Create Your Own Pension With Immediate Annuities

People love pensions because of the security that they offer - a steady, guaranteed stream of income that you can’t outlive. Another way to achieve this reliability is to buy an immediate annuity, also called an income annuity. It lets you convert a lump-sum payment into a regular stream of income payments that can last for your lifetime, or the longer of you or your spouse’s lifetime.

Although there are many factors that come into play, very generally immediate annuities pay about 6-7% of the lump-sum back to you every year. So if you bought a $500,000 lifetime annuity, you might get $35,000 every year until you die. You can also play with the quotes at ImmediateAnnuities.com for different ages and survivorship scenarios.

This is much higher than the “safe withdrawal rate” of 4% that many financial folks quote as the amount of your nest egg that you can spend each each without running out of money before expiring. 4% of $500,000 is only $20,000 per year. More info on safe withdrawal rates can be found here.

But remember, with an annuity the $500,000 is gone. If you live another 50 years or just one, after you die there is nothing left to inherit. Also, annuity providers are like life insurance companies in that you really need to make sure they are stable enough that they’ll be around to pay you! Look for ratings from A.M. Best Company, Moody?s, and Standard & Poor?s.

The last article I mentioned when talking about how pensions will be gone soon also suggested annuities as a possible reform to current retirement plans:

If defined benefits are on their last legs, then it would make sense to try to incorporate their best features into 401(k)’s. The drawback to 401(k)’s, remember, is that people are imperfect savers. They don’t save enough, they don’t invest wisely what they do save and they don’t know what to do with their money once they are free to withdraw it. Quite often, they spend it.

Here there is much the government could do. For instance, it could require that a portion of 401(k) accounts be set aside in a lifelong annuity, with all the security of a pension. Behavioral economists like Richard Thaler have demonstrated that you can change people’s behavior even without mandatory rules. For instance, by making a high contribution rate the “default option” for employees, they would tend to deduct (and save) more from their paychecks. If you make an annuity a prominent choice, more people will convert their accounts into annuities.

If you think of pensions as annuities, you can use this to get a feel for how much those pensions are worth! For example, let’s say you’re a teacher and about to retire with a pension paying 70% of the average of your highest 3 years of income. If that number is $50,000, then you’ll be receiving $35,000 every year. If you refer back a few paragraphs, you’ll remember that’s the same as having saved up half a million dollars! Now you see how pensions are so expensive.

Although I’m still far from retiring, I have started considering using part of my savings to by an immediate annuity in order to cover my most basic spending needs and reduce the risk of retiring early in the event of a turbulent stock market. It would be almost like buying my own Social Security safety net But I’ll also need to learn more about how this plan should affect my current asset allocation. Some papers that are on my (really, really, long) reading list can be found here.

(There are also probably some tax considerations that I’m ignoring here.)

Posted in Insurance, Retirement | 20 Comments »

Why Pensions Are Soon To Be History

It’s been a few years since the United Airlines debacle where they unloaded their pensions onto the government-created Pension Benefit Guaranty Corp, but the future of pensions are still a huge issue for many people. If you’re interested in more background, try perusing this New York Times article called The End of Pensions. It’s long, but I found it fascinating.

First, some background:

It happened that 401(k)’s, which were authorized by a change in the tax code in 1978 and which began to blossom in the early 1980’s, coincided with a great upswing in the stock market. It is possible that they helped to cause the upswing. In any case, Americans’ experience with 401(k)’s in the first two decades of their existence was sufficiently rosy that few people shed tears over the slow demise of pension plans or were even aware of how significantly pensions and 401(k)’s differed. But 401(k)’s were intended to be a supplement to pensions, not a substitute.

I find it very ironic that companies are failing to provide for their employee’s retirements, just like individuals are now accused of failing to provide for their own retirements. Simply put, these corporations used rosy predictions to justify not saving enough money!

Given that pension promises do not come due for years, it is hardly surprising that corporate executives and state legislators have found it easier to pay off unions with benefits tomorrow rather than with wages today. Since the benefits were insured, union leaders did not much care if the obligations proved excessive. During the previous decade especially, when it seemed that every pension promise could be fulfilled by a rising stock market, employers either recklessly overpromised or recklessly underprovided - or both - for the commitments they made.

Gee, that sounds kind of familiar. You could partially blame the government for their lax accounting and lack of good funding requirements. Still, if the government provided the bullet the companies pulled the trigger:

For example, United Airlines did not make contributions to any of its four employee plans between 2000 and 2002, when it was heading into Chapter 11, and made minimal contributions in 2003. Even more surprisingly, in 2002, after two of its jets had been turned into weapons in the Sept. 11 disaster, and when the airline industry was pleading for emergency relief from Congress, United granted a 40 percent increase in pension benefits for its 23,000 ground employees.

So what does the future hold?

In 1980, about 40 percent of the jobs in the private sector offered pensions; now only 20 percent do. The trend is probably irreversible, because it feeds on itself. Hewlett Packard, for instance, must compete with younger companies like Dell Computer that do not offer traditional pensions.

And what about state and city governments? Chances are that they’re underfunded too.

Because public pension benefits are legally inviolable, default is not an option. Sooner or later, taxpayers will be required to put up the money (or governments will be forced to borrow the money and tax a later generation to pay the interest).

Thus, unions can bargain for virtually any level of benefits without regard to the state’s ability, or its willingness, to fund them… At least in the private sphere, there are rules - ineffectual rules maybe, but rules - that require companies to fund. In the public sector, legislatures wary of raising taxes to pay for the benefits that they legislate can simply pass the buck to the future.

Yet another form of focusing on short-term gain and not looking at the big picture. Sigh.

Posted in Retirement | 12 Comments »

How Do You Account For Interest From Savings Bonds or Treasury Bills and Bonds On Your Tax Return Forms?

If you earned any interest from Treasury Bills or Savings Bonds last year, and are subject to local or state income taxes, be sure note it on your tax returns! Interest from federal debt obligations such as these are subject to federal tax, but not state or local income taxes. Here are some tips and examples to make sure you file correctly and get all the money that’s owed to you.

First of all, you have to manually go and print our your 1099-INT forms from TreasuryDirect.gov, if that’s how you bought or sold the securities. Go to Manage Direct > Manage My Taxes > Year. It’s not elegant, but at least they provide it… (You can also try calling 1-800-943-6864 to request one be sent to you.) On your federal return, there should be nothing specific to note as they are fully taxable at that level.

If you use online tax software for your state/local income taxes, look very carefully for a question that asks if you need to make any adjustments to your federal income numbers, or if you have any interest from government obligations or debt. If you go to an accountant and they don’t know how to do it - fire them

To find out the applicable lines on the paper forms, first locate your appropriate state tax form in PDF format. It might be a good idea to start with the most general all-encompassing form. Then run a search in Adobe Acrobat for “bonds” or “subtractions” or “adjustments”. You are basically looking for the area where you make adjustments to the federal income figure. You may be referred to a supplemental form. Visually skim for keywords like government bonds, savings bonds, treasuries, or treasury bonds.

California Example

1. I’ll start with Form 540 [pdf], the most general form.
2. See per the Form 540 instructions that “If there are differences between your Federal and California income or deductions, complete Schedule CA (540) - California Adjustments
3. Per the Schedule CA instructions: On line 8 enter in column B (Subtractions) any interest from U.S. Treasury bills, notes, and bonds (and also most U.S. Savings Bonds).
4. Finish the schedule, transfer the appropriate value to line 14 of Form 540, and now your California taxable income should ignore any government debt interest.

Oregon Example

1. I started with Form 40.
2. In the “Subtractions” area, I see Line 16 - “Interest from U.S. government, such as Series EE, HH, and I bonds”. This is where I put in the interest from T-Bills as well.

Posted in Savings Bonds, Treasury Bills and Bonds | 9 Comments »

How To Compare Treasury Bill Returns Directly To Savings Account Rates

I’ve been getting a flurry of questions about comparing Treasury Bills to bank accounts. Here is a step-by-step walkthrough to make it from the weekly auction results to a bank’s quoted APY interest rate.

1. From the recent auction results page, grab the investment rate (not discount rate). This is APR. It is based on a 365-day year and reflects the actual annualized rate to maturity. Here’s the most recent snapshot:

Let’s take the 28-day T-Bill, which has an APR of 5.247%, or 0.05247.

(If you want to learn more about how the other terms and the relationship between “Discount rate” and “Investment rate”, please see this post on T-Bill terms.)

2. Convert it to APY. APY, as opposed to APR, takes into account the effect of compounding interest. It’s also a higher number, which is why most banks just tell you the APY. An approximate way to convert it to APY is using this formula:

APY = (1 + (APR/PeriodsInAYear) )^(PeriodsInAYear) - 1

For our case, the APR is 0.05247 and PeriodsInAYear= 365/28. Solving for APY, you get 0.05376, or 5.376% APY.

This is only a approximation because you can’t actually reinvest all of the money continuously. For example, you might get back $1,000 from your first T-Bill, but can only reinvest $995 of it in the next T-Bill. The rest must sit in a savings account at best. For 28-day T-Bills, you can get a more accurate number using my 28-Day Treasury Bill APY Calculator.

Assuming a 4.89% APR/5% APY savings account, you’d get 5.367% APY, a bit less. If you don’t pay state or local income taxes, you can stop here. As you can see, it’s very competitive with online savings accounts.

3. Find Your Tax-Equivalent Rate. Treasury Bills are exempt from state and local taxes. Thus if you are subject to such atrocities ;), then your T-Bill rate is actually better than that of a fully-taxable bank account. This is one use for my tax-equivalent yield calculator. You’ll need to know your tax rates and whether you itemize taxes.

Let’s use the 5.367% number from Step 2 and my own tax situation. For 2007, I’ll probably be in the 28% bracket federally, 9% for state, and will itemize. For this specific T-Bill, my final number that I should use to compare to banks is 5.898% APY. Your number will probably vary.

Yes, there are a lot of variables to get the conversion just right. Sorry!

If you are interested in investing in Treasury Bills, please also see my visual guide to building a T-Bill ladder to maximize your returns and also liquidity.

Posted in Treasury Bills and Bonds | 24 Comments »

Citibank Ultimate Savings Account - $50 Bonus

Citibank has a new online savings account called the Ultimate Savings account. (It’s not the ultimate savings account.) It varies from their e-Savings Account noted in my online savings account comparison in the following ways:

1. You don’t need a linked checking account; It can stand alone, unlike the e-Savings Account.
2. The interest rate is slightly lower, at 4.65% APY instead of 4.75%.

There is no minimum balance and no monthly fees. Citibank is offering a $50 bonus for signing up if have never had any bank accounts with them before. Since you only get one, also consider this $100 bonus for opening a Citi e-Savings + Checking combo with at least $5,000.

Also note that it Citibank usually does perform a hard credit inquiry with account openings (for no good reason). So it may or may not be worth it. I used to have a Citi checking account, so I’m out. Thanks Tanyetta for the tip. Fine print:

$50 Offer is only available for first-time Citibank deposit account customers, and will be paid only once to any individual. Persons who currently have or at any time have had a deposit account at Citibank (or any of its predecessor banks) are not eligible. To qualify for this offer you must apply for and open a new Ultimate Savings Account by 04/30/2007. $50 will be credited to your Ultimate Savings Account within 90 days from the end of the statement period in which your account was opened.

Posted in Deals & Offers | 11 Comments »

Links About Saving, Debt, and Lending

NCN shares a list of things he actually does to save money. Maybe you can pick up a few ideas.

If you are looking for more about online lending at Prosper, Lazy Man is starting his Prosper Week. He started by addressing some parts of my Prosper Review.

Mighty Bargain Hunter has a multiple-part review of the book Debt Is Slavery and how stuff will imprison you. It’s amazing how much junk I’ve accumulated after living in a house with a huge basement.

Got a crockpot? Trent shares some of his essential recipes. Am I the only person who doesn’t have one of these things? I don’t think I can handle any more kitchen appliances. Maybe if I throw away that old sandwich-maker…

Sometimes trying to save money can be tricky. Have you seen those places that offer $100 brake repair and a lifetime warranty? If you couldn’t smell the cow dung from a mile away, Golbguru has shared his own experience. Hint: It’s never just $100. That reminds me, our Nissan is nearing 100,000 miles as well.

Posted in General | 4 Comments »

$25 or $75 Bonus For Opening HSBC Checking Account

HSBC Bank is offering a $25 or $75 bonus for opening one of two types of checking accounts with them. This may be a good complement to their 6% HSBC Direct account (my opening review). Your two options:

Interest Checking ($75 bonus)
- To avoid fees, you need to keep $3,000 in combined balances, or simulate direct deposit with an ACH transfer from another bank each month. HSBC Direct balances count toward the $3,000 requirement!

Free Checking ($25 bonus)
- No monthly fees, no minimum balance, no direct deposit requirement
- You do need some sort of checking activity every 3 months, or you’ll be knocked down to Basic Banking checking, which does have fees.

Both offer:
- HSBC Debit MasterCard? Card with PayPassTM
- Free first order of selected wallet-style checks
- Check-writing ability, and thus the ability to link to banks like ING Direct, Emigrant Direct, etc.
- ATM access to money and free Online Billpay
- Possible branch access to people who live near one.
- Instant Transfers between Checking and HSBC Direct accounts, and thus possibly avoid HSBC’s longer transfer times.

I recommend opening an Interest Checking account first, and either keeping $3k in HSBC Direct or simulating direct deposit for a while to grab the bigger $75 bonus, and then after 6 months downgrade back to the Free Checking account. I did this myself with a previous bonus offer with no problems. Fine print:

HSBC reserves the right to charge your checking account an amount equal to the bonus if your checking account does not remain open for at least 180 days. Limited to one (1) cash bonus per household. Offers expire April 10, 2007 and cannot be combined with any other offers.

Posted in General | 35 Comments »

Are We Saving Too Much For Retirement?

One contrarian article deserves another. This one, courtesy of the New York Times is titled “Save Less and Still Retire With Enough”. The main premise is that contrary to popular opinion, most of us are actually doing just fine money-wise. All this talk of impending consumerism-drive doom? It’s a big scam by the investment companies, who have a vested interested in us keeping big balances in our brokerage accounts.

The more realistic amount could be as little as half the typical recommendation made by Fidelity, Vanguard or any number of other financial institutions. For a middle-income couple, that could mean trading $400,000 in retirement money for about $3,000 a year more during prime working years to spend on education or home improvement. ?For a middle-class household, that?s a lot of money,? said Laurence J. Kotlikoff, a Boston University economics professor, who is on the forefront of this research into spending and savings, and is selling his own retirement calculator.

You can read more of Mr. Kotlikoff’s research here. Here is an excerpt from one paper:

TIAA-CREF is recommending a retirement ?salary replacement? target equal to 80 percent of annual labor earnings. For our stylized household [couple earning $125,000 with two kids], this equals $100,000… This is 78.0 percent higher than the appropriate target!

In other words, his “appropriate” target replacement salary is actually only about 45% of their previous income, or $56,000, for a couple earning $125,000 a year. This is due to a number of factors which aren’t explained in detail, but factor in that their house should be paid off and the kids will be gone during retirement. However, I saw no mention of the increased costs from health insurance and other medical costs that increase with age. He also expects the their investments to earn 9% a year (6% real, 3% inflation), which is a bit optimistic to me.

In the end, of course some people are saving too much. I mean, if you’re eating Cup o’ Ramen ten times a week and checking your million-dollar bank balance on the free computers at the public library, sure, maybe you need to loosen up a bit. I’ve never met any of these people, have you? There’s no way that they outnumber the ones that are saving too little.

And how do we even know what will be too much or too little? Every retirement calculator is simply trying to predict the future. Note the huge “we are not liable if this is wrong” disclaimers. I’ve read a lot of articles that also support the fact that the stock market will only earn about 6% annually in the future, and similar ones that say that the long-term expected returns of stocks will be the same as bonds. Japan’s stock market has been in the dumps for more than decade.

A possible personal solution?
I’m trying to come up with what I call the Core Lifestyle, which essentially includes everything that I would personally really want out of life - things like a job that I value, a small house in a specific area, a skiing season pass, and an international trip every year. The idea that this should require a certain amount of money, for example $100,000 a year. (Yes, I am aware that this is a lot of money. I’m also living in a big West Coast city…) My feeling is that after a certain point, any extra spending just ends up on “stuff” like nice cars, gadgets, brand name clothes, and bigger houses that really won’t improve my quality of life.

Anything above that threshold goes into investments. This is opposite of some plans which suggest socking away a specific percentage of your gross income each year. Then, as our wealth builds, whenever it is that we have enough to cut back on working, we will! It could be 39, 45, or 52. There would be no “squandering of youth”. We’ll live well now, and then we’ll live even better after that. Sounds easy, doesn’t it? We’ll see how it goes

Do you feel like you’re depriving yourself now to save for retirement? If your retirement planner told you that you could save less, would you do it?

Posted in Frugal Living, Retirement | 22 Comments »

My 401k to IRA Rollover Decision Process

A couple of people have asked me about rolling over their 401(k) plans into an IRA. I actually went through the decision process myself back in the middle of 2005, but that was 500 posts ago so nobody can find it anymore! Here they are:

Part 1 - Stay put with old 401k?
Part 2 - Maybe Rollover into Fidelity?
Part 3 - Vanguard Options
Part 4 - Final Decision

The main differences between then and now is that (1) there are more low-cost ETF options available now that cover just about every asset class, and (2) more brokers that offer cheap or free trades. If you are rolling over a lump sum and don’t plan to trade very much, ETFs may present a lower-cost alternative. Still, if I had to make the decision again today I think I would end up at the same conclusion. My expense ratios are already low, and I make enough trades that the net cost difference is minimal. I continue to be very happy with the competent and helpful support from Vanguard. My portfolio has since changed from their Target Retirement funds to something slightly more complicated.

I should add that I also opened a Self-Employed 401k with Fidelity last year, and have also been very satisfied with their customer service. I still wish they would expand their Spartan index fund lineup, though, and if Vanguard offered a low-cost Self-Employed 401k option I would have went with them.

Posted in Retirement | 11 Comments »

Washington Mutual Adds Some Fees… And Freebies Too

As of May 1, 2007, WaMu is rearranging their fee schedule slightly. American Express Traveler’s Checks, ATM Mini-Statements, Money Orders, and Notary signatures will be free. However, it appears that using a non-WaMu ATM will now incur a $2 fee on their end. This works out great for me as I never use non-WaMu ATMs, but getting free money orders and notary signatures will save me a few bucks here and there. Look for a flyer in your most recent bank statement.

Also see: WaMu Free Checking and 5% APY Savings Account Review

Posted in Banking | 8 Comments »

Are Homes Actually A Horrible Investment?

Here’s an article specifically designed to push people’s buttons: Why Your Home Is Not the Investment You Think It Is from the Wall Street Journal. It questions the plan of many people to use their home as part of their retirement strategy, and points to economic studies that show that houses often (1) cost more than most people make when they sell and (2) rarely match the long-term returns of stocks or other investments.

Did you know:

• If you bought a house in Los Angeles in 1990, just as the real-estate market turned downward, you would have had to wait a decade for your home’s value to return to what you paid.
• If you bought in Rochester, N.Y., in 1980, you would have seen only a mediocre 4% annual growth for the next 25 years.
• If you bought in Dallas in 1986, as the oil boom went bust, your home wouldn’t have appreciated at all before 1998.

Some other excepts:

When most homeowners figure their returns, they don’t do much more than subtract the price they paid from the price they received. Then they come up with a really big return because they paid only a 10% or 20% down payment. So they figure they made a huge “profit.”

But they didn’t. That’s because the costs of owning a home — buying it with a long-term mortgage and then paying taxes on it, insuring it, repairing it, renovating it — sap most of what most homeowners think they make in price appreciation.

I can agree with this. This overestimation of returns happens all the time in all forms of investing.

Boom market or bust, home buying has so many extra costs — from upfront “points” paid to a lender to title insurance and appraisal fees — that over the first five to seven years, a renter who invests the equivalent of a down payment in stocks could easily do better overall than a house buyer. Compounding that problem: Most homeowners move within seven years.

As the ownership timeline stretches out to 15, 20 or 30 years, however, the buyer will almost certainly do better than the renter, especially given the tax benefits of paying mortgage interest over traditional rent and the big rebate when the owner finally sells.

There is always a break-even point. Recently, it has been as little as one year, but now it may be 5 - 10 years. This will vary by location, as some areas are still going up, while other are well on their way down.

Whether you come out ahead depends on where and when you buy. Even cash buyers might be surprised to see that they can’t be assured of making a profit.

“The Costs of Home Ownership” table is a simplified rundown on a typical single-family home — a house that was bought for $50,000 in 1977 — based on national appreciation rates as reported by the Office of Federal Housing Enterprise Oversight (OFHEO). Included are modest estimates of other home-owning costs (not adjusted for inflation). To keep things simple, there are no transaction costs, no additional borrowing to finance improvements and no refinancing costs, all of which would drive the expenses even higher. It’s not a pretty picture.

I’m sorry, but this analysis seems a bit biased. Let me count the ways:

1. The interest rate is at 8.72%. While it may have started out that high, there’s no way they wouldn’t have refinanced within those 30 years and significantly lower their rates.
2. $3,000 a year for taxes and insurance my be reasonable, but still feels on the high side for a house that went from $50k to $300k. That 6% to 1% annually, with an average of about 4% due to exponential growth. Maybe if they lived in Texas.
3. $150,000 for “major repairs” on top of $1,800 every year in “maintenance costs”? My parents have lived in their house for almost twenty years and have replaced their heater once. That’s it. What costs $150k to fix on a $300k house?

While their point is made that you need to take in all housing costs, if you take out the $150,000 bombshell, both scenarios made a decent profit.

In the end, I think it’s good that people take a critical look at some of their housing assumptions. Maybe they are a worse investment than some people think. As for me, my basic opinions remain the same:

Regarding buy-vs-rent, I think people should run several different possible scenarios and make a decision based on their specific geographic location and potential need to move. You may need to stay in the house for 5-10 years to making buying profitable. Most calculators rely on several hard-to-predict factors, including the annual appreciation of the property, the annual rising of rent, and the assumed return on the money that is not put towards a mortgage, i.e. when you “rent and invest the difference.” Keep in mind that you’ll need a 10+ year horizon to guarantee that you’ll get 8% or whatever in stocks. If you’ll need the money sooner, you should probably keep it in more conservative investments and lower your projections. Try a bunch of different combinations of numbers to see how they affect the results.

Finally, housing prices are not as efficient as stocks. It is quite possible to negotiate with buyers and be picky in this buyer’s market. I don’t have to pull the trigger unless I see both a house and a price that I like.

Posted in Real Estate | 42 Comments »

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Posted in General | No Comments »

Pet Food Recall Involving Many Popular Brands

If you’re a pet owner and buy canned or “wet” food, you should read about the Menu Foods recall after reports of kidney failure and deaths. According to this CNN/AP article, Menu Foods makes pet foods for all these companies from just two factories:

Iams; Eukanuba; America’s Choice; Preferred Pets; Authority; Award; Best Choice; Big Bet; Big Red; Bloom; Bruiser; Cadillac; Companion; Demoulas Market Basket; Fine Feline Cat; Shep Dog; Food Lion; Giant Companion; Great Choice; Hannaford; Hill Country Fare; Hy-Vee; Key Food; Laura Lynn; Loving Meals; Main Choice; Mixables; Nutriplan; Nutro Max; Nutro Natural Choice; Nutro; Ol’Roy; Paws; Pet Essentials; Pet Pride; President’s Choice; Price Chopper; Priority; Publix; Roche Bros; Save-A-Lot; Schnucks; Springsfield Pride; Sprout; Stater Bros; Total Pet; My True Friend; Western Family; White Rose; Winn Dixie and Your Pet.

This reminds me of my list of acceptable and unacceptable generic products. So much stuff is made at the same facility, it’s hard to figure out if you are actually getting better product by buying a brand name like Iams or Eukanuba. While the ingredients may be different, I would bet many of them are very, very similar. In this case, the recalled products were all made using the same wheat gluten.

While there are lots of good choices out there, we choose to buy Natural Balance dry food for our dog.

Posted in Frugal Living | 12 Comments »

Poll: What’s The Most You’ve Ever Spent On An Impulsive Purchase?

See, this is why I don’t go to the mall. Even though we don’t like pet stores and the associated puppy mills, we came perilously close to buying another puppy today. It looked very similar to this little dude (We already have a Cavalier).

(image from CuteOverload)

Impulsive means you woke up that morning without any plans to buy something, but by the end of the day you had it in your possession. Mine was probably a laptop that was “too cheap to pass up”. Leave the fun details in the comments

Posted in General | 40 Comments »

How To Build A Treasury Bill Ladder: A Visual Guide

So you’re interested in buying some Treasury Bills for the potentially higher returns, but aren’t exactly sure how to set it up. Well, this guide is for you! I’ve been laddering T-Bills for over a year now in order to maximize the profit out of my existing house downpayment savings and also my 0% balance transfer schemes.

Quick Facts

1. Treasury Bills are purchased at a discount and redeemed at the full par value. So for each $1,000 worth, you’ll pay ~$99x dollars upon issue and receive $1000 upon maturity.
2. Rates are set by auction, so you will not know your exact interest rate before you commit to buy. However, if you are in a high income-tax state the chances are very good that it will be better than similar savings accounts.
3. Auctions are held on Tuesdays, and the T-Bills both issue and mature on Thursdays.
4. You must schedule the purchase before Noon EST on the auction date (Tuesdays), otherwise you are pushed to next week.
5. The transfer of money to/from your bank account upon purchase/maturity is very timely. Thus, if one Treasury Bill matures (deposits $1,000) and another is issued on the same day (withdraws $995), your bank account will have a net positive $5 balance at the end of that day.

Visual Guide To Setting Up A Treasury Bill Ladder
Laddering is a method of purchasing that increases the liquidity of fixed term investments such as Treasury Bills. Imagine if you bought a T-Bill every week, and each one lasts for 4 weeks. After four weeks, you could simply use the proceeds of your first T-Bill to purchase your fifth T-Bill. The week after that, you could use the proceeds from your second T-Bill to purchase your 6th T-Bill, and so on forever. If you stopped buying T-Bills, you would get $1,000 back each week until all have matured.

Since each T-Bill has an investment minimum of $1,000, you would need to commit 4 x $1,000 = $4,000. If you don’t have enough, you can simply buy them at less frequent intervals. Below are four visual examples for buying them every month, every two weeks, and every week:

$1,000 Minimum - Buy a T-Bill Every Month
Assuming a discount value of $995:
Week #1: T-Bill #1 will be issued on Thursday (net taken from bank account: -$995)
Week #5: T-Bill #1 will mature (+$1,000) and T-Bill #2 will be issued (-$995) on Thursday (net: -$990)
(and so on…)

In some months, there may be a gap between the T-Bill maturing and the next one issuing, but you should never have more than $1,000 invested “outside” in T-Bills. However, you may have to wait up to 28 days for your money to come back to you.

$2,000 Minimum - Buy a T-Bill Every Other Week (Bi-Weekly)
Read the rest of this entry…

Posted in Treasury Bills and Bonds | 42 Comments »