Cash or Bonds or Stock
Hello- I’m a newbie here and have achieved FI. I’ll be quitting my job soon and retire. I have significant amount for cash $1m in CDs and MMFs, $4m between IRA and brokerage, 95% equity. Market is at all time high . Wondering where should I put my cash as I understand in not in a favorable tax position with interest income being taxed as ordinary income! Please advise
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Ignore "markets are at an all time high".... that means absolutely nothing. That is it's common status and what has made it a great investment.
1M out of 5M portfolio is 20%, which is an incredibly suboptimal amount of cash to have on hand, unless you had a plan to spend it immediately and the remaining 4M was your 160k retirement income, which is reasonably higher than average American income, completely liveable. A good portfolio will not hold more than 6% in cash, as more is too heavily adversely impacted by inflation and lack of growth, dropping SWR.
What is your FI Number, or your expected annual expenses in retirement? How soon do you expect to retire? At what age?
Follow moneyguy.com for where to put each of your current and future cash savings->Investing. If headed to early retirement, it can make sense for Step 4 Emergency Fund to be 2 years of expenses. Then move on.
If you are FI but don't expect to retire in the near future, you could invest the FI Number amount of your portfolio in a Withdrawal Phase portfolio, like the Golden Ratio, which is optimized for highest SWR, and then put the surplus in an Accumulation Phase 100% Equity (like 80 VTI/20 VXUS) portfolio. Or put 100% into Golden Ratio... both reserving the ability to retire at any time at your desired quality of life. Or, if you knew you wanted to work for more years, you could gamble and opt to phase into the Golden Ratio, being 100% at the date of retirement (the problem being the portfolio MAY go down in the short term until then due to normal volatility)... it could end up a higher portfolio size at the time you transition though. Unknown.
If "cash" means money market accounts making +4% it might not be as horrible as you are saying given that ten year treasuries aren't returning much more.
I agree about all time stock highs not mattering but bond yields are tough and short term treasuries do 'soften the ride' even if they don't have huge returns.
In any case it send the op has probably over saved and might not need to maximize returns.
The alternative to "stocks" or "cash" isn't necessarily 10-year bonds. There are many better assets to hold based on goals of the portfolio. The goal (if Accumulation Phase) may indicate more stock. It may be diversifying into a Golden Ratio-type portfolio, etc., if there's nearer-term goals or impending retirement.
Hey Bella! To answer your question, what would be important is what is your risk tolerance and how much withdrawals a year would you need to make? Depending on your situation take the VanGuard Quiz here it can give you a reccomended allocation based on how you answer the questions.
For myself since I'm 31, have no intention of making any withdrawals and am comfortable with high-risk, high-reward it recommends I keep my investments all in stocks since in the long-run. QQQ or the S&P 500 is a certain 10-15% returns if you have no interest in knowing the markets.
Let us know if the quiz helps!
The question are: how much do you need a year to live on for How many years? Will you have any other sources of income over this years? In other words how much of that do you plan to spend in your lifetime and what are your plans for any unspent money?
Market at all time high is the normal situation, so don't let that idea push you towards any actions.
But... at one point I read that really really rich people have lower-risk portfolios. Why? Because they have already more than enough money. Their biggest risk is losing that money by making too risky investments.
So you might have arrived at a position similar to them... it might be that reducing your risk (and upping the % of safer investments/cash) is worth it, because you already have all the money you'll need. Your goal has shifted from "making the most possible money!" to "making sure my pile of money is not exposed to too much risk".
Excellent perspective. Thank you!
If your just holding cash to balance your portfolio, that should be in your IRA as that gets no preferred tax treatment for capital gains like your Roth or your after tax accounts. If your holding it to buffer market conditions then hold that cash where you can withdraw it quickly without penalty. I usually keep about 3 to 6 months aside and withdraw on market highs to replenish. Alot depends on your age, and what buckets you plan on spending from, when.
Congratulations! So you’re really 80% equities and 20% cash (need to look at everything together). Depending on your expected expenses that much cash with be a major drag, but if you only spend $100k a year it doesn’t matter as you’ll way underspend your assets. If you’re only spending 2-3% of your assets yearly then it doesn’t matter, pay the taxes, keep it simple, go enjoy.
If you’re trying to maximize spend and enjoyment and closer to 4% or more, then look into risk parity portfolio (check out Risk Parity Radio). Frank has answered similar questions and mentioned BOXX which pays the interest as qualified dividends if i remember correctly. But all depends on what other income you’ll have as that’s intended to help reduce ordinary income for super high earners.
In reality you want to reduce your cash, add equities or Gold in brokerage account and then in IRA hold treasuries or other items that pay ordinary income. But again, start with expenses and figuring out your overall allocation.
Also, with $1.4M total, 4% rule of thumb (which was shown to last 30 years in worst case scenarios, not FIRE timeframes, and 30% equities is likely below the low end of what 4% can support) only supports $56K annual spend, not $100K plus.
Using a more realistic 3.5% SWR for FIRE timeframes (see The *default* (baseline starting point) SWR (Safe Withdrawal Rate) for FIRE should be 3%-3.5%, not 4% (29X-33X, not 25X)!), $1.4M could support $49K/year with a higher equity allocation.
I would recommend determining how much cash is appropriate to hold - note that low equity / high cash/bonds is appropriate in the years surrounding retirement date (retirement red zone) to lower sequence of returns risk and then shift to rising equity glidepath a few years after retirement. 30% equities still seems low, though.
I would recommend decide first on equity percentage and either buy a total stock market or S&P500 low cost index fund to push up equity allocation to desired level or a low cost allocation fund with your target allocation.
@JDFI hello- thank you for the reply. I see that the period has caused confusion! It’s not .$4m but $4m!
$1m in cash but a little hesitant to invest in stock with how “hot” market is
@bellajenkins, Ah, that makes sense, and you are correct that it was the period placement which caused me to misinterpret what you meant. FYI, you can edit your initial post using the ... menu, to fix the spacing on the period so no one else is confused.
In that case, I see how JoeQ17 got his numbers, so I would agree that you sound well positioned for FI and to RE if your SWR is below 3%-3.5%.
"Retirement red zone" is still a concern, so pick an allocation of cash you want to hold during retirement red zone and for emergency fund, etc, and invest the rest. Alternately, you could choose a time segmentation/bucket strategy if you are more comfortable with reliable income for a few years. A bond ladder which you spend down, causing your equity percentage to rise over time could implement that.
You need to determine what your retirement income style preferences is to determine which approach is more suitable for you. I recommend taking the RISA to crystalize understanding of your own preferences on that. See Retirement income sourcing preferences / biases for an explanation and details around RISA.