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Top 5 Reasons This Physician Holds $500,000 in Cash

Minnesota 51 Iowa 14

Today’s Top 5 list is a guest post from VagabondMD, a late-career interventional radiologist who has been a regular reader here, and a frequent contributor of wisdom on the WCI forum. In his early fifties, he is looking forward to reducing his workload to part-time status this fall.

Take it away, VagabondMD! 

Top 5 Reasons I Keep 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.

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.


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?

The 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. 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?


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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.


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.]


To read more from the prolific guest author, Vagabond MD, see all of his articles:



What do you do? Would a large cash position make you feel better or worse about your future prospects? Will you continue to play the game after you’ve already won?


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103 thoughts on “Top 5 Reasons This Physician Holds $500,000 in Cash”

  1. Pingback: Médecin sur le FEU – Conseils tactiques ET pratiques pour l’indépendance financière – NATARU
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  3. Great explanation of your rationale. To build on it, Wade Pfau (noted researcher on retirement issues) has studied asset allocation going into retirement and would support a low equity % in the early years (aka hold more cash). Then in retirement, slowly build the equity % back up. I can’t find the exact article, but I recall that he recommended having equities in the 20-50% range when starting retirement. The main reason was to manage sequence of return risk in the first decade of retirement.

  4. As I write this I have 712,513.94 in bank products. The rest is a split between bond and stock funds. We are retired with no debt so anyone reading this obviously knows how much I agree with this article. Would it be nice to have another 500K in this market the last 3 or 4 years, yes. I have reached the point where I just don’t care. (Whew, that is easy to think but hard to write). I am actually starting to pull out some of the stock funds and put them in bond funds. Yes, interest rates will go up but I believe over time the funds will rise back up. We have been retired almost 5 years and without SS we have lived on dividends, interest and an annuity payment. Our net worth is higher today than when we retired. And no, we don’t eat Alpo, as a matter of fact we are getting ready for a 2 month stay in Hawaii….ahh, Hawaii… So the whole point is you will know when you are comfortable and that point is different for everyone just like there are no 2 snowflakes alike! Have a great day everyone!

    • Aloha, Paul! You are clearly of the “You’ve won the game, so why keep playing” mentality. It’s an abundance mentality, and I like it, even if it doesn’t necessarily jive with my own thoughts on what I plan to do with my money.

      I think the absolute dollar amount is more meaningful in relation to the size of the total portfolio. If we’re talking 10% to 20% or less, which I suspect we are, there’s nothing wrong with having that amount of cash / fixed income on the sidelines.

      My family and I are spending nearly all of February in Hawaii. Kauai, Big Island, and Oahu.

      Surfs up!

      • Aloha Nui Loa!
        I spent 30 years there and it was wonderful. While you are on the Big Island I recommend Huggo’s for a great dinner if you are on the Kona side. It is on Alli Drive just a mile or 2 from Kona. It would take 15 pages to give you all my favorite spots on Oahu but two I will mention are Roy’s in Ko Olina and if you like sushi here is the spot: https://www.yanagisushi-hawaii.com/reservations. Have fun!

        Paul (It is really Kimo but no one here gets that unless they are from Hawaii LOL)

        • Thank you for the recommendations! We are sushi fans. The kids, not so much.

          We’re spending time on the Kona side, and the Hilo side (and a couple days in a Yurt near the volcano park), so we should see much of the island.


  5. Well said, PoF. I have a hard time explaining at times my reasoning for keeping my powder dry. From now on I’ll refer them here.

  6. Phil was the best investment decision I ever made. I’m in the middle of 70 mph winds. The feeder band that pounded Miami all day has made it to me, Power is still on most of the time. Proof God loves me.

    I have tips in the form of a DFA fund. One advantage to having someone like Phil is I get access to institutional grade funds, which often have slightly different rules compared to say Vanguard’s S&P fund. DFA is the brain child of Eugene Fama and others and they figure out further efficiency in an index like having rules that allow trading a stock that enters or leaves the S&P in a different time frame than a standard index fund. This buys a little more return. DFA studied what is the most efficient cash equivalent for inflation protection and came up with a fund of long term TIPS, so I use that DFA has very low cost funds et. So own both muni for convenience and tax free return plus short term paper will tend to follow inflation closely. For TLH there are several sorta equivalent funds (very similar performance) that fit wash rules so it’s not hard to harvest. Phil is connected. He is in Buffets roll a dex and has lunch with him every year, and he is very up to date on fine tuning modern portfolio thinking vs return. Maybe I’ll write a guest post on that.

    I strongly recommend his books especially if you’re a resident or med student or early attending. You can spend hours and hours searching forums or read his books and have an excellent handle on how to invest. Your portfolio follows his perspective very well


  7. During my practice lifetime I kept about $200K under my mattress, mostly as ready cash for my wife “in case”. It would give her plenty of time to get her sea legs regarding our finances. Phil DeMuth PhD is my financial adviser and I used him, and my portfolio as my “insurance policy”. He would make sure she was properly guided.

    A quick plug for SOME advisers. Phil charges 0.5 % on a minimum portfolio of 2.5M, for that I calculate I do a little better, about 1.5% than if I held a standard boggle head Vanguard mix. My net return therefore is about .5% to 1 % to my advantage. Put that in a future value calculator and see what you see. At least for me it was a no brainer. The reason I chose Phil was I read several of his books and his style matched mine. I’m very much an efficient frontier modern portfolio theory type. So I gave him a million to start and soon after pretty much the whole shootin’ match. Most financial advisers are about picking your pocket for sure, but some represent real value. For me I get a little better return plus my wife isn’t left flappin’ in the breeze if I kick the bucket.

    When I FIRE’d I increased my liquid holdings to $650K in the form of a “home brew annuity”. I wanted 5 years of living expenses at $10K per month so that’s $600K plus a little dab for occasional extravagance or non budgeted expense. Some of the lump is in cash in my bank to feed the things I sweep every month like utilities but the main part is in a short term Muni bond fund which sits there and throws off about 1% tax free every year till I start to spend it.

    I chose short term Muni’s instead of cash as an inflation hedge. Inflation eats cash for lunch. Inflation and taxes eats CD’s for lunch. Short term tax free paper has a chance of keeping up. I went to med school back in the early 80’s and between the time I contracted with my school and I matriculated (maybe 6 months) my tuition had increased from $6600 to $8900, and loan interest rates increased dramatically, so inflation is no joke. (yes I’m old) I had saved enough to pay for med school by working as an engineer but inflation ran me out of dough in 2 years, so I went into the Navy and owed them 2 years instead on the back end. I graduated and completed my residency debt free. Retirement is vulnerable to exactly this kind of inflation scenario so some attention to it is warranted IMHO. It can kick up fast and can be devastating.

    My experience is distribution is not exactly like reverse accumulation. In accumulation we typically had a 80:20 or 75:25 stock : (bond/gold/reit/alternative) portfolio across half a dozen accounts. Just sit back and plow in the dough every month and let compounding and diversity do its job. In distribution you need a plan that takes into account many moving parts like “taxes” “state of economy” “budget” “which of my 10 accounts do I pull money from (see taxes)” “what’s happening with SS and health care costs” “inflation” “RMD on IRA” etc, so it’s similar but not the same. A few poor choices can also compound to a bad outcome.

    In early distribution mix ratios have been studied and something around 50:50 is recommended because those portfolios have been shown to survive a singular event (like the stag-flation of the early 70’s) , so my home brew annuity plus some LTIPS brought me closer to a 58:42 mix. Phil monitors several financial markers and I felt comfortable leaving a bit more money in equities with the caveat if the financial arrows start pointing into the ground, I would be exchanging equities into tips till I reached 50:50. My next re-balance will be in 5 years, when SS kicks in and I will re-evaluate where I stand then. Otherwise I will let the money machine do its thing. In the mean time I have a guaranteed 10K per month to live on for the next 5 years. It’s a little different but not radically different approach, and shows how “cash” can be quite useful to live on as well as provide portfolio balance.

    • You’ve got Ben Stein’s buddy managing your money? Very nice — I’ve enjoyed what I’ve read of his over on WCI in book reviews and a guest post. If he’s outperforming a Bogleheads DIY portfolio with similar risk, he’s one of the few. Congrats to you both!

      Have you considered TIPS as opposed to short-term Munis? The inflation protection is built in.

      Once SS kicks in, will you be comfortable with a more aggressive portfolio? More guaranteed money should give you more leeway to do so, if so inclined.


  8. That is an extremely impressive shoebox stash.

    We keep a $25K stash all in $20’s as to not arouse suspicion if I ever had to spend it on groceries or other expenses etc… *if* times got hard. It is about 6 months of living expenses + a cushion.

    What do you think about holding some other currencies other than the USD, like the Euro as you are planning to travel to Italy anyway? Risk curves can change and it really seems like a no brainer if you are going to go to Italy.

  9. This is great…

    1. I ordered the “Ages of Investor” book. Looking forward to reading.

    2. I think holding this much cash is smart. Nobody thinks Warren Buffet is an idiot for holding $90 Billion in cash.

    And yes, Buffet knows all the math personal finance bloggers do too and “opportunity cost” talk, etc

    “Buffett referred to cash as a business that effectively sells for more than 100 times earnings because Berkshire earns less than 1% on the cash it holds on its balance sheet. Munger quipped that it was even worse after taxes. ”

    Yet, he still has a large cash position because “dry powder” is valuable.

    3. I’ve never heard of the bucket theory the way the linked article described. Neat.

    4. Ken McCarthy has a book called the “Financial Independence Day Blueprint” and he also recommends keeping the first wave of your wealth in cash. He used to work on Wall Street (in the 80’s) and was one of the first guys to make money from the internet in the 90’s (was pals with the founder of Netscape, etc. Has taught 1,000’s how to do it now).

    The longer people have been in the markets — or have been alive it seems — the more they seem to value cash.

    5. Everyone is also forgetting the value of cash in a deflation. Not to go too deep down that rabbit hole, but…

    A.) it’s still a possibility we have a deflation depression in the future

    B.) the Fed has been targeting 2% inflation for years, and hasn’t really hit it

    6. VagabondMD, the only thing I can’t agree with is this comment of yours, “As for cash at home, we keep very little, which is probably not good practice, but I have yet to come up with a scenario where having cash will help me in an emergency.”

    I think there is real value to so called “folding cash” at home or somewhere safe, that’s not a bank, etc.

    Historically, during major financial crisis events, getting access to “your money” at the bank has been hard. There’s a financial newsletter guy named Porter Stansberry. All his money was simply taken from his bank account one day (episode 165 of old StansberryRadio podcast). He now keeps $100K + $1 million in gold coins out of the banking system.

    To really get worrisome about it… Everything is digital now. Banks can be hacked, etc.

    Anyways, there’s a ton of reasons for a person to hold cash. Doesn’t sound crazy to me!

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  11. Nice cash hoard! I agree with the points, but the bond market has rallied since Jan 1, 2017 and will stay elevated IMO.

    I’m sitting on s ton of cash bc of a liquidity event whoo hoo!


  12. Vagabond, I agree with you on a healthy cash reserve. Many of my friends lost their jobs for several years after 2001, but bull markets make for short memories.

    The last eight year bull market has spawned a lot of wealth, finance bloggers, and even those who call for no emergency fund at all. Its the same kind of exuberance that leads people to ask about 100% stock allocations. Maybe those who have won the game can forgo healthy cash reserves, but for the other 99%, a bit of caution and conservatism will go a long way.

    All the best.

  13. Hi, Shaun,
    Thanks for the reply. Personally, I leave my cash position in “no risk” vehicles like savings accounts, checking account, and CDs. Corporate bonds, while suitable for one’s portfolio in the fixed income slot, do carry some credit risk and liquidity concern (if you need the money), so I do not consider them part of my cash position.

    I do like the “dry powder” argument for keeping some cash, and that has served me well in my younger days, too.

  14. Good advice in this article! Many of the financial problems that people with “good jobs” get themselves into are less about net worth and more about liquidity. Having a positive or high net worth can be almost irrelevant when you have a need for cash but can’t get it. That leads to (1) selling assets at fire-sale prices or (2) getting into a dangerous debt trap. Cash is good protection against this. Also, I like keeping cash above and beyond my emergency fund so I can invest more when there is a downturn in the financial markets.

    Keeping cash doesn’t mean earning zero return either. I recommend setting up a “ladder” of corporate bonds and CDs with a duration of 7 years or less, with the expiration dates staggered out over time.

  15. I found your blog through Rockstar Finance. (Thanks again J$). After reading your post on your cash position I smiled as I thought I was alone. Having 5-6 years living expenses in various liquid accounts with very easy access does help me sleep at night. While we no longer enjoy lucrative interest rates like before the idiots melted down the economy, cash holds its value. Securities, stock bonds, real estate values are market value dependent because the Wall Street analyst say so. They decide on the value of securities, not cash. Cash provides, flexibility, opportunity choices, freedom and one hell of a valuable cushion just in case Wall Street needs to reset values. When they do, the market goes on a huge clearance sale for dividend stocks.

    I recently moved some cash to a Capital One 360 account that pays 1% interest. It helps close the gap of the crappy interest rates we’ve been experiencing since 2008.

    Thanks for posting and sharing.

    • Thanks for taking the time to reply. Recently, Ally has upped the interest rate for the savings account to a gaudy 1.05%. Woohoo! (Not really.)

      At any rate, no pun intended, it is more about the security than the return. Many happy returns (pun intended 😉 ).

  16. Hey there Vagabond-another 500k/5 years of cash poster. Wrapping up now with a bit of part time and a 6-12 month window of leaving medicine behind after 30 years. Sequence of returns and winning the game rule the day. Not market timing. In fact, the opposite. Rock solid planning for many years. Like the idea of a steady paycheck with no risk. Remainder of portfolio is diversified the Bogglehead way. Medical Practice may very well sound like your buddies in finance and IT in short order with the teutonic shift underway.

    • Well said, and well done. It looks like I am a few years behind you, but on the same trajectory. Be well and enjoy.

  17. Great number of comments. After reading all these comments I am going to increase my cash allocation. It is only 1.6%. I consider the nest egg done so why not? I will brag now. Bernstein once emailed me about a comment I posted on WCIs site. I was extremely honored.

  18. I’ve seen some really tough times, so I have to agree that keeping a bit of extra cash around is a good idea. It saved my a** more than once.

    Having a plan to bounce back from big financial setbacks is a very smart idea.

  19. Vagabond — I’m with you and just wrote about how I’m out of stocks completely, for now. Investment returns and financial goals are not the same thing. If you can meet your goal while taking no risk, it’s probably a better bet than surpassing your goal while taking medium to high risk.

    Great post — I was recently thinking almost all personal finance bloggers were engineers but now I see there’s this subculture of docs as well. Good stuff. –R

  20. I have a similarly large cash position. I think of the cash as part of my bond allocation — a bond with the shortest duration possible -zero.

    Also, I am curious, do you keep any gold as part of your portfolio? It too has a track record of holding value in tough times. I do not personally as I can not figure out why anybody values gold anymore or less than anything else. It pays no dividends and its value seems to be strictly based on a shared agreement to value it. But for a long time that agreement has held, which tempts me to put some of it in my portfolio as ballast. I can’t bring myself to pull the trigger on the golden gun.

    • I do have a small precious metals position (gold, silver, and palladium), but barely enough to meaningfully contribute to my overall nest egg.

  21. I keep about 50k in cash due to having two rental homes, wishing to be able to cover repairs without touching other investments. I will be a dying breed with a pension as a military doc, since it will cover 80% or more of our expenses unless we really, really travel a lot, we could always cut back in an economic downturn and be fine. I am planning on no more than 100k in cash equilivant accounts, but another goal is to pay off our mortgage after we reach FI but before I fully retire, reducing expenses needed in retirement.

  22. Interesting, I think it all comes down to what makes you feel safe.

    I don’t have $500k cash on hand, but more like $10-30k and that should be enough for me when it goes down. However, by having so much cash on hand, when the market does go down, it’ll be easy to find bargain deals to make a lot of money off of!

  23. I have 700k in cash , the stock market and real estates are very expensive right now , but eventually they will go down and then I will find a bargain

      • I am not timing the market , I just sold some of my real estates holding that I bough in 2009/10. Due to high appreciation in Miami and now I prefer to wait for good opportunities

  24. I have 700k in cash, I am waiting for a good opportunity, stock market and real estates are very expensive right now but eventually they will be going down then I will have a chance to find a good bargain.

  25. Cash is king when time is uncertain. It’s personal finance, you can do whatever you want. 🙂
    At this point in our lives, we prefer to have our cash invested, but I can see where you’re coming from.

  26. I’m completely on board with having around 3-5 years of cash on hand as I enter retirement. This should be enough to ride out an extended bear market and avoid drawing from a depleted portfolio. For me, 3-5 years of cash would be approximately 200K, or around 10% of my goal net worth. 500K may seem high, but if you have higher yearly expenses or a higher net worth (like $5million), it doesn’t actually seem that outlandish.

  27. Nice post Vagabond. People disparage cash right up until they don’t…and then they wish they had more. There is a balance we all need to seek, and as PoF states, there is a reason it’s called personal finance.

    • Thanks, man. When I buy a new pair of Hokas, they do not accept a transfer from my Vanguard account. They do take cash/check, though. Funny how that works.

  28. Good stuff, doc. Thanks for sharing your strategy.

    Too many, in my opinion, are focused on the half million. Based on your age and professions, I’d be willing to bet that as a % of your net worth, your cash holding is comparable to many others that are commenting here.

    The $500,000 number sounds sexy and crazy, but percentages might make this easier for some to accept

  29. It’a easy to feel confident with a high percentage equity portfolio after a ~9 year bull market euphoria. I think after a 2008 type crash many more would be feeling the wisdom of a large cash cushion. Ask who’s sleeping well during a crash and the poll results would be different.

    • I completely, 1000% agree!!! In other words, I have seen this movie before and know how it ends. 10% annualized returns are baked into some investors expectations. If your anticipated date of retirement coincides with the next 50% drawdown in equities you may be screwed. Either you work longer (or go back to work) or cut your living expenses.

      Having a big cash cushion MIGHT allow you to skirt that problem. My mid-60’s uber-wealthy neurosurgery colleague, the guy with the great connections, vacation home and cool country club membership, retired in 2007 and then came back to work in 2009 and worked five more years. He probably wishes he had the big cushion.

      • A key point is paying off a mortgage comes before accumulating large cash position. Many keep some mortgage even if they could pay it off figuring the invested return is better than the tax adjust interest rate.

        So I’m not entirely comfortable holding a very large cash position, but I did pay off the mortgage even though it was a 15 year 2.875% rate. Deleveraging is a small step that allows better sleep too!

        Next I’ll keep about 5% of my basically FI portfolio in cash equivalents as emergency/better sleep/won the game cushion. Maybe slowly grow the percentage a bit as portfolio grows.

  30. I’m a fan of the bucket strategy. having maybe 3-5 years of cash on hand might make ya sleep better at night. While working I have about 7 months worth of expenses in cash.

  31. Thought provoking post. If you don’t encounter perspectives that challenge your own beliefs you’ll never grow. I appreciate the new perspective. May take me a while to fully digest it, but I’ll surely synthesize a stronger belief because of it. Great stuff!

    • Thanks! I did not realize that this would be a new perspective for many. It seems rather old school and reminds me a bit of my grandmother, come to think of it.

  32. Good post. How much cash to hold is really a personal thing. We keep about $100K in our cash bucket. I also believe in “why play a game we have already won”. We have enough still in the market playing the game. Between that cash and the income from dividends our portfolio generates (and should still pay something even in a down market) we should be able to cover 3 to 4 years of our early retirement living expenses. All without having to sell assets and locking in losses. Most people would not keep as much in cash as we do but I don’t care. I sleep very well and don’t worry about what it could have earned in the market. It is my life’s piece-of-mind insurance. Insurance costs money. I pay much more in health insurance than what I “might” make investing this cash.

  33. Thanks for the post, VagabondMD. Great example of personal finance being personal. While I don’t expect to have as much cash as you as I near FI, I’ll probably have enough to cover 2-3 years of expenses. It will probably be a combination of savings, CDs, and other fixed-income investments. For now I’m just accumulating as much as I can.

    I love that William Bernstein quote. Kind of touches on the concept of having “enough.” Thanks for sharing!

    • Bernstein is The Bomb. I wish I were half as smart as he is. My only consolation is knowing that I am probably twice as fast on a trail. Well, who knows, maybe is a speedy in the mud, too.

  34. Finally, someone who has somewhat same mind frame.

    I have always been an outlier. fairly young- over 500k in cash/equivalent. I am comfortable with that. I see a lot of post that you should be 100% equities on your portfolio when you are young. My argument is- I know what the value of stocks now as compared to its price. Price is what you pay- value is what you get. In our lifetime, you will always find golden opportunities to invest and our current market is not the time. As you said, you experienced downturn from 2000 and 2008. loss is loss. I agree with locking in the gains.

    • A kindred spirit at last! We should get together and celebrate our insanity over a beer–maybe PoF will do the buying since he is the beer magnate.

      • Hey, I just wanted to point out that you have another kindred spirit here, in case you haven’t seen the WARM model yet: http://jlcollinsnh.com/2017/09/09/sleeping-soundly-thru-a-market-crash-the-wasting-asset-retirement-model/

        I was fascinated. Basically, once he had more than enough money, he pulled out of the market almost altogether (6.51 percent in stocks, 27.94 percent in real estate, and 65.55 percent in money markets/bonds).

        I’m a cash girl, but after Mr. Money Mustache preached about making every dollar a soldier that works for you, I’ve slowly nerved up and pitched more of my money into the market.

        After you’ve already won the game, as you point out, you don’t need to take as many risks. Millennial Revolution counterpoints that if you have 60+ years of retirement, you need to take more risks than 6.51% in stocks. It’s always a balance. Thanks, VagabondMD & PoF!

  35. I’ll be doing something similar as I near “FI” – 3 years in cash (of expenses) is what I was thinking, have about 20 years to build that up. This is mainly to weather market downs during my hopefully long “retirement”.

    Hard to say what 1 yr expenses will be, but I think 100K a year will be adequate. I plan to keep the rest of my investment portfolio primary in equities.

    • 20 years is a very long time. Lots of life happens between now and then. It’s very difficult to extrapolate what your needs, wants, and expectations will be in 2037. I only try to plan in 5 year rolling blocks–which is why it’s nice having five years of expenses, literally, in the bank.

  36. 500k would make for an awfully lumpy mattress.

    My own cash holdings are about 10% of yours, and that is enough to allow me to sleep like a rock. It is called personal finance for a reason.

  37. Theoretically, I’m not big on holding cash outside of an emergency fund either. But in reality, I’ve got several hundred thousand dollars too. It’s mostly ear-marked for stuff (emergency fund, short-term savings, and especially upcoming tax bills.) But in reality, I’ve also got a 10% portfolio allocation to the G fund in my retirement portfolio. It’s current yield is 2.375%, so it’s an awfully nice “cash holding,” but other than the high yield it’s a whole lot more like cash than anything else.

    Incidentally, if a major reason one is holding cash is to avoid the short term loss of value in bonds in the event of rapidly rising rates a better option may be CDs.

  38. Thanks, PoF, for the shoutout to our cash management post!
    Well, $500k is a lot. If it makes you sleep better at night then that’s what have to keep as a cash cushion. I hold pretty much our entire net worth in equities (or equity-like investments). No need to time the market.
    Also, I don’t get very stressed out about having to withdraw from an equity portfolio during a downturn. The money doesn’t go down 100%. If the trough is -50%, and I withdraw money gradually during the downturn and then during the recovery, I sell equities at an average discount of 25%, not 50%. Just a few years of opportunity cost from the big cash cushion’s low return would be worse than that scenario.
    But as I said before, if that cash makes someone sleep better, there’s no arguing.

  39. Nice article! I dislike cash and have been close to fully invested in stocks for 15 years. But last year I also moved about $500,000 to cash. The reason I did so was to mitigate the sequence of returns risk as I consider early retirement in the near future. We’ll also have some big expenses upon retirement such as moving, replacing one vehicle, etc. But a big driver is that we’ve already won the game and this is “extra” money. The markets have done really well for a long time and I’m leery of being too greedy. But if markets drop, I won’t be able to help myself from plowing the money back into stocks where I am ultimately more comfortable.

    • I did not pull my chips from the table, per se, to accumulate my cash hoard. It was more of an organic process. About three years ago, I decided that I was interested in retiring from my medical practice. At that time, my cash position was probably closer to $200k. I guesstimated what would be required to live for five years if we both lost our jobs and could not find work, and came up with “about $500k”. We have had a few unexpectedly good earning years, and this allowed us to nudge up our cash position, without changing our investment process and plan. I am hoping to get fired now. 🙂

  40. Ahhh, interesting! I know many, many people are against having large stores of cash on hand. Personally I don’t keep that large of an emergency fund. We have a healthy fund to cover a few months of expenses (and we’ve cut our expenses tremendously). We’re in the debt elimination part of our money journey, so it doesn’t make sense for us to have tons of cash on hand when it could be applied towards debt. But everyone’s situation is different, so you do you. 🙂

    • It would make no sense to hold so much cash if there was debt in the picture. Earning 1% from a $500k cash position while paying 6% on a $200k student debt and 4% on a $300k mortgage would seem silly to me, unless the liquidity was required for business purposes, an anticipated major expense (like a home renovation, helping your parents, etc.).

  41. In theory I have been a proponent of taking some chips of the table when you have won, but then I also like the idea of either leaving $ behind for the next generation and/or some of the causes I support. For those reasons, I don’t think I would hold so much in cash.


    • I do not believe that these are mutually exclusive. Later in life, like perhaps 20 years from now, if the nest egg is solid, I can see being more aggressive with my assets than I am now.

  42. We have $5,000 in cash. I can’t justify holding on to more until I am debt free (at least student loan debt free). He is right though, cash is taken for services. When we lived in Argentina we lived solely on cash (but still only kept a few $100 in our apartment at a time).

    At the end of the day, comfort level and risk tolerance are what should be driving the emergency number fund.

    • I agree that if I had any debt, the emergency fund would be substantially lower. The emergency would be paying off the debt!

  43. Wow, that’s a lot of cash! Kudos! I agree though that it is all personal. I keep a hefty sum of cash, but mostly because I own several rental properties. When there is a repair or vacancy, it is not just a paper loss like in a mutual fund, it is writing a check. This allows me to sleep better at night. I also want to do some long term traveling, so having a nice cash reserve will be helpful.

    I recently used some of my cash reserve to pay off another property, but that was a hard decision to make…. either keep it on hand, or have a fourth property owned free and clear. It was definitely a mental game for me, more than math. After reading some opinions on not keeping so much cash on hand, I pulled the trigger. I still have a nice lump sum left, but I do want to build it up more.

  44. WealthyDoc – HELOCs are an option, but be aware that banks can close them pretty much any time (this happened to some folks during the 2008 Great Recession, when their home values plummeted). You might want to look into HECM’s (otherwise known as Home Equity Conversion Mortgages, or “Reverse Mortgages”). They have a bad rap, but are actually a viable tool for many of us who are 62 or older. Check out some of Wade Pfau’s writing on the subject. (I, personally, chose to stay with a HELOC because a HECM would not protect my unmarried partner if I had to leave the home. Also, HECMs are not offered by the major banks, and it can be hard to find an “honest mortgage broker” who will charge fair origination fees. (Brokers can get paid fat commissions by the lender if they quote a higher-than-required margin on the loan to the borrower.)

  45. Always enjoy your posts VagabondMD. Love that you don’t confirm easily.

    While I get your/Bernstein’s “once you’ve won the game” argument, in my mind the game never stops, meaning much of what drives me is multigenerational wealth and setting up my four children. I realize this puts me in the minority in the FIRE crowd and in general.

    If one must have a “cash stash”, Id prefer it in short Treasury bond funds to maximize rebalancing and still provide some safety when the next recession hits.

    • Thanks for showing the love to the Vagabond!

      I also have plans for multigenerational wealth accumulation, but I separate it from my own wealth accumulation process. Silos. Perhaps PoF will forget this disaster and indulge me for a blog post again sometime. :O

  46. I’m in the put your money to work camp. 5 years is just too much for me to keep in low return accounts. Vagabond states that he has already achieved his number so it’s not unusual that he would shift to a more conservative route with his money. For someone still trying to meet their number, keeping a large cash balance will hold them back.

    • I agree that this decision is influenced by my stage in life. Ten years ago, at 41, my cash position fluctuated between $50k and $150k, with a target of $100k, depending on what major expenses were on the horizon.

  47. Enjoyed reading this one and fully appreciate the personal aspect to make you sleep well. Good for you!

    We are approaching extra time in terms of our game. Close to winning but hey so were Paris St Germain yesterday before Barcelona put 3 past them in the space of 5 minutes….dramatic stuff can happen very quickly and I can’t disagree with your points #1-3.

    We fall on the end of the spectrum closer to PoF. We hold <$35K in cash. Over the next 16 months, that will grow significantly to cover 3 years expenses in cash. Our bond allocation when we both pull the plug on July 3, 2018 (I will be 51) will be ~7 years of expenses, spread across taxable and tax-deferred accounts. 10 years expenses in "more stable" assets will make us sleep like babies. Still trying to work out the value of holding TIPS (e.g. VAIPX) along with a fund like VBTLX. The remainder in US and ex-US equities, including small cap and emerging markets to boost returns.

    • Now is a good time to be raising cash, in my opinion (although I think that I have raised enough for the time being).

  48. I largely agree with Bernstein. Investment is all about taking risk to earn a return. At some point you don’t need a return to support your goals. At that point there is no reason to take the risk. I might still use a cd ladder (you might already be doing so with your cd holdings but it’s not clear) to get a higher return on my cash, but otherwise I see your position and with the right financial situation I would do similar. In my case though I likely won’t reach a number where I don’t care about the return. As such I’ll be using bonds and other items in correlation to my risk tolerance and asset allocation. Personal finance is deeply personal.

    • Yes, I do have a $200k HELOC. Perhaps it is my twisted way of thinking, but in a true, sudden dual job loss situation or other catastrophic financial calamity, the unmortgaged house, which is expensive to maintain, gets jettisoned in Year 2 or 3, if the reason for the emergency is not reversed.

    • I’ve seen HELOCs get cut in half during the last recession. I guess if it’s 3-4 times what you would need, then it may work, but cash does have advantages.

    • Our HELOC was frozen during the last crisis. Granted, in our case the value of the home dropped below the loan amount so if your home is paid off or mostly paid off it may not. Thankfully, we didn’t need it at that time and our home value is now about 200% of the loan.

  49. Gotta say, I’m pretty aligned with VagabondMD. Love the quote, “If you’ve already won the game, why are you still playing?”

    I’m working on filling “Bucket 1” before I FIRE in June18, and am close to having 3+ years of cash on hand.

    I sleep great.

  50. I am 59 and working 3 days per week now. I never really kept cash or mm when I worked full time. My practice working capital was my efund. I have $106k in short term funds now. Mostly In a short term bond fund at Vanguard and a money market at Vanguard. I do keep $3000 mattress money in my house. Actually a secret drawer in an antique for another tornado outage. I lived through 2000 and 2008. When this happens again I can live off dividends and interest just fine. As I have aged the Bernstein philosophy of quitting when you are ahead and taking some chips off the table is appealing. I have let my stock allocation run up to 65% because of the coming interest rate rise.

    • There is no doubt that living and investing through 2000 and 2008 colors our collective outlooks. A bird in the hand and all of that.

      As for cash at home, we keep very little, which is probably not good practice, but I have yet to come up with a scenario where having cash will help me in an emergency. I rarely have money on my person.

  51. Like POF said, I think it comes down to personal comfort and what lets you sleep at night. If you’re already $500k north of your “number” and still working for a few more years, it probably won’t matter either way. Personally, I’m keeping a relatively modest cash cushion, somewhere around 3-6 months of net cash flow. I’ll pull from taxable accounts regularly to replenish that.

    I go back and forth about the idea of “taking some chips off the table.” I like the modesty of that approach and that it mitigates risk in some potential downturn scenarios. If I won $100M today, I probably wouldn’t dump it all into an S&P 500 index fund; I’d want to diversify with cash, stock, bonds, real estate, and alternative investments to be very secure against all kinds of risks. On the other hand, though, if you’ve saved well beyond your number, why not take the highest expected value and stay largely in equities? If you’re drawing only 1-2%, for example, you’ll easily weather anything but the most catastrophic scenarios — and you’ll set yourself up for even more wealth that could support other causes you care about.

    • Not sure what I would do with a $100M windfall, but where to invest the money would be way down the list of concerns. My first thoughts would be about quitting the day job ASAP. Then, it would be figuring out whether to spend a month in Florence followed by a month in Yellowstone, or the other way around. ?

      • That’s true! I meant it more as a thought exercise at the extreme end of over-saving. But yes, Yellowstone or Florence — that is a very tough choice!

  52. Personally I don’t think that I need to hold that much cash in order to feel comfortable. 5 years worth of expenses is a ton of cash not working for you but if it helps you sleep at night go for it.

  53. Nice article, VagabondMD. Have you considered short to medium term CDs? Of course, when you’ve won the game, what is an extra $5,000 a year in interest?

    I personally would not have this much cash in retirement. When/if I win the game, I will start playing for my kids and other future beneficiaries of my estate. In this scenario, theoretically you could have the 3-4 million you need to live on retirement using the 4% rule, and any remaining money would actually be invested in 100% equities, because this money is for your children, not yourself, who wouldn’t need the money for their own retirement for potentially 40-50 years.

    • Yes, I have a decent chunk in a 4 year CD at 1.75% or so and another couple smaller pieces in 12 and 18 month CDs in the 1.1% to 1.25% range. At these rates, it might as well be under the mattress ?.

      Down the road, if I am able, I will concern myself with the future generations. I still have two full college tuitions to cover and two cash hogging teens to launch.

  54. Holy cash, Batman! That is the largest amount of ‘cash’ reserves I have ever heard anyone keeping in the event of emergencies. Ironically, I just did an e-fund post yesterday and the response was fairly passionate. People love to give their opinions on this one – since it is the basic fund for anyone serious about their finances. After reading this, I feel like we may be totally inadequate 🙂 We have the lower side of the recommendations sitting in cash and the rest invested, but “tappable” in the event of catastrophe. I tend to think that major catastrophes are extremely rare and we’ll take our chances with having to pull out invested money to cover expenses. Although, I do appreciate the idea of having $500k under the mattress 😉

    • I am very cautious about the future. I have seen bad things happen to people who seemingly did everything right. Having a large cash cushion allows me to not worry about money.

  55. Great points! We have $290k in cash – about three years worth of living expenses for us. And we hold it for those exact same reasons. Related note: The other 90% or so that is invested is invested 100% in equities – no bonds in our portfolio. Having the large cash cushion makes me very comfortable with that investment “mix”. 🙂

    • I am glad to see that there are others of a similar mindset. My investment portfolio is quite a bit more conservative than yours, 65:35 or so, but higher than average allocation to high risk assets: small value, emerging markets, etc.

      • Smart. The future is uncertain and past performance is NO indication of future results. These funds are not necessarily there for a ROR. You can be on a cash basis if anything unexpected comes up. Plus, you have dry powder on hand should an opportunity present itself which could potentially have a big payoff. You will not need to panic sell assets at an inopportune time.


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