Alternatives to Cash? Advice Requested

[Gumby]

A somewhat oblique approach to your issue is to see if you can get any discount or bonus for pre-paying some of your regular bills. For example, some insurance companies give you a discount for paying annually or semi-annually instead of monthly. If you're going to pay that money out anyway, may as well get some additional benefit. The young wife and I get meat and eggs delivered to us monthly for a fixed price. If I pay for the year in advance, I get the 13th month free. I will spend the money anyway, so to my mind that is like getting 8.3% on the cash that would otherwise sit in my checking account earning 0.01%. It's only 8.3% on $1140, but every little bit helps.

Another thing that will help a little is to run every one of your bills through a cash back credit card rather than paying them direct.

 

[youbet]

While some may disagree, I see absolutely nothing wrong with keeping 3 years cash reserves - assuming the AA for the rest of your portfolio is adequate to meet your long term needs..

"3 years" is a pretty loosey - goosey target to measure needed cash reserves against. For some, if they have pensions, SS, an annuity, maybe some rental income, etc., they may be meeting their budget cash reserve desires with no or only a small amount of cash sitting on the side. 3 years might only be a few bux or even zero. For others, living 100% off of FIRE portfolio withdrawals, 3 years of cash reserves might represent 10% or more of their FIRE portfolio, a pretty expensive amount of cash to be holding in terms of opportunity cost.

Sooooo........ I think "it depends." In our case, a chunk of our annual spend would be supported by pensions, SS and divs. Whenever I look at the portfolio, I always think about how I'd come up with the difference between our pensions/SS/divs without selling equities if the market were to take a very serious crash. Is there a bond maturing? A preferred stock that's going to be called? A stock or equity fund bucking the trend and actually is up a bit? Etc.

If your income sources and portfolio earnings (that are not substantially impacted by equity valuations) don't fund a sizable chunk of your spending, you're likely not as diversified as you think.

 

[youbet]

We're about to retire next year and I feel like I might have too much in cash.

How much do you have in cash? Depending on your pensions, future SS, divs or other sources of income, 3 years may be a lot or a little. Have you done a few hypothetical looks at what you would do, given your current AA and some hypothetical cash reserve levels, for income if the markets took a substantial downturn?

I'm leery of keeping this money in equities for two reasons: 1) recent market performance and 2) what this site has taught me about sequence risk.

Unless you've decided to be 100% equities, why would you put this money into traditional equities? Bonds, bond funds, reits, preferred stock and, yes, cash are all there. Is there nothing else in your portfolio to liquidate other than equities?

What are my options? I really hate seeing this money doing nothing but won't be thrilled about exposing it to downside market risk. As mentioned in my original "greetings" post, I feel the market is over-valued and due for a correction but obviously I'm speculating.

You continue to sound like your portfolio is non-diversified. If you think it is diversified, play some hypothetical games seeing how you'd come up with your annual spend for a few years without selling equities or equity funds.

As far as where to put the cash you do have, it's tough right now and I don't have anything to add beyond the suggestions you've received so far. And that's why I'm not holding much cash. Although, because my portfolio is diversified and because my need for cash withdrawals from my portfolio are relatively small, I think I can count on my diversified portfolio to have some things I'll be able to harvest in a down domestic equity market.

 

[Austin704]

If you go this route, don't buy an electronic 10,000 (maximum) Bond; buy 4 $2500 Bonds, or smaller denominations, in event you need to tap into just some of the money down the road.

I don't think this is accurate. Partial redemptions (as little as $25) are allowed for electronic I-Bonds.

 

[mystang52]

I don't think this is accurate. Partial redemptions (as little as $25) are allowed for electronic I-Bonds.

You're right! I stand corrected. I guess my post is too old, as I can no longer delete it.

 

[connor77]

Youbet - good points raised. We have 3 years worth of cash for expenses. Our "equities" are all in Vanguard funds, mostly low cost index funds. We have 30% of our retirement portfolio in bond funds also with Vanguard. We have no other passive income.
Our plan is to withdraw from our taxable account and deplete it before touching either of our tIRA's. We have some safer funds to withdraw from first if the market should go south. I appreciate that 3 years of cash may not be a lot and for sure I'm investigating ways to withdraw to minimize our tax impact. I'm still working but hope to fully punch out some time this year. Could continue to do some consulting if I had to. I may sell part of one fund in my taxable account just to give us a slightly bigger cash cushion since we have no other sources of income.
For what it's worth, Vanguard categorizes our holdings as consistent with an investor who seeks growth and income.

 

[Dash man]

. I'm hopeful that I can buy another $20k in 2022. Wasn't thrilled to learn that one forfeits the last 3 months of interest unless they are held for 5 years but it is what it is. I was under the impression that one would get the full 7.12% after a full year.

The 7.12% is only guaranteed for the first six months. The second six months may be higher, lower or remain the same. You can’t redeem the bond for at least one year, so you’ll have six months of a likely different interest rate, which is the interest you would lose three months worth if you did redeem. You could also hold it 15 months or longer and lose only the interest in effect at that time.

 

[pb4uski]

The 7.12% is only guaranteed for the first six months. The second six months may be higher, lower or remain the same. You can’t redeem the bond for at least one year, so you’ll have six months of a likely different interest rate, which is the interest you would lose three months worth if you did redeem. You could also hold it 15 months or longer and lose only the interest in effect at that time.

But the WORST case is that you get 1/2 a year at 7.12% and 1/2 a year at 0% and then lose 3 months at 0% if you redeem after 1 year... so your effective rate of return for the one-year holding period is 3.56%... better than any 1 year CD avaiable and that is the WORST case... it is very likely to be better.

 

[finnski1]

But the WORST case is that you get 1/2 a year at 7.12% and 1/2 a year at 0% and then lose 3 months at 0% if you redeem after 1 year... so your effective rate of return for the one-year holding period is 3.56%... better than any 1 year CD avaiable and that is the WORST case... it is very likely to be better.

Exactly and why I bought my first I bonds. Still much better than other fixed investments.

 

[WhenIsItTime]

I don't stress holding pure cash within FDIC limits. I choose not to go out of my way to chase 1% interest rates. Relative to traditional AA's, I prefer to be a little higher on stocks and lower on bonds instead.

 

[hotwired]

Alternatives

Going from least risky to most, you could first scour the internet for sign up bonuses. We made about a thousand last year just opening up two or three checking accounts, making a couple of transactions then closing them out. I tried not to abuse it too much, that is I left the money in there for a few months to give the bank some benefit and thanks for the bonus.

Then there's I bonds of course, your money's locked up for a year with a token penalty for taking the money out within 5 years. Currently yielding 7.12% I believe, but that gets reset every 6 months I think and it could easily be one half a percent next reset

There are some ways of combining assets that might be risky individually but put together aren't so much. I've got three or four percent of our net worth and peer-to-peer lending and another three to four percent in various crowdfunded hard money lending platforms. We make six to 11% in a fairly steady uninterrupted man. One might say this is not an appropriate place for an emergency fund or cash, but due to the diversification and filters I use I think my risk adjusted return is acceptable.