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Cash management strategies
Old 12-30-2011, 12:12 PM   #1
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Cash management strategies

I'm curious what other retirees are doing to manage the cash portion of their portfolio's. Obviously FDIC insured rates are extremely low and there is a concern of interest rates rising and eroding capital in bond funds. Bank MM's are paying .003% a year. CD's aren't paying much more and treasuries are worse. Some of the online banks pay more, i.e. Discover, Ally but some of the reviews aren't that great on their service. For the most part I've been playing it safe with the lower rates with FDIC insurance. I do have some GNMA & bond funds but I try to keep a short duration so I don't get hurt too bad when rates rise.
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Old 12-30-2011, 12:19 PM   #2
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I use Vanguard Short-Term Bond Index Fund.
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Old 12-30-2011, 12:40 PM   #3
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So Vanguard GNMA is up about 7.7% in the last year and about the same annually for the past 3 years. Even if it dropped by 5%, it would still beat CDs and high-yield savings accounts. If it dropped by 10% it would still beat investing in CDs for the past 3 years.
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Old 12-30-2011, 01:04 PM   #4
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I park my cash portion earning currently virtually earning nothing in a money market fund. But that's okay as for me the cash portion is for stability and immediate access and not for earning -- I let my other asset classes do that.
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Old 12-30-2011, 01:54 PM   #5
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I like sticking it underneath the mattress in bricks of $20 bills. It provides good lumbar support and I figure the money I save by not having to replace the mattress for a year or two more is more than I could possibly make sticking it money market fund, of short term CDs.
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Old 12-30-2011, 02:02 PM   #6
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Reinvest it when the market is down.
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Old 12-30-2011, 02:02 PM   #7
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Aside from the floating balance I maintain in my payment account, I have my cash in three buckets:

- An online savings account paying something close to 1% (about a third of the balance)
- A loose ladder of CDs that started out with original terms of 5 to 10 years (about 50%)
- More recently, I put the remainder of what had been in the online savings account into I bonds as a way to generate slightly higher yields in what amounts to a 1 year CD

The amount in the savngs account should handle just about any conceivable emergency. The rest of it I am comfy having sit in longer term instruments because if I were in a real "oh sh!t" circumstance I could break them early and pay the nominal early surrender penalty. In the meantime, that money earns several times what the online savings account pays.
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Old 12-30-2011, 02:25 PM   #8
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Quote:
Originally Posted by easysurfer View Post
I park my cash portion earning currently virtually earning nothing in a money market fund. But that's okay as for me the cash portion is for stability and immediate access and not for earning -- I let my other asset classes do that.
Same here.

Cash is not for "investing", IMHO. It's there to provide us with income, regardless of market flux, and removes most of the stress when the market takes a dive.

For us, it's the tool that keeps us from converting our possible paper losses to actual losses.

DW/me may be considered by many to currently have "too much cash" to cover our anticipated/budgeted expenses (me - 3 years; DW - 5 years), it works for us and lets us sleep well...
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Old 12-30-2011, 02:44 PM   #9
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My cash is in:

Discover Savings on-line account paying 1.05%
Capital one high interest checking paying 1.01% for the first year
I-Bonds just bought my $5K for 2011 and will buy $5K more next week
Thrift Savings Plan G Fund paying approx. 2.5%

I just found out that I can roll over from my IRA into the TSP G fund - will be doing that with my underperforming international fund from Vanguard.

We are at the point where we don't really need to grow our invested assets, we just need to avoid big losses. I am in the process of reducing our equity exposure to 20%.
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Old 12-30-2011, 02:55 PM   #10
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We use online accts w/ CapitalOne, Ally and ING for household, cars & boats, and general funds. I have found the customer service to be good on all accounts. Also, we use a sweep acct w/ VG for brokerage transactions- no return whatsoever.
Likewise we have Series I bonds over a year old which we can cash in. Prior to 5 years you lose 3 mo interest.
Not real keen on short term bond funds for cash. While we have these we don't treat them as cash. Look to the duration of the fund vs cash at 0 duration. Even holding for a year a ST fund can lose money if you may need it soon.
No real great answers here. Like many people we're holding about 15% in cash and feel it lowers volatility and helps us weather the storm.
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Old 12-30-2011, 03:06 PM   #11
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I am lucky enough to have a Government "G" Fund in the TSP to park my cash in.
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Old 12-30-2011, 03:16 PM   #12
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grumpy:I have also transferred part of my traditional IRA into the TSP "G" fund. You can't beat the G fund for a safe investment.
I also like the idea of opening up a few different online bank accounts with different banks. From what I can see they are all FDIC insured and pay over 3 times the interest on MM's then do the local banks or investment houses. I'm also guilty of holding too much cash. Obviously I want it to be safe but I want to earn at least a few bucks on it to offset inflation.
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Old 12-30-2011, 07:35 PM   #13
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So Vanguard GNMA is up about 7.7% in the last year and about the same annually for the past 3 years. Even if it dropped by 5%, it would still beat CDs and high-yield savings accounts. If it dropped by 10% it would still beat investing in CDs for the past 3 years.
Yep, I agree completely. My IRA is currently invested in a mix of Vanguard GNMA and Vanguard Wellesley. So I am heavy to bonds, but that is where I want to be right now, unless and until I see some evidence that interest rates are starting to rise. If that starts to happen, I'll look elsewhere, but until then, I'm pretty content staying right where I am. Beats the heck out of money market funds and CDs.
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Old 12-30-2011, 08:54 PM   #14
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In the old days, back when bank accounts, CDs, money markets and even checking accounts actually paid interest, I used to play the games I was forced to play to get as much interest as possible on cash. These days, however, it seems like playing that game is like winning at a loser's game. So, for the most part, I just keep spare cash in the checking account - no noticeable interest (hey, no 1099's either, heh, heh). I have access to my 401(k) and at 2 days notice if I need a chunk of cash, I just hop on-line and transfer to the checking acct. Yes, they keep 20% for the gummint, but it's quick and I do get over 2% right now in my stable value fund (whoooopieeee!)

DW and I did the I-bond thing this year as well, though I doubt I'll mess with that in 2012 since it will all be on-line and I like the bonds in my hot little hands.

Slightly off topic, but one reason to carefully manage cash is to keep inflation from ravaging your cash savings value. Realistically, right now, one could make a case for using some spare cash to purchase things they will need within the next few years and then store them - It's a PITA, but no one is likely to steal your extra bails of TP or industrial size cans of tuna, but you WILL equal inflation with such a strategy. AND, you don't get charged taxes on the gains!! Naturally, YMMV.
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Old 12-30-2011, 10:15 PM   #15
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During the first week of each year I withdraw the cash I plan to spend that year, and keep it in my local bricks-and-mortar bank. I also have some in Vanguard MM where it can be accessed conveniently for transactions. Neither of these has a good interest rate.

I do have substantial investments in the government "G Fund" that Grumpy, donheff, and others mentioned. This is a government bond fund that is guaranteed not to lose value. It is not available to the general public, since access to it within the TSP is part of the benefits package for government employees. I count this as part of my bond allocation. It earned 2.51% during the past 12 months.

I just can't bring myself to store cases of tuna fish and TP as koolau suggests. Closet space is at a premium!
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Old 12-30-2011, 11:02 PM   #16
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Slightly off topic, but one reason to carefully manage cash is to keep inflation from ravaging your cash savings value. Realistically, right now, one could make a case for using some spare cash to purchase things they will need within the next few years and then store them - It's a PITA, but no one is likely to steal your extra bails of TP or industrial size cans of tuna, but you WILL equal inflation with such a strategy. AND, you don't get charged taxes on the gains!! Naturally, YMMV.
You've just described Pierre Omidyar's strategy of keeping a storage warehouse full of food & household supplies near each of his homes. I'm talking several months' worth of each, and for someone of his net worth it probably includes other "security" equipment as well.

Inflation's been ravaging a lot less these last few years, and I'd rather have a 0.05% APY checking account today than the 10% APY checking account I had in 1982.
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Old 12-31-2011, 09:51 AM   #17
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It seems that the general consensus is to strategically spread cash holdings over online savings, CDs, short term index and government backed bonds. I don't believe anyone has appetite to buy physical gold bars and store them yet.

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Slightly off topic, but one reason to carefully manage cash is to keep inflation from ravaging your cash savings value. Realistically, right now, one could make a case for using some spare cash to purchase things they will need within the next few years and then store them - It's a PITA, but no one is likely to steal your extra bails of TP or industrial size cans of tuna, but you WILL equal inflation with such a strategy. AND, you don't get charged taxes on the gains!! Naturally, YMMV.
This is also what I thought. I already bought a Zoeller sump pump as a spare for my basement, with fittings installed and can be swapped in at the last minute notice. Also spent some money to have basic canning setup with a lot of mason jars and lids. One safe bet which hasn't been mentioned yet is hoarding the forever postage stamps. Its return rate already beats the best CDs in the past a couple of years.

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You've just described Pierre Omidyar's strategy of keeping a storage warehouse full of food & household supplies near each of his homes. I'm talking several months' worth of each, and for someone of his net worth it probably includes other "security" equipment as well.
This sounds like a mini version of the setup in movie "Blast from Past". He probably doesn't does have to worry about mutants from financial meltdown though.
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Old 12-31-2011, 09:59 AM   #18
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Keep my cash for expenses in a tax free MM fund and move each month's expenses into a tax free checking account at the beginning of each month. Oh....and $5k in my safe!
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Old 12-31-2011, 10:22 AM   #19
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Originally Posted by Koolau View Post

Slightly off topic, but one reason to carefully manage cash is to keep inflation from ravaging your cash savings value. Realistically, right now, one could make a case for using some spare cash to purchase things they will need within the next few years and then store them - It's a PITA, but no one is likely to steal your extra bails of TP or industrial size cans of tuna, but you WILL equal inflation with such a strategy. AND, you don't get charged taxes on the gains!! Naturally, YMMV.
I first read about this tactic years ago in the book "The Only Investment Guide You'll Ever Need" by Andrew Tobias. I think the author must have been a BogleHead even if they had not yet been invented. He noted that a famous multi-millionaire (back when a million dollars was worth something) got a better return on his mouthwash - which he bought by the case to get a big discount - than on his investment portfolio! As mentioned above, the discount return was also tax-free!!
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Old 12-31-2011, 10:32 AM   #20
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Like W2R I withdraw cash at the beginning of the year; I don't reinvest so the cash is a source of funds for the next year. It goes into a high yield savings account (Amex) and then quarterly I transfer to a credit union savings account paying .25%. The savings account feeds by checking account month.

In 2012, I'm assuming savings rates (a misnomer!) will stay the same. I'm going to try investing extra cash in short term CDs in my brokerage account where my retirement accounts reside as a way to generate a little more cash, other than what's paid in the sweep account.
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