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I’VE SPENT THE PAST seven or eight years lamenting our cash position, both the interest it was earning and the size of it. The former was too little, the latter too much.
Some years ago, we sold an investment property with the idea of buying another somewhere we might potentially retire. But as I noted in a recent article, we’ve never been able to settle on where that would be. We were also constantly thinking we were going to move or be moved away from the Houston area, where my job had deposited us, and that we might want the cash for a house in our new location. Of course, despite repeatedly raising the possibility of a relocation to my higher-ups, this never happened.
The result: Hundreds of thousands of dollars have languished in cash, with me grousing about it—at least until last year, when I retired. But with the volatility in the stock and bond markets that soon followed, this large cash position has probably contributed to the quality of our sleep.
Still, I know high inflation is eating away at it. True, a majority of this money is in a 401(k) stable value fund, which provides higher rates than are available in most other options. Our stock position is now three percentage points off our target, and is politely asking for a rebalance. Add the coming proceeds from the house we just sold, and the voice becomes more insistent: Shouldn’t we be buying stocks?
Well, maybe, except we may still want to purchase a property. We’ve decided to store everything and travel, but for how long? We could tire of living out of suitcases and decide to pick a place from our U.S. short list, or we might pull the trigger on a part of Italy that we like. This might be in a few years, or we might stumble on something in our first few months of travel. If that happens, we’ll be glad to have cash on hand, rather than having to get a mortgage—especially if we settle on a foreign country—or being compelled to sell stocks at a market low.
Not counting the proceeds from this year’s house sale, the cash in our taxable account would cover a few years of living expenses, although exactly how large those expenses will be has become more nebulous, given our lifestyle change. We can approximate them at “more.” Even before considering a potential property purchase, we’ve introduced our own uncertainties, financial and otherwise, into our lives. Where’s our roof? Where are our doctors? How quickly can we be settled somewhere again if care is needed or, alternatively, get to a family member who needs us? An extra margin of safety for a while isn’t an altogether bad thing.
So, as much as my DNA as a (former) longtime accumulator says to buy into the current stock market weakness, I’m not positive it’s the right call for us. It’s not so much concern about the next turns in the market that gives me pause, but the fact that we might need this cash in the near term—and, if we need it soon, it doesn’t belong in the stock market. The good news: We don’t need to create a margin of safety by selling stocks today. We already have it.
What we’ll likely do is move a significant portion of our taxable cash position into Treasury bills, either building a ladder of one-year bills or sticking with three-month Treasurys. These are yielding more than high-yield savings accounts and certificates of deposit, and are liquid, fully guaranteed by the U.S. government and carry little interest rate risk. Yes, it’s possible to lose money if rates continue to rise and we want our money before maturity, but the possible loss seems minimal.
With interest rates rising, we’ll also want to think more about where we hold our cash, so it’ll be accessible yet minimize taxes on the income. Rather than buy the Treasury bills in a taxable account, we may choose to buy a tax-efficient stock fund there, and then offset this with an equal shift from stocks into Treasury bills in an IRA. When we need cash, we can then reverse this maneuver, selling stocks in the taxable account and offsetting that with an equal shift from Treasury bills to stocks within the IRA.
Of course, what’s most likely to happen is we’ll continue to hold what seems like a lot of cash, I’ll continue to bemoan the opportunity cost, and we’ll go another few years before buying anything. Meanwhile, the stock market will head back to new highs. But at least I’ll sleep well.
Michael Perry is a former career Army officer and external affairs executive for a Fortune 100 company. In addition to personal finance and investing, his interests include reading, traveling, being outdoors, strength training and coaching, and cocktails. Check out his earlier articles.
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Analysis paralysis is the doom of many a fine lad. Move to where you and your wife really wish to be and without regrets – in Italy or Europe you are likely a few hours flight from anywhere in the world you think you need to be. With a big pile of cash and your other assets you will be welcomed with open arms to buy property and even apply for citizenship. This winter should solve the Ukraine problem for your purposes, ie whether Europe remains a viable homesteading option. Sounds like a good problem to have compared to what many in this world face. Best wishes!
Another alternative to analysis paralysis is to do something, but not too nutty. How about investing a small portion of the cash (5, 10, 15%?) in diversified funds or ETFs or fixed-income products. You’ll have the comfort of knowing that you did something forward-looking, yet you remain committed to the over-hold of cash. Less fretting, more enjoying.
Thank you. Definitely appreciate that we’re fortunate to have the choice to make.
You could do worse than holding cash. Crypto comes to mind! Fear of missing out is a strong motivation but if you have already won the war you don’t need to start another one. Take your time and things will iron themselves out and you will know what’s best to do. Markets will do better and inflation will come down, take a deep breath and relax, like a kidney stone this too will pass.
Indeed. No crypto or alternatives for us. Thanks for reading and commenting.
Your plans and decisions for cash seem to be well thought out and appropriate. I hope you and your bride enjoy the go go years of the early part of your retirement.
Happy travels.
Best, Bill
Thanks Bill
Cash and equivalents are Bucket One, and hold three years of expenses. Another five years of expenses in Bucket Two include intermediate treasuries, bonds, and dividend-paying stocks. Bucket Three includes equities I don’t need to touch in a down market. I don’t consider “opportunity costs” of this approach. It beats having to sell equities in a down market to pay your expenses.
The bucket approach works well for lots of people. If we were using it, we might say our bucket one has suddenly become perhaps excessively large, and we’re choosing to let it be.
Do the 401k rebalance. Bonds are begging to be bought.
If you decide on keeping the cash in the taxable account, and truly will be stateless (no state taxes), consider CDs. They currently pay more than Treasurys on the secondary market. Either way, I agree about the value of peace of mind and the comment below about its very high interest rate.
Thanks for the comment and suggestion.
I think peace of mind pays a very high interest rate. Especially in retirement. Zero debt also pays a very high piece of mind interest. If one is fortunate enough to have won the game, perhaps it’s wise to stop playing.
“Peace of mind interest” is a good way to put it.
Very interesting learning about your thought process on retirement. Your conundrum makes we glad we stayed put when I retired. Eight years later we did relocate and downsize – 7/10 of a mile away. Kept it simple near friends and family and 45 years in the same place.
Your article made me think, what percentage of my investments are cash. Turns out it’s 5.6% (not counting regular bank accounts used daily). I guess I’m fully invested. 32% is in various bonds though including muni funds. This is 13 years into retirement but living off a pension and SS.
Five percent cash is fine – if you have mailbox money coming in that covers a big chunk of at least your fixed/non-discretionary expenses. If you don’t, it may not be enough if unless you have low expenses, or a large portfolio.
One way I’ve changed my thinking about our large emergency cash position is to exclude it from our Asset Allocation. Technically it should be in the bonds/fixed side of the AA. And in reality it is – buckets just provide psychological comfort, but the money doesn’t care how you choose to think about it – 60/40 is 60/40, regardless of how you’ve divvied it up in your head!
That all said, my FA suggested omitting the cash position from our AA, and after doing it I felt a lot better about having it hanging around, even though it’s about 10% of our investment portfolio.
Behavioral finance is real!
I know from your writing that your situation has worked out very well for you. I’m envious of people whose job deposits them where they want to spend the rest of their lives 😉
Where to live is ironically less of a conundrum now that we’ve pulled up roots. Having made the decision to ignore the points in favor of a place we really didn’t want to be and leave it, we’re more focused on enjoying the present than planning the future.