olevelo
Posts: 31
Joined: Fri Jun 12, 2015 3:55 pm

Short term holding cell

Post by olevelo »

I separated from the Air Force a couple months ago and received a not-insignificant separation pay that I have been working on various investment plans for. However, I just found out there's a greater than zero percent chance that I could be returned to active duty, and would subsequently have to pay back the separation pay. I could find out in about a month, but more than likely it will be at least October, and possibly longer. So now I'm trying to figure out what to do with the cash in the meantime. It would be nice if I could make a little interest on it, but will obviously need to pull it out in short notice (assuming I have to pay it back in a lump sum, which isn't guaranteed...but if I could get it back to them this year, that would solve my terrible tax issue in April!).

My first thought was stick it in a bond index fund, but looking at the charts, even over the short term it doesn't seem all that safe. Of course I'd love to make a 40% return on it while I have it, but anything significant would require a gamble. So at least a 2-3% return would be nice. Obviously the safe answer is keep it in cash, but that seems so wasteful!

Any ideas?
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ogd
Posts: 4876
Joined: Thu Jun 14, 2012 11:43 pm

Re: Short term holding cell

Post by ogd »

Savings account, 1% . Find one at http://depositaccounts.com.

It may seem like very little, but understand that market instruments only pay 0.1% for the kind of safety that you need. You have a 0.9% advantage vs the market within the exact parameters you're seeking, and this is rare. Why would you willingly give it up? It will take quite a bit of risk-taking to even get the same return with market instruments, let alone to get a significant advantage.
sharpjm
Posts: 657
Joined: Fri Feb 20, 2015 2:41 pm

Re: Short term holding cell

Post by sharpjm »

Getting a 2-3% return in 5-6 months is equivalent to 4% to 7.2% annual return - which is somewhere between the average stock and bond index returns. You already said bonds were too risky, let alone stocks. The best bet is to go to Ally, Synchrony, Ge Capital, or other online bank that offers 1% annual rate in their savings accounts. If your lump sum is greater than $250k, spread it out between multiple banks so you can be FDIC insured for all of it.

P.S. Thank you for your service. :sharebeer
Topic Author
olevelo
Posts: 31
Joined: Fri Jun 12, 2015 3:55 pm

Re: Short term holding cell

Post by olevelo »

Thanks! I said it "seems" like the bond index is risky but looking for input from others if that's the case. The high yield savings account does make sense...I just hate opening new accounts, especially when I don't plan on keeping them for very long! And when I said 2-3% return, I meant APR, not over the course of time...again, no idea how long it will be. If I had to put a bet on it, I don't think I'll be going back in and paying it back, but crazier things have happened. So I just don't want to be caught with my pants down! I was really hoping to get this money working for me long term, as I will have to pay it back in 25 years when I retire from the Reserves, but I'm obviously planning on having it grow quite a bit by then!
nordlead
Posts: 739
Joined: Thu Sep 12, 2013 9:09 am

Re: Short term holding cell

Post by nordlead »

Non-insignificant could be as small as 20k or as big as $200k or more. Either way, 2-3% APR over a 4-month period on $200k is ~$2000. The thing is, you could lose $2000 in those same three months too, even in bonds where everyone is expecting interest rates to rise. If you have to have the money, then a Savings account is the right choice.

I did a quick google, and if I read the right FAQ, you can't pay it back in lump sum, instead it comes out of your pay at a rate of 40% of pay, but you can increase that (possibly to 100% of each check).

You should figure out the actual repayment plan, and if you can live on 60% of your pay, then I'd just invest the separation pay now per normal.
Topic Author
olevelo
Posts: 31
Joined: Fri Jun 12, 2015 3:55 pm

Re: Short term holding cell

Post by olevelo »

It's about 100k. The 40% payback is when you have to pay it back due to collecting a Reserve retirement (which is the more likely scenario I face is 25 years). But in the situation I'm in...there isn't really any clear guidance, as it doesn't really happen very often. So I'm not sure how it would play out. I would prefer to just get it done. The taxes are the big issue. When they paid the lump sum, they withhold 25% for taxes. But when they recoup it, they recoup the whole amount, including the taxes withheld. The idea is that they recoup it pre-tax, so it's a wash. However, in the case of retirement, it's probably not, because by giving it to me now, I'm stuck paying 28% on all of it, and probably into the 33% bracket. In retirement, I expect I'd be in in the 25% bracket. Paying it back this year, in the same year, would make it a wash, but if it's not paid till next year....I haven't looked at the math because it hurts my head!
Topic Author
olevelo
Posts: 31
Joined: Fri Jun 12, 2015 3:55 pm

Re: Short term holding cell

Post by olevelo »

I changed my mind and I'm rolling the dice. I decided that even in the low chance I go back to active duty and have to pay the separation pay back, I'll have the option of paying it off over time. So with that, I'd rather be more aggressive and see what I can do with it, as well as have a starting point for long term growth. As I've mentioned elsewhere, I have a TSP and Roth IRA that along with my potential pensions (military and government civilian) are my primary retirement sources, so my taxable account is primarily for seeing what I can do.

So with that, so far what I've done is put 30% into the Fidelity Total Market Index, 25% into the USAA Science and Technology Fund (one of the top rated high-return tech funds), 15% into USAA California Bond Fund (I'm a California resident, at least if I don't end up back as active duty), and 10% in Fidelity Capital and Income Fund. I'm still trying to decide what to do with the rest. I'm sure I'll get scolded pretty badly on here, but hey, you only live once!
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