Money in a tax free money market mut fun, seeking principal protection, current monthly income, better method?

Question

I am looking to retain ownership of principal and no loss to principal value of a million dollars. I also seek current monthly income that could either be tax free or not, but preferably tax free. Wondering if there is a better method than the tax-free money market mutual fund to achieve higher return as rates are low, but still have principal and most importantly current monthly income. I am not looking for an annuity, again ownership of principal. Thank you in advance.

Answer 1

You could buy individual AAA rated municipal bonds that yield over 4% tax-free.  You might be able to find them through an online trading account like Fidelity or Etrade or one of the other discount brokers.  Otherwise, you could use a full service broker in the state where you live.  If you live in a state where there is an income tax, you could buy that state's bonds and be both state and federal tax free.

With that much money and with rates being so low and your money being subject to the ravages of inflation, you really ought to extend the risk on at least a part of your money.  For example, you could buy preferred stocks (which are less risky than common stocks, but not riskless) with dividend yields of over 7% on some highly rated companies.  Many sell for around $25 per share and the share price doesn not fluctuate that much.  You could buy a basket of different preferreds.  There are mutual funds that specialize in both preferreds and muni bonds, if you can't get comfortable picking them yourself.

Standard and Poor's publishes a newsletter called Outlook(available at most libraries) that lists companies with strong ratings that have increased their dividends each year.  Many utility companies have dividends over 3% and raise them frequently as they benefit from increased use of water, electricity and gas and phone usage.  I like to invest in energy companies as a hedge against my utility bills.  Dividends have the advantage of the lower tax rate than CD's and interest on bonds.  Finally, you could invest in the highest grade corporate bonds and get a better rate than in a money market with little risk as long as you stick to AAA rated companies like Johnson and Johnson.

With a million dollars, a tax free money market rate of less than 2% is only going to return $20,000 per year.  You could easily increase that to $50,000 tax free with muni bonds.  Start slow at first, maybe just invest $50-100k and see how it works out.

Answer 2

Check bankrate.com for the highest rate for 1 year CD's.  Then figure out which pays you more, tax-free money market account or CD's.  

tax free yield divided by (100 minus your tax bracket) = taxable equivalent yield

Taxable yield X (100 minus your tax bracket) = tax free yield.

If you find the CD's offer a higher after tax yield, to get monthly income from them, first put the money in a money market account, then once each month, invest 1/12 of the money in a 1 year CD (or 1/24th in a 2 year CD which ever has highest interest).  During the first year, you will get less monthly income as the money market part is used.  But after 1 year, as each CD becomes due (one per month) take the interest as your monthly income and reinvest the principal in another 1 yer CD.

Answer 3

You don't say how old you are but you seem to have your mind made up:  no risk to principal!  Of course, inflation is running higher than MM interest rates so by being "safe" you are guaranteed to lose buying power.

My best advise is to call Vanguard, Fidelity or the like (no-load mutual fund companies).  I'm partial to the first because I have had excellent service from them but you have many choices.  They can help you put together a simple, balanced portfolio that will give you superior income and still give you some inflation protection.  There is no charge for this at your portfolio level and their costs are very, very low.