Sitting on One Million Dollars in Cash

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Several years ago, regular reader and guest author Vagabond MD wowed us with the fact that he happily sat on a half a million dollars in cash.

Fidelity FIRE

Well, he didn’t literally sit on that much cash, nor did he keep it under his mattress as he hyperbolically claimed, but he did indeed have that much money invested in cash equivalents.

I checked in with the good doctor for an update at a time when holding cash was looking rather brilliant as the stock market had (at the time) given up over 30% of its value in a matter of weeks. Was he still figuratively sitting on a $500,000 pile of greenbacks?

Nope. One million dollars now.

I’ll let him tell you why in this followup piece, followed below by the original post that generated a great deal of conversation the first time around.

 

Sitting on One Million Dollars in Cash

 

$1,048,000

 

It has been over three years since I guest posted the Top 5 Reasons This Physician Hold $500,00 in Cash. There were 110 comments and responses to the post, and when PoF features it on his Twitter feed, there is usually a response or two.

Despite that a large cash position is an anathema to many in the personal finance blogosphere, quite a few respondents outed themselves in the comments for also having large cash positions, or at least believing in it.

I am going to double down on the idea. Literally. As of today, I have $1,048,000 in cash – in CDs, high yield savings accounts, and money markets – all in taxable accounts.

[Once again, my wife would have me add that there is very little money in the house, a few hundred bucks and some Euros, probably less than when I wrote about cash last time.]

 

One Million Dollars

 

Why the Large Cash Position?

 

To review, my reasoning for holding so much cash summarized in the previous blog post including the following:

  1. Recessions happen
  2. Fear of locking in losses
  3. Why Play a Game You’ve Already Won?
  4. Interest Rates Are on the Rise
  5. Following a Three Bucket Strategy

 

Most of this reasoning holds true for me today. Has anyone noticed a recession lately? Of course, and this one has affected physicians significantly more than the previous two. In 2008, in the teeth of the Great Recession, I had my highest earning year ever as a physician; in 2020, I am furloughed and have no work income. It’s nice to have a substantial cash cushion so that an absence of professional income will not affect my lifestyle anytime soon.

The “game” was largely won in 2017, when I wrote about holding a lot of cash. We had hit our number and had enough to retire. Since then, from March, 2017 to May, 2020, our nest egg (net worth excluding home value) has increased over 30%.

Our margin of victory has continued to expand despite our growing cash position. Note that the cash position comprises 10-15% of our nest egg. Otherwise, our investment portfolio is approximately 60:40 (stocks:bonds).

As for interest rates, they did indeed rise, and then they fell again, and this turns out not to be much of a factor. Currently, bond rates are extremely low, the lowest in decades, and locking in those rates seems even less advantageous.

And I still have the bucket strategy (or bond tent) mindset, having set aside 5+ years of living expenses in safe, liquid assets. Who knows if or when I will return to work? My wife is still working, and we are continuing to add to the nest egg in her 401k plan and in our taxable accounts.

pearson 250web

 

What Has Changed?

 

What else has changed since 2017? We are both three years closer to retirement, and I might be retired very soon, and not exactly on the timetable I anticipated. We have learned that my wife’s corporate job, the one with the pension and retiree health coverage, is also more stable than my doctor job and should be the one we hold onto longer, all things being equal.

We considered a partial move requiring a second home purchase and carrying two houses for a period of time, but this idea has been shelved. We have recalculated our annual living expenses upward, especially with both children in college (hopefully!) this fall.

One problem with the large cash position is how and where to hold it. FDIC protection becomes a consideration, and while our joint marital trust is excellent for asset protection, it limits where the cash can go. Ally (“high yield” savings interest rate – 1.15% as of June 2020) accepts trust accounts, but Marcus (1.05% in June 2020) does not.

Vanguard accepts trusts and unlimited cash into their money market funds, but the yields are currently very low (under 0.5% on the municipal and treasury money market funds). We had a 4 year CD at our local bank at 1.76% which matured this spring, and the renewal rate offered was 0.65%.

 

Cash is (Still) Not Trash!

 

A sizable cash position still has some value. Yes, maybe it looks dumb to some, holding a lot of cash…until you really need it!  Like stocks, bonds, real estate, and perhaps alternatives, cash has a place in your portfolio, at the very least for emergencies, maybe for investing opportunities, for shocks in the economy, and to smooth the financial transition into retirement.

When you do not need or want to take risk, it has a way of piling up, especially if you are still working and not spending or investing all money that is inbound. For some, like myself, it reduces the worry of what happens next. And you now know who can afford to buy the first round at the next WCICon.

 

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Top 5 Reasons I Kept a Half Million Dollars Under My Mattress*

 

[* my wife asked me to add here that we really do not keep any money under the mattress. None at all. Really.]

 

It is personal finance dogma to maintain a liquid (i.e. cash) emergency fund which would be expected to cover three to six months of living expenses in the event of job loss, illness, or other personal or financial catastrophe.

While this is considered by many to be the first thing that you do in your financial plan, before contributing to 401(k) accounts or 529 plans, many are woefully unprepared for what life throws at us on a fairly regular basis . A well-publicized 2016 survey revealed that the majority of people could not manage a $500 surprise car repair without going into debt, let alone being let go from work.

On the other hand, there are many in the personal finance blogosphere who scoff at the idea of a 3-6 month cash cushion. There are other alternatives to resorting to idle cash, including tapping your home equity line of credit, selling investments from a taxable account, and invading the Roth IRA.

VagabondMD
speed vagabonding

Why leave three to six months of expenses, thousands of dollars, in a lowly savings account (currently yielding 1% or less) when you can have the money at work in the stock market, in real estate, in your business, or somewhere else (anywhere else) where the expected returns are much greater? I am going to tell you why.

But first, i would like to dispel some of the hyperbole in the title. My current cash cushion is not $500,000, but, as I demonstrated to my wife last week, it is $475,000, which I would expect to cover 5 years of living expenses in the event of a sudden, unexpected dual job loss. Second, not all of the money is in savings account or in one bank, but it is distributed in two online banks, one local bank, and two brokerage accounts, in checking, savings, and money market accounts and in CDs. (If you add in the very liquid savings bond position, the total would be north of the $500k.)

On to the reasoning…

 

1. Recessions happen

 

We have lived through two major recessions in our professional lives, 2000-2002 and 2007-2008. In both cases, we had countless friends in “good, stable jobs” that lost these “good, stable jobs” and witnessed the financial and personal carnage that this wrought upon them.

Like my CPA friend who was previously a Comptroller for a Fortune 500 Company who, after a seven year period of unemployment beginning in 2008, now does part time bookkeeping for a solo law practice.

Or my IT friend, an executive in an international financial firm who was forced to train Indian software engineers to replace him as his US-based job was eliminated and moved abroad after the tech meltdown. Neither of these guys saw it coming. I do not see it coming either, and I do not generally do well with carnage— it’s not in my DNA.

Md250

 

2. Fear of Locking in Losses

 

It is very likely that when there is another financial upheaval, some of the other assets that you own will lose their value and or their liquidity. It happened in the early 00’s and again in the late 00’s.

Do you really want to be forced to tap your Roth IRA when the S&P 500 fund in it is down 50%? Or sell your house or investment property when no one can get a mortgage loan to buy it? Both are great ways to lock in a loss.

 

3. Why Play a Game You’ve Already Won?

 

William Bernstein, the esteemed neurologist and author, said in his book, The Ages of the Investor: A Critical Look at Life-cycle Investing, “When you’ve won the game, why keep playing it?

q? encoding=UTF8&ASIN=1478227133&Format= SL160 &ID=AsinImage&MarketPlace=US&ServiceVersion=20070822&WS=1&tag=ph0c43 20ir?t=ph0c43 20&l=li2&o=1&a=1478227133The gist is that if you have enough saved to live in retirement, reduce the risk you take with your portfolio, especially later in life and as you approach retirement. In personal finance parlances we often talk about “The Number”—how much of a nest egg you need to call it quits on the day job.

Is it a big number pulled from the sky like $1 Million, $5 million, $10 million or $100 million? Is it a multiple of annual living expenses like 25x in the Trinity study or a more conservative and ambitious 33x? “The Number” is a rather elusive concept, but even while we are working, we are presently a bit north of our Number, by about, say, $500,000. Having a large cash position pays homage to Dr. Bernstein’s concept by taking some chips off the table.

 

Minnesota 51 Iowa 14
had a 44 point lead over iowa. still played the game.

 

4. Interest Rates Are on the Rise

 

Interest rates are likely rising in the next few years, after a prolonged period at historic lows. Janet Yellin largely promised this in December. As interest rates go up, the value of your bond holdings will decrease. In this environment, is it really crazy to have a chunk of your fixed income allocation where there is no interest rate risk, in a savings account?

 

 

5. Following a Three Bucket Strategy

 

My wife and I are in our early 50’s, working full time in demanding medical and legal positions. I plan to cut back to part time later this year, and we both expect to be retired from our current professional jobs in three years. The $500,000 cash position transitions nicely to the cash bucket of a Three Bucket Strategy.

If our equity investments continue to increase in value in the next few years, we are on track. If the stock market takes a dive between now and then, we are still on track. Either way, we hope to spend our retirement alternatively working as tour guides in Florence, Italy and Yellowstone National Park.

 

 YosemiteFlorence

Cash is Not Trash!

 

In fact, cash is still accepted in many places for good and services. In one’s personal finance portfolio, I prefer not to think of it as an anchor holding back returns but the lifeboat that might save you when the boat hits the iceberg. Or maybe the dinghy that takes you ashore when you are tired of sailing.

 

 

It is flexible, it gives you options, and it is there when you need it. Earlier in my career, even when my human capital was near its peak, I preferred to have an out-sized cash position and over time, with more life experience and a professional career in the bottom of the eighth inning, I value it even more.

 

 

[PoF: Today’s guest post is a good example of personal finance being personal. I wouldn’t choose to hold so much cash, citing math as the principal reason. VagabondMD has his reasons, which are largely based on risk tolerance and the ability to sleep well at night. 

There is no right answer, but each of us can have a best answer as it applies to our personal situation. 

The question of bonds and rising interest rates is an interesting one. The resale value of an individual bond will fall when the interest rate rises, but what happens to bond funds isn’t entirely predictable. When some bonds reach maturity, they are replaced with new bonds at the new, higher interest rate. If you’re interested, Schwab has explored a number of periods of rising interest rates and the effects on various bond funds. Hint: we should be OK.

Personally, I keep a miniscule cash cushion of one to three months’ expenses, or less than 4% of VagabondMD’s $500,000. I like to put my money to work, but that’s just me.]

 

How large is your cash position? How did you settle on that amount? Is there any reason you would increase or decrease how much cash you’re holding?

26 thoughts on “Sitting on One Million Dollars in Cash”

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  2. Our cash position is 850k and about 20% of the overall portfolio. Its higher than we’d like but right now the issue is – where the heck else are we going to put it? We own our house outright and have our remaining money in investment real estate (30%), Stocks (50%). Bonds make no sense to me right now so there’s a tiny sliver of them lumped into the stock’s bucket. I like the overall distribution but yes, the cash number is kind of high…. but right now we’re out of good ideas that feel reasonable. Any “new money” in the form of new paychecks etc are invested in the ratio 75% markets (this includes stuff like 401k money and also personal investments) and 25% dumped into …er, cash. Maybe its time for some new real estate investments … I just don’t feel like the recession is priced into RE yet. We always have an eye out for a good deal but prices for properties are still pretty frothy…

    Reply
    • When you hit your mid-50’s, there are two big potential “emergencies”:
      1. Job loss and inability to find a new one.
      2. Devastating health condition.

      Having a large emergency fund limits the damage from these emergencies.

      Reply
  3. Key here is the ability to sleep at night. Everyone is different. I happen to need a German Shepherd Dog sleeping in the same room to get a great night’s sleep. Sleep is important. “Whatever gets you through the night.” RIP John.

    Reply
    • Exactly. Money issues do not keep me up at night. Kids issues, COVID concerns, snoring dogs, etc. DO keep me up at night.

      Reply
  4. Excellent post! I’d missed the first one and caught up with it here. This seems to me to be the very definition being wealthy. When you do not have to worry about making every dollar work for you. When you can prioritize peace of mind over the math. Of course, not everyone may choose to quit the game- but it gives you the choice. And that’s worth something. Maybe a million dollars.
    Best,
    PFB

    Reply
  5. I get #3, but I really don’t get #1 or #2… it seems like if you have that much money you could afford to take a 40% loss in the stock market as well? (Also chasing interest rates when they actually make a difference and having to deal with FDIC limits seems like it’s not fun.)

    I mean, we have possibly too much in cash-equivalents, but the amount we have would buy a lot of time to figure out other assets and so on in the case of an emergency, which presumably we wouldn’t draw on all at once.

    I guess if you are a big spender it might make sense to hold that much in cash-equivalents… it would take me over 10 years to use up a million dollars in cash at our current rate. (I could come up with ways to spend it, but would not want to do that in an emergency situation.) But if you spend a million dollars a year, then this would make sense.

    Reply
    • My thinking aligns pretty well with yours. The lower my withdrawal rate, the more excess money I’ve got, and the more I can afford to take risks with that excess money.

      My plan is to carry at least 5 years’ worth of bonds and cash, and the rest in stocks / real estate.

      Best,
      -PoF

      Reply
    • Yes, #2 did not age well. $1M is about five years of expenses, and if we both lost our jobs in our mid-50’s, it would ease us into retirement.

      Reply
  6. Great post. Relatively little is written for those who have “won the game.” 2 other reasons to hold 5-8 years cash if you are entering retirement are the ability to live off cash and obtain nearly free health insurance via healthcare.gov or to do nearly 100k of Roth conversions a year in the 12% bracket until the cash runs out. I am planning to do the latter working 6-8 hours a month as a 1099 contractor to pay health premiums as a fully deductible expense. Fiphysician.com has written about this strategy among others.

    Reply
    • Excellent point. Because of other income streams, and my wife’s corporate retiree healthcare benefit, the nearly free ACA health plan will not work for us, but we might be in a good position to Roth convert into the lower brackets in the first few years of retirement. I will check out the article you referenced.

      Reply
  7. Awesome post Vagabond and yes, I agree with Bill Bernstein, if you’ve won the game quit playing. Though there is a risk of inflation eating up that nice cash chunk. Inflation makes sure that the game really never ends! are you sure you are recognizing inflation risk? I’m sure you calculated this in your invested non-cash portfolio, but if you don’t need a cool million in an emergency, why not put some that money in TIPS (that is if you have space in your tax advantaged accounts) or bond funds to keep some of that money safer from inflation? I think all of us may have been lulled into a false sense of safety in cash given years of low inflation. But after reading about the late 70’s I myself am definitely not comfortable with cash that’s not needed in a year or 2 as it is not safe from inflation. I wouldn’t want to hang my cash out to dry while inflation takes pot shots at it.

    Reply
    • RR, excellent point re inflation. I am expecting the assets invested in the stock market, real estate, etc. to account for this. If inflation ticks up, it is highly likely that interest rates will follow such that the delta may not be much different.

      Reply
    • I agree with you. Risk mitigation is really the primary goal of retirement planning in my opinion. However the next 3-5 years (the cash position) is unlikely to be afflicted by much inflation. During that time I will Roth convert. After that a TIPS ladder will commence finding me fully till 92. Fully half my portfolio will be untouched in stocks for over 30 years. Most of FI literature takes a purely stochastic approach (safe withdrawal rate based on probabilities) but if you work a bit longer and save enough one can take a safety first approach without giving up growth for one’s heirs or extreme old age. So little addresses the high net worth retiree (5-7million ) that this contribution is a great opportunity to offer other approaches to those who can take advantage.

      Reply
  8. I have to say, I get the appeal of cash. If VagabondMD’s portfolio is only 10% in cash, then honestly, unless his lifestyle is pretty expensive I think the reality is that there’s nothing at all wrong with 1M in cash and it’s a big who cares. Plenty of money still in the market with that risk/reward profile. If he said that it was a third of his net worth or more then I would have raised more of an eyebrow. I’ve got 17% of my nest egg sitting in cash right now. Usually around 13%, but we were thinking of some major home renovations or buying a second home so I increased it. Do I fret that that money isn’t in the market. Nope. I remember ’08 and having a mortgage, no job, a global recession, etc. Scary times. Having a runway helps reduce that anxiety and if, like VagabondMD, you are only compromising on your ability to be uber uber wealthy versus just uber wealthy, then it seems pretty safe what he’s done. (For clarity, he’s clearly at those levels; I’m not there yet on either.) If you are compromising your ability to hit your number at all and your number equates to a much more modest lifestyle, then I think it’s a different story. People are right, he probably could take the risk of a 40% drop in his portfolio and ride out a long recovery. But I think some people forget that even in those models there is risk that you won’t be safe. If you have 10M and you decide to only have 9M of it in the market, I don’t see the big deal that he’s not math optimizing. It sounds very much like he can still be super wealthy and probably reduce his sequence of return risk to negligible levels. Maybe totally unnecessary but by all accounts has so won the game has earned the right to buy that comfort.

    Reply
  9. Thank you for the follow-up post. I recently came across your initial post during the beginning of quarantine, and it helped crystalize the importance of my cash:stock ratio. Before reading your article, I had mostly focused on the denominator (i.e., stock). Since your post, I have gained a healthy appreciation of the importance of the numerator (i.e., cash).

    Reply
  10.  
  11. After reading this I looked at my cash position and found a lot more cash than I thought I had. I really don’t waste time paying attention to it much anymore. It is on auto pilot now. Once you win the race, you can stop running. I wrote about my crossing the finish line in this article: https://financialsuccessmd.com/stop-putting-money-in-your-retirement-plans/
    People thought I was crazy to stop putting money into my retirement plans. But I already have more than enough. What am I continuing to save for? So I will have more than more than enough? Once you cross the finish line, your thinking really does change. Things you thought were so important before are not so important anymore, like spending hours rebalancing your portfolio. I’m going to add this article to Fawcett’s Favorites next Monday. Thanks for your prospective.
    Dr. Cory S. Fawcett
    Financial Success MD

    Reply
    • Thanks for responding and linking your article.

      I guess that mentally I have not reached the finish line, but we do also continue to add to retirement accounts for the tax benefits.

      Reply
  12. I am a turtle, a lowly paid state employee turtle. I move slowly with money after being devastated in the Great Recession and having to get a new job and move several hours away. I live in a very cheap, little paid off turtle house (912 sq ft) in a very low cost of living area, in a very cheap cost of living state, which also is reflected in my salary ($50,000 gross a year.) But, for a turtle, I have almost a years worth of salary (my net for the year after insurances are taken out is $36,000) saved in cash. So, yeah, I get it……totally. I am at $31,000 and won’t be comfortable until I hit $36,000. I just save slowly and I will hit my goal by the end of this year, I hope. So, while I am nowhere near the amount of you fine folks, for my income and my cost of living, I am moving slowly but surely along. I would like to have two years in cash also, to sleep a bit better at night.

    Reply
    • Hi, Cindy,
      Well done. We all move through life at our own pace, with different perspective and goals. “Sleep at night” money is certainly worth having in relative abundance.

      Reply
  13. so from basic math you have a 10 M portfolio. Congratulations! Im not there yet. I do agree with trying to keep 3 to 5 years in liquid assets. I dont think cash is necessarily the only answer for this. The balance of my portfolio is in 3 buckets,
    1. Taxable account – Consists of Liquid- for emergencies (layoff, health, injury, emergency expenses etc. ) right now about 10 % of portfolio
    Tax advantaged Bonds ( MUNIs, Vanguard Tax exempt high yield bonds etc.) This is 25 % of my overall portfolio. Im 5 years from retiring.
    2. Tax advantaged accounts – roughly 100 % equities. This is money I dont plan on touching for at least 15 years, so it can withstand the slings and arrows of the stock market. This makes up about 65% of my portfolio.
    3. rental condo, jewelry ( 15k Rolex which I wear and has actually appreciated over the past 10 years. An investment, but also a guilty pleasure.

    Reply
  14. Rule #1: Don’t lose money

    My liquid assets are in after-tax money. Yeah, I know I’m losing some to inflation but when I withdraw it there’s no tax. How do you do that? You get divorced and con your ex into taking IRA money in lieu of the complicated process of untangling your after tax investments.

    Tax-advantaged accounts are in stocks & bonds

    Stealth wealth is in physical PM. The gummint doesn’t know when you bought it or sold it. Even when you invest in something like OUNZ and leave a paper trail of the purchase, you can take physical delivery. Since the way OUNZ works you own allocated gold, it’s been yours all along, and if you cash in for physical delivery you still own it. No tax. If you sell it for cash in a private sale, who will know?

    Reply
  15. To sleep to sleep per chance to dream, one million is dog meat… keep working big guy… good article and replies to keep the topic engaged

    Reply

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