Cash Isn’t Always King

It seems like there is a lot of money just sitting out there in cash these days. Perhaps people are unsure and just not deciding to move forward on anything. And some of that nervousness is reasonable.

Cash may be doing one of its most useful jobs of providing liquidity for you. But at the same time, it can be unhelpful because of the low rates paid by banks on savings, CDs, and money market accounts. That’s why it’s not always “king” when it comes to your retirement goals.

Recently, one of my clients sheepishly confessed that she had almost $480,000 sitting in a money market account earning just 2%. At that rate, it would be difficult to keep up with today’s inflation.

I asked her what her monthly expenses were, and she told me she spends around $4,000 to $5,000 per month. When I showed her how much cash she had sitting in that account compared to what she actually needed for her monthly expenses, a light bulb went off.

You probably don’t need that much cash sitting on the sidelines unless you’re planning to buy a house or car, or you need that level of liquidity for a major purchase or unexpected repair. Even half of that amount may be more cash than you need.

So, why leave $200,000—or even more—in an account earning very little?

It makes me wonder: just how much money is sitting in checking accounts across the U.S. right now, earning 0.01% or less?

Cash Should Do Its Job

The risk is letting comfort and inertia quietly become a de facto retirement strategy, aka procrastination. You’re comfortable. So, when does a healthy cash reserve start turning into a retirement plan problem?

Cash should have a job. And what is that job? Cash is for spending, paying taxes, paying for emergencies, paying for near-term purchases, or paying for pending or future vacations. Every bucket of your cash should have a different job. And going forward, your job with that cash is to realize how much you need for point A, point B, and C, and put a whole retirement plan together.

When we put a plan together, we determine how much you need for your daily living, your household expenses, and your future living, and so forth. And unfortunately, what you are spending today might not be what you need to spend tomorrow.

You may not realize what you’re going to spend later in retirement, for instance, on healthcare. And that could end up being a big problem if all your cash is in the market. Because we’re going to have market swings. We’re going to have fear in the world. We’re going to have a lot of things that don’t go our way, like high gas prices, high mortgage rates, high inflation, and other things we can’t even speculate about.

It’s part of life. We’re going to have tax hikes. Some of these things are controllable and some of these are not. But that’s why it’s important to put your cash to work for you.

Moving Cash to Annuities for Interest

Consider putting some of that money, maybe $100,000, you have sitting in excess in a savings account or checking account or money market account earning 0.01%. You can move that into a one-year annuity account earning 4%, or a three-year account earning 5%, or a five-year account earning 5.5% contractually guaranteed by an insurance company. Those are just hypothetical examples… I can get you real numbers.

In terms of liquidity, you will have a short timeframe. Plus, you’ll still have access to 10% or more of that money every year. The best part will be that your money is working for you.

Does that intrigue you, or are you just going to be passive and think that you are only getting 5% of that money, maybe an extra $5,000. By not earning that interest, you in many respects are throwing five grand away. Time goes by quickly, and compound interest can add up. Take advantage of it. Don’t let your hard-earned cash be stagnant. Put it to work.