So What About Cash?

In setting up for the next traunch of Roth conversion I converted some stock to cash to round out my living expense into my 73rd year. If SECURE passes 73 will be my RMD year. I store my cash in a high yield savings accounts paying 2.45%, so my interest is entirely predictable and government secured. My money market account only pays 1.75% so to me this seems a better deal. Cash at 2.45% is pretty safe. It grows and its growth beats inflation and I don’t have to put up with the variations in valuation of a bond fund like VBMFX. It’s basically as stable as a 3 month T-Bill but pays a lot more interest

Here is a 3 year chart of VBMFX and it has grown 2.13% where as my savings account is paying 2.45%. I also own bonds but I think this provides some diversity

I dont know how to model a savings account on the efficient frontier so I modeled VTI vs BIL which is the 3 month T bill etf and VTI and VBMFX fidelity total bond

You can see the VBMFX has an expected return of 3.83 with a SD of 3.32 vs the T Bill which has an expected return of 0.43 and a SD of 0.31. With a return of 2.45 I would expect the blue line to move up and more closely resemble the red line. My yield would be 2.45% but my SD probably less than .31% since the investment is fixed and government secured like a T bill.

Given bonds keep falling, meaning more volatility. I’ve concluded this is a pretty good investment. Essentially zero risk with a return only 36% less than the bond fund and it is perfectly liquid. It fits my need. I think cash is often ignored as an asset class because it’s paid so little compared to inflation but now that it pays more than inflation it seems both safe and efficient for risk free money, and I think provides some diversity which lowers overall risk in the portfolio. In the olden days before everybody moved out on the risk curve is was quite common for retiree’s to hold laddered CD’s as an income vehicle.

4 Replies to “So What About Cash?”

  1. That is actually quite a nice rate. I have an online savings account with discover and it is only 2.08%.

    What are your thoughts on the likely death of the stretch IRA which is tied to this SECURE bill?

  2. My financial adviser says seeking an ever higher interest rate is what old men do to try and goose their returns. 2.45 is one of the best out there but the account is no frills. I can check money in and out. I think it compounds daily and is paid quarterly or something like that. I track it in Personal Capital and the balances keep going up so I’m satisfied. My FIDO MM is paying 1.75 so I keep the bulk in CIT bank and some over at FIDO in case I need a quick cash infusion. You should remember interest is taxes as ordinary income so better diversity might be obtained by having the cash inside a IRA but this money has a specific purpose over a specific period so it doesn’t pay to get too cute.

    I think the whole point of the SECURE act is for the government to acquire as much taxes as they can as soon as they can. While you and your wife are alive, it’s more difficult for the government to reach into your accounts and start ripping off money because the governments claim on your money only extends to the taxes you have yet to pay. Not so with your heirs. They may give them a step up in basis but they may also demand an accelerated spend down and the spend down apparently applies to all inherited IRA accounts TIRA and Roth. If your spend down is 10 years and your inherited account is 3M You can expect to be cleaning the entire 3M plus interest out of those IRA’s in 10 years. If your heir makes 100K/yr and the spend down requires an additional 350K/yr they are suddenly making 450K/yr and paying taxes on that, at least that’s how I understand it and that understanding makes sense from a money starved government point of view. So I think the notion of stretching your IRA into an inter generational endowment is going to bite the dust in the second generation. There are things you can do like give money away but otherwise you’re stuck and not just stuck but dead and stuck. The legislation hasn’t passed so who know exactly what the consequence will be. By extending the Roth conversion period the government entices you to pay more taxes now instead of nickle and diming you for 20 years. Again paying taxes now gives you the benefit of true tax free growth during your lifetime but they will pick up the change on the back end after you’re gone and too cold to complain. At least that’s how I read it.

  3. My cash landed with Vanguard last year at some point.

    I was just about to mention my Vanguard Prime Money Market fund had you beat, but then I looked at the rate and, alas, 2.39%. So you win. But the battle is far from over. Nothing like having over-engineered cash position. Have a good weekend.

    1. I never even looked at Vanguard. Pretty strong rate. Tnx for the heads up. FIDO is paying 1.75% not enough. I expect this cash position to last 6 or so years as I draw it down to pay Roth conversion costs and living expense so a few extra 10K in interest works for me in a perfectly liquid asset. Tnx for stopping by.

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