It’s finally happening people! It’s my 3rd year of retirement and I’m starting to plan for withdrawing from my portfolio…probably in my 4th year of retirement. Like you’re surprised I enjoy planning ahead 😉 .
So I looked over my 100+ pages of notes that I wrote when planning how I would approach FIRE. I knew what I had to do, but actually doing it is a different matter 🙂 .
I just found my digital notebook with all my research into Financial Independence🤑. It's like 100 pages of notes with every possible step and potential eventuality I could think of🤓…it's almost like I prepared a lot for this or something🤣. pic.twitter.com/HO6EZuhKMp
— A Purple Life (@APurpleLifeBlog) February 1, 2023
My feelings were similar to how I felt before doing my first Roth IRA Conversion – nervous I would fuck it up 🙂 . I haven’t written about this in detail on the blog before, but the first time I invested in a Traditional IRA I did it wrong – I pushed an incorrect button and lost out on those hundreds of dollars of tax savings for a year. So my nerves aren’t completely unjustified. One wrong move has financial consequences. As for when I’ll write a post about that experience – I happily will when I can figure out how to make it more than 2 sentences in a helpful way 🙂 .
Anyway, despite my preparation for withdrawing from my investments, I wanted to make sure I wasn’t forgetting something, so my Mom suggested that I chat with her financial advisor at Vanguard. Despite my distrust of self-proclaimed financial advisors who are not fiduciaries, I was down for this plan for several reasons – and not just the fact that I was the one that encouraged and then helped her move her investments to Vanguard 🙂 . I’m comfortable with Vanguard because:
- Vanguard advisors are fiduciaries, which means that they legally have to put your financial well-being above their own when making recommendations
- Vanguard, unlike any other investment company, is a co-op. The owners of their funds are the actual owners of the company so there is no conflict of interest like at other investment firms
- As a result of their co-op model, Vanguard is able to pass all subsequent savings onto us, the owners of the company, which results in low expense ratios, which are obviously key when you want to keep your money working for you
So I was down to chat! However, if my Mom hadn’t suggested this I was planning to talk with a fee only advisor instead (the next best option 🙂 ).
All that to say, I chatted with her advisor for about 15 minutes and he confirmed that my thinking was correct *phew.* However, he also introduced a new option that I had previously dismissed as an answer to “Where should I park my annual spending?”
As I mentioned in the post Show Me The Money: All My Financial Info & Answering Y’all’s Questions, I currently keep my cash in 3 places:
- Credit Union Checking Account (for everyday expenses)
- Ally High-Yield Savings Account (to keep most of my cash cushion making money for me)
- Charles Schwab Investor Checking Account (for free global ATM withdrawals)
As of this writing, Ally’s High-Yield Savings Account returns 3.6%. I was originally planning to transfer my annual spending amount to Ally after withdrawing it from my portfolio. However, this financial advisor suggested that I consider using Vanguard’s Federal Money Market Account (VMFXX), which is currently returning 4.5%.
Interestingly, every time I withdraw dividends (or when I sell stocks from my portfolio), they go into this Money Market Account at Vanguard anyway – it’s just done behind the scenes quickly before being deposited into my bank account. I don’t see it, but it’s happening anyway.
Taking this advice would allow me to eliminate the need for Ally, which has been a great option for me, but does have restrictions such as a max of 6 transactions per month, that make it impossible to use as my main account. It would also give me a slightly higher return, but one that’s so negligible and obviously directly related with how much cash I keep in this account that I wasn’t sure if it was worth it.
Neither option has any type of payment delay, but a money market account is obviously not a bank account, it’s an investment account and has all the risks of those, such as not being FDIC insured up to $250K like a bank account such as Ally. VMFXX also has a minimum starting balance of $3,000, which isn’t a problem for me since I’m planning to withdraw my full annual amount of $23K+ at once, but it’s something to consider. Ally doesn’t have minimum starting balance requirements.
Conclusion?
So I’m torn. One of the things I enjoy about this blog is that we’re all just here trying to figure our financial shit out. I’ve never claimed to be an expert at, well…anything 🙂 . I’m here to learn as well. So feel free to let me know what you think below. Do you think I should keep using Ally’s savings account or switch to Vanguard’s money market account? Am I forgetting a pro or con to either? Obviously when I make a decision, I’ll let y’all know and explain why, in case it helps anyone in the future. Thank you for being here 🙂 .
Do you use high-yield savings or money market accounts? Which is your preference and why?
This decision is all about how you feel about risk, I think. Keeping your money at Ally is a good idea because of the FDIC insurance; you need to live on this money so you can never go without it. That’s why the FDIC was created. If you were still working and if you didn’t need the money within the next couple of years taking the risk of keeping it in VMFXX would be ok because you could work a couple more years to replace the money.
While runs on banks (like what happened at SVB over the weekend) are bad they are also a good reminder to factor in risk in all financial decisions. The risk that either Vanguard or Ally would fail or have cash flow problems is very low but never zero. And the difference in the interest rate is less than 1%. So this decision is how comfortable you are with risk.
Yeah – this would be money I use that year instead of having it sit around so I’m just trying to weigh what makes the most sense of me. SVB has been an interesting event to see unfold – the fact that the CEO successfully lobbied the government to decrease regulations on his bank only for us to see exactly why those regulations are important blew my mind.
We’ve had an account at Citibank for over 10 years. They have a savings account (linked to checking) that gives us close to 4% interest. Also, they have bank accounts that let you withdraw money all over the world without paying a fee. Customer service is top notch. They closed all branches in Boston where we live, but no problem, money can be withdrawn without fees at thousands of ATMs. They have great services like free checks, mailing you foreign currency at home with no fee, mailing your ATM card for free anywhere in the world, etc. We simply love them!
That’s awesome you’ve had a great experience with them 🙂 .
Go with the money market.
How did that statement make you feel? Nervous, excited, annoyed, vindicated? Sometimes making a decision and seeing how you respond to it can be one way of gauging your feelings about it.
Questions I’d be asking are things like: does this make me significantly financially better off? Is it more flexible? Does it match my needs in current year? How much do I care about it not being protected by the FDIC? Is it insured up to a different amount? How easy is it to change if I decide it’s not working for me? How difficult is it to change accounts?
My advice is to take your time with it to let new pros/cons come to you. You won’t make a bad decision, as both are solid options. So be comfortable with whichever makes most sense to you then go for it.
I feel…meh haha. That’s a great tactic and fantastic questions to ask though! Thank you 🙂 .
Thank you for being transparent. Glad to know I’m not alone in making investing errors. I inadvertently had some uninvested cash sitting in my Fidelity core account aka SPAXX (Fidelity Government Money Market Fund). I decided to leave it there. Three days ago, when I checked, the interest rate was 4.23%. No, it’s not FDIC insured, but thankfully covered by SIPC (Securities Investor Protection Corporation).
After taking your time and reviewing all of the pros/cons, I’m sure you’ll make the correct decision Purple.
Of course! You are definitely not alone 🙂 . Thank you for reading!
That’s funny that you’re writing about this right now, Purple – I’m in an almost identical position and have been thinking about the same thing. Almost all our investments are at Vanguard and right now, I keep a year’s worth of expenses in an Ally savings account. I have a small portion moved over to our Schwab checking account every month like a paycheck. And like you, I’ve been eyeing up VMFXX as an alternative to Ally.
I also had the same concerns as you about FDIC, but as long as it’s in the money market account, it would be protected by SIPC. If it were to be sitting in cash there, it wouldn’t be covered, which is pretty unusual for most folks.
Eliminating that 6-limit withdrawal limitation would be nice too (although Ally is still waiving any fees for that right now).
The one downside that I see is that I haven’t figured out a way to automate the transfers out. Right now, I have a recurring transfer scheduled in Ally to automatically move to our checking at the beginning of every month. It works well and I don’t have to think about it. But with the Vanguard solution, I’d have to do this manually. It’s not the end of the world, but it’s still something I’d have to take a few minutes to do every month.
Right now, I have about 6 months of this year’s annual spending parked at Schwab in U.S. Treasuries just to squeeze a little more juice of out the return. But when that matures in a few months, I might move everything to Vanguard instead of back to Ally.
Good luck on your decision – keep us posted! 🙂
I came here to comment on SIPC but you beat me to it.
Cash in a money market is protected up to $250,000 and the total protection is $500,000 (cash plus investments), per account. So if you have more than $500,000 in one account at Vanguard AND you are worried about them going bankrupt (what SIPC and FDIC protects against), then open a 2d or 3rd account.
Actually on your suggestion of adding a 2nd and 3rd account, to my surprise, the protection is per depositor. Not per account. The person can double check on that but that is what I learned.
Thanks for making me dig deeper! So it turns out to be quite complicated.
If you split your taxable accounts to get more SIPC coverage, that won’t work.
If however you have a Roth IRA, Traditional IRA, 401K and a taxable account, they are EACH covered up to $500,000.
Also if you are married and have joint accounts, that doubles the protection.
The key phrase is “SIPC protection of customers with multiple accounts is determined by “separate capacity.” ”
https://www.sipc.org/for-investors/investors-with-multiple-accounts
Awesome additions!! Thank you both 🙂 .
Same page 🙂 . Good to know about Ally waiving fees for additional withdrawals right now – I didn’t know that. Good point about having to manually transfer money from Vanguard. That would be an additional small hassle. I’ll definitely keep y’all posted and please do the same! I’m curious what you decide 🙂 .
Any chance you can share snippets from your notes? Be curious to see what thoughts and ideas you had
“So I looked over my 100+ pages of notes that I wrote when planning how I would approach FIRE. I knew what I had to do, but actually doing it is a different matter 🙂 .”
Otherwise, the extra account with Ally probably isn’t my preference since you have SIPC insurance (covers 250k securities, 250k cash) but your call
I’m honored you’re curious 🙂 . It’s all on my blog in various posts already, but releasing the whole thing together is basically a book and I’m currently too lazy to make my notes presentable for public consumption and they wouldn’t make sense to others unedited sadly. Good call on the pros/cons.
If you were doing it today, I’d agree with the above comments – best return (by a little bit) is in a money market account fund at a brokerage, including Vanguard, Schwab or Fidelity. Nearly-as-good return at Ally, CIT, other banks, etc but subject to a monthly transaction limit. It’s really your call on what’s more convenient to you. You/we have multiple good options!
That said, I’m just speaking for right now: the current money market fund rate being paid by Vanguard, Schwab or Fidelity is variable. It sounds like you won’t be doing this fund locating for a year, so, who’s paying what then, is likely to be different. You’ll have to see what’s up at that time and decide accordingly.
Great call out about the variable return 🙂 . I’ll definitely check the updated rates at both Vanguard and Ally in a year before pulling the trigger.
I am torn myself. I have opted to use them both. I keep my emergency fund in the saving account and the rest of my cash in the money market fund.
Interesting! I hadn’t considered both as an option, but that’s a great compromise 🙂 .
Perfect timing for this post – I have been wanting to re-establish an emergency fund and have been considering doing so with Ally (starting a new “bucket” in an existing account). But given the higher interest rate & the ease of use, after reading your post I opened a MM account with Vanguard again*. [Although I was surprised by the MM expense ratios compared to my other (index) funds!]
* Until the interest rates tanked, I had a Vanguard MM fund for years.
I’m so happy it was well timed 🙂 ! ER is a good point. Definitely more than my other funds while still being less than other investments companies, BUT I should factor that into my return for sure. Good catch.
Goldman Sachs – Marcus account also has a pretty high interest rate. But, I’m interested in the Vanguard MM account you mentioned in the article and I may look at adding money there. But, the recent bank issues has definitely given me cause for pause on moving money!
Hi, the 2 sides if fI podcast spoke about Marcus in an episode. One of the hosts opened a marcus account due to a hugh rate and then had an AWFUL time trying to withdrawal money! So he ended up moving his cash back to a credit union. Just adding this info in as food for thought.
Uh oh – good to know! Thank you for the additional info 🙂 .
That’s interesting – I hadn’t heard of that account before.
You travel hack, so obviously are willing to trade some complexity for the right reward. Maybe bank account bonuses are the right strategy. You’ll get MUCH more in new account bonuses.
I’ve done new bank bonuses before, but I’m too lazy to do them now haha 🙂 . The ROI for international first class is way higher so I still pursue that.
There is no substitute for cash in the bank. A money market investment cannot pay bills. If you wanted to have, say, 5 years of expenses in cash to cover a massive bear market and the peace of mind allocation, then maybe 3 years in cash and 2 in the money market. But money market is an investment and rates can go down and 0.9% (at the moment) isn’t even that much a difference. Even if it was, cash flow is everything. I can’t believe an advisor is advising this.
Just a cautionary note on Marcus – you cannot login internationally. Even with VPN. this was a huge issue for us and we are now finally Marcus free.
Good to know!! Thank you.
t-bill ladder with your monthly amount, $2k, maturing each month? locks in high 4% for a bit longer.
Would you consider an Ally checking account? For some it might defeat the purpose of keeping separate savings, but to me it’s a nice companion. I can access money if need be and I use mine to distribute and access certain sums of money easier, without having to worry about the number of transactions. Maybe you can transfer money monthly from your savings and then use the checking account to make your daily transactions or online transfers, without worrying about transaction limitations. I currently use mine to pay CC bills, invest, and transfer to my everyday debit card.