Keeping Investment Cash Available

[Drake3287]

Sort of a hard question because everyone has a different situation but in my case I have a generous pension that we easily live off plus our house is paid for and we have medical/dental paid for by former employer.

I/we have 1 million in savings/investments including $300,000. in cash. Currently I have 2 $100,000. CD's paying around 2.50% and the remaining $100,000. in a Money Market account paying 1.5% which of course isn't locked in like a CD.

Is there an amount most people would recommend keeping fluid like in a Money Market? My thought was to roll this $100,000. Money Market into another CD and earn another 1% more. ($1,000. per year extra)

I don't like the idea of having all my cash being "locked in" but I figured that if I had each CD maturing at different time periods I'd always be within 4 or 5 month's of having one CD available. I also typically keep a few thousand in my checking account for emergencies or if something comes up I need to buy.

 

[mpeirce]

in a Money Market account paying 1.5% which of course isn't locked in like a CD.

Money market funds are easy to transfer money in and out of. So if you are going to hold significant money in one, it's not hard to zing it over to the one with the best return. Vanguard's Federal Money Market has a SEC yield of 1.93% right now. Their Prime Money Market is at 2.09.

Look at Schwab, Fidelity, etc. And also check out the banks - Cap 1 360 Money Market is at 1.85%.

 

[jazz4cash]

Just because it’s in a CD doesn’t mean you can’t get to it in case of an emergency. Choose a CD with a low penalty for early withdrawal and split the amount into several certificates if they don’t allow partial withdrawals. The easy access amount depends on your expense level. I’d try to keep the MM liquidity amount at 6 mos expenses. I might add a chunk for a major emergency repair but I have a HELOC instead.

 

[Another Reader]

Sort of a hard question because everyone has a different situation but in my case I have a generous pension that we easily live off plus our house is paid for and we have medical/dental paid for by former employer.

I/we have 1 million in savings/investments including $300,000. in cash. Currently I have 2 $100,000. CD's paying around 2.50% and the remaining $100,000. in a Money Market account paying 1.5% which of course isn't locked in like a CD.

Is there an amount most people would recommend keeping fluid like in a Money Market? My thought was to roll this $100,000. Money Market into another CD and earn another 1% more. ($1,000. per year extra)

I don't like the idea of having all my cash being "locked in" but I figured that if I had each CD maturing at different time periods I'd always be within 4 or 5 month's of having one CD available. I also typically keep a few thousand in my checking account for emergencies or if something comes up I need to buy.

Why do you want to have so much cash? Is there some dire emergency you anticipate happening? With guaranteed income, a paid off house and a comprehensive medical plan, thirty percent seems excessive.

I keep six figures in cash and short term instruments because I have rentals. Repairs, evictions, and many other expensive problems can show up and sometimes in multiples. I will increase my cash if I anticipate a buying opportunity. I also keep six months of total expenses in bricks and mortar banks, high yield savings and money market accounts. That money is part of the six figures. If I did not have the rentals, I would only have six months of much lower expenses in savings plus a few thousand in checking.

In addition, I hold around three years of RMD's for an inherited IRA in treasury money market funds, short term treasuries and laddered CD's. I don't want to sell when the market tanks to pay out RMD's.

However, total cash is a small percentage of net worth. I would not have 30 percent of my investments in cash. Money needs to work.

I'm more conservative than most here, but I think in your situation, I would have a lot less cash. Low living costs plus a strong pension and health insurance make you less vulnerable to the vicissitudes of the market.

 

[Dtail]

Why do you want to have so much cash? Is there some dire emergency you anticipate happening? With guaranteed income, a paid off house and a comprehensive medical plan, thirty percent seems excessive.

I keep six figures in cash and short term instruments because I have rentals. Repairs, evictions, and many other expensive problems can show up and sometimes in multiples. I will increase my cash if I anticipate a buying opportunity. I also keep six months of total expenses in bricks and mortar banks, high yield savings and money market accounts. That money is part of the six figures. If I did not have the rentals, I would only have six months of much lower expenses in savings plus a few thousand in checking.

In addition, I hold around three years of RMD's for an inherited IRA in treasury money market funds, short term treasuries and laddered CD's. I don't want to sell when the market tanks to pay out RMD's.

However, total cash is a small percentage of net worth. I would not have 30 percent of my investments in cash. Money needs to work.

I'm more conservative than most here, but I think in your situation, I would have a lot less cash. Low living costs plus a strong pension and health insurance make you less vulnerable to the vicissitudes of the market.

Well isn't 20% in CD's and thus can be a substitute for bonds in the non equity portion of his AA?

 

[Another Reader]

Well isn't 20% in CD's and thus can be a substitute for bonds in the non equity portion of his AA?

Not if if doesn't even match inflation. That's not an investment, that's nominal capital preservation.

I don't buy bonds directly. I have some held in Wellington and a small Wellesley holding. I have pensions, Social Security, guaranteed health insurance, and an inherited IRA that must be liquidated over time. I collect rent on mostly paid for rentals. I don't really need bonds.

With a guaranteed pension and health insurance plus a paid off house, a lower allocation to fixed income might make sense for the OP as well. Some cash to carry him through the rough markets and a focus on growth for much of the remaining money is how I would probably play this. Not 30 percent cash, however.

 

[sengsational]

Short bond ladder? If my allocation dictated that high cash percent, that's what I'd check out. You probably could do quite a bit better than CDs with similar (although uninsured) risk. And no, a short bond fund isn't the same!

 

[mrfeh]

Given your living expenses are covered by a pension, I don't understand why you would have 30% of your investments in CDs and savings accounts. Seems overly conservative.

 

[RAchip]

"Why do you want to have so much cash?"


I keep A LOT of cash (in MM mostly). Cash now produces interest of 2.16% for admiral shares at VGPMM. I know some people say cash is bad. I disagree. Especially now when you get a reasonable return while having near instant liquidity. Cash is king for me.

 

[pb4uski]

Well isn't 20% in CD's and thus can be a substitute for bonds in the non equity portion of his AA?

+1 ..... I view CDs as another type of fixed income and not cash... to me cash is money that can be immeditely accessed without any penalty... like money market funds and online savings accounts, other checking and savings accounts, etc.

 

[pb4uski]

"Why do you want to have so much cash?"


I keep A LOT of cash (in MM mostly). Cash now produces interest of 2.16% for admiral shares at VGPMM. I know some people say cash is bad. I disagree. Especially now when you get a reasonable return while having near instant liquidity. Cash is king for me.

VGPMM? Do you mean VMMXX... Vanguard Prime Money Market fund?

And the yield is 2.11%.... the minimum investment for Admiral shares that yield 2.17% is $5,000,000... or are you a high roller with over $5,000,000?

 

[Dtail]

+1 ..... I view CDs as another type of fixed income and not cash... to me cash is money that can be immeditely accessed without any penalty... like money market funds and online savings accounts, other checking and savings accounts, etc.

Yeah. Could be recency bias, but there appears to me to be somewhat of a shift away in various forums from bond funds (not individual bonds) for some CD's in the portfolio.
If one can build a ladder to stay above inflation, to me that's a win for this portion of the non equity AA.

 

[Drake3287]

Thanks for some of the suggestions and yes I knew that having that much cash would raise a few eyebrows. As you might have guessed I'm pretty financially conservative and I like the idea of always having that cash as a backup vs some of my other investments which can change quickly.

After retiring early I stopped investing new money into the market and simply built up my cash.

 

[copyright1997reloaded]

There is no reason why you can't chunk money into new CD's in increments. For instance, NASA FCU has a 15-month 3.25% CD special. Let's say you wanted to put $100K there, but were concerned that there was a small possibility of needing some of the money before the 15 months were up. You could simply open 4 $25K CD's or 5 $20K CD's or whatever to reduce your early withdraw exposure for the entire amount.

Also, there are institutions with 2.0%+ money market funds. Just yesterday, MySavingsDirect upped theirs to 2.25% and IncredibleBank to 2.02%.

If you have a lot of cash (which you do), you should be following closely this blog: https://www.depositaccounts.com/blog/

 

[pb4uski]

Some financial institutions allow partial withdrawals from a CD where if you need to withraw then the EWP is calculated on the amount withdrawn so multiple CDs are unnecessary.

 

[OldShooter]

Sort of a hard question because everyone has a different situation but in my case I have a generous pension that we easily live off plus our house is paid for and we have medical/dental paid for by former employer.

I/we have 1 million in savings/investments including $300,000. in cash. Currently I have 2 $100,000. CD's paying around 2.50% and the remaining $100,000. in a Money Market account paying 1.5% which of course isn't locked in like a CD.

Is there an amount most people would recommend keeping fluid like in a Money Market? My thought was to roll this $100,000. Money Market into another CD and earn another 1% more. ($1,000. per year extra)

I don't like the idea of having all my cash being "locked in" but I figured that if I had each CD maturing at different time periods I'd always be within 4 or 5 month's of having one CD available. I also typically keep a few thousand in my checking account for emergencies or if something comes up I need to buy.

Some thoughts:

1) What problem are you trying to solve? If you don't know where you are going, any road will get you there. Do you have an identifiable potential problem that would require you have $300K in ready cash? It seems to me that would be very unusual.

2) Focus on being "locked in" is really not where you should be. You are never locked in. Some investments, though, have cost penalties if you want to liquidate early. So if you can get enough additional return from less-liquid investments, you should not care if part of that additional return would be lost in an untimely (and likely improbable) liquidation.

3) If you really want liquidity with yield, look at govvies. Specifically, your MM$ would do better in T-bills or notes and these are highly liquid. My guess is that the actual probability of early liquidation is very low, to the point of really not worrying much about it. Buy them on the auction; don't pi$$ away your money by paying a govvie bond fund "manager" who is little more than an overpaid clerk.

 

[jjflyman]

Not everyone is comfortable risking too much in the stock market casino.
I actually keep more than 30% in cash/CD's/T-Bills/money market. I have enough to live comfortable for the rest of my life, I have no desire to risk it in another stock market crash. I had 40 years in the stock market, I don't need it anymore.

 

[OldShooter]

Not everyone is comfortable risking too much in the stock market casino.
I actually keep more than 30% in cash/CD's/T-Bills/money market. I have enough to live comfortable for the rest of my life, I have no desire to risk it in another stock market crash. I had 40 years in the stock market, I don't need it anymore.

I think you have proposed a false choice. There are alternatives to equities that are not "cash/CD's/T-Bills/money market." If "cash/CD's/T-Bills/money market" is what you choose, no problem there, but for others there are higher yields available at acceptable risk.

FWIW, I don't consider the stock market to be a casino, though many make it into one by being speculators. Viewed over decades, the stock market has delivered reliable returns that far exceed those of traditional fixed income investments. Focusing on low volatility rather than on actual risk is IMO hazardous to your wealth.

 

[pb4uski]

+1. In the long run the stock market is not a casino... anyone that thinks that it is doesn't understand stocks... it's just buying a small part of various businesses.

 

[Dtail]

+1. In the long run the stock market is not a casino... anyone that thinks that it is doesn't understand stocks... it's just buying a small part of various businesses.

+2
counting on a diversified AA to carry me through.

 

[jjflyman]

I think you have proposed a false choice. There are alternatives to equities that are not "cash/CD's/T-Bills/money market." If "cash/CD's/T-Bills/money market" is what you choose, no problem there, but for others there are higher yields available at acceptable risk.

FWIW, I don't consider the stock market to be a casino, though many make it into one by being speculators. Viewed over decades, the stock market has delivered reliable returns that far exceed those of traditional fixed income investments. Focusing on low volatility rather than on actual risk is IMO hazardous to your wealth.

Whatever you are comfortable with. The fact is it is estimated that only 54% of Americans are invested in the stock market, and 1/2 of those who do invest in the market have less than $40,000 in play.
These are the facts.
I have well over $40K invested, but I'm not comfortable putting 60-90% of my AA in to equities. If you are, good luck, but at some point the bottom will fall out.

 

[Lukeee]

+1. In the long run the stock market is not a casino... anyone that thinks that it is doesn't understand stocks... it's just buying a small part of various businesses.

I had a discussion with a couple of guys that strongly believed bitcoin, the stock market and the casino were all equally risky. They had all their ‘investible’ money in bitcoin

 

[pb4uski]

.... I have well over $40K invested, but I'm not comfortable putting 60-90% of my AA in to equities. If you are, good luck, but at some point the bottom will fall out.

I ran FIRECalc assuming a 50% permanent decrease in equities and it still works.... since that has never happened, I'm sleeping well.

 

[OldShooter]

Whatever you are comfortable with. The fact is it is estimated that only 54% of Americans are invested in the stock market, and 1/2 of those who do invest in the market have less than $40,000 in play.
These are the facts.
I have well over $40K invested, but I'm not comfortable putting 60-90% of my AA in to equities. If you are, good luck, but at some point the bottom will fall out.

I'm not sure what your point is. I didn't say that everyone should put their money into equities, only that history has shown that long-term equity holdings are reliably far, far more profitable than fixed-income alternatives.

Re 54%, etc., I don't think that is a result of fear of investing or some kind of conscious decision. Roughly that number of Americans pay no income tax at all and, hence, probably don't have money to directly invest anyway.

Re your AA, there's nothing wrong with making that choice. But the nature of choices is that they foreclose options and you have chosen to foreclose the both the option of speculative trading and the option of patient, long-term equity investing. I agree on the former but, for us, not on the latter. FWIW I think we are about 70% equities right now at age 71 and are not fearing the future corrections that you and I both expect.

As to "the bottom fall[ing] out" that prediction is kind of inexact. History shows randomly-occurring setbacks but also shows that a patient buy and hold strategy is the winner. Other than small sales to fund our checkbooks, I doubt that we average more than one equity trade a year.

 

[Dtail]

I ran FIRECalc assuming a 50% permanent decrease in equities and it still works.... since that has never happened, I'm sleeping well.

Hey there,
I know how to play with the Firecalc expenses and equity allocations, etc.
How does one play with a 50% equity loss?
I assume your reference is not going from 60% equity allocation to 10% equity allocation.