Cash's role in a retirement strategy

[Timothy A]

I'm a typical mid 40's working guy who has a 401K whose employer pitches $.25 for every $1.00 I put in, up to 3%. I put in 6% of my pay, so I essetially get $.125 for every dollar I put in. I also have an annuity from a previous job that I don't contribute to, it just feeds or eats itself. (I also will have SS (therhetically) when I retire, but I am not counting on that.)

Here's the thought. Would it be crazy to stop contributing to the 401K and just stick the money in the bank? If there was some catastrophic market meltdown, I could lose all my 401k and therefore most of my retirement gets wiped out, other than the annuity that has a gaurenteed value. I'm not at all worried about spending this retirement cash on other things, we are very disciplined spenders.

I could still invest the cash at some point if I felt it was the prudent thing to do, obviously sticking it in the bank won't make me any money.

Am I nuts to consider cash as part of my retirement plan? Part of me says I am crazy for just following the herd and investing in the stock/bond markets when the markets/economies are entirely global and therefore more volitile, unlike 20 yrs ago. Part of me says I am crazy for thinking outside the box and not making any money on the money in the bank.

Thoughts?

 

[FlagDUDE08]

Re: Cash's role in a retirement strategy

I'm a typical mid 40's working guy who has a 401K whose employer pitches $.25 for every $1.00 I put in, up to 3%. I put in 6% of my pay, so I essetially get $.125 for every dollar I put in. I also have an annuity from a previous job that I don't contribute to, it just feeds or eats itself. (I also will have SS (therhetically) when I retire, but I am not counting on that.)

Here's the thought. Would it be crazy to stop contributing to the 401K and just stick the money in the bank? If there was some catastrophic market meltdown, I could lose all my 401k and therefore most of my retirement gets wiped out, other than the annuity that has a gaurenteed value. I'm not at all worried about spending this retirement cash on other things, we are very disciplined spenders.

I could still invest the cash at some point if I felt it was the prudent thing to do, obviously sticking it in the bank won't make me any money.

Am I nuts to consider cash as part of my retirement plan? Part of me says I am crazy for just following the herd and investing in the stock/bond markets when the markets/economies are entirely global and therefore more volitile, unlike 20 yrs ago. Part of me says I am crazy for thinking outside the box and not making any money on the money in the bank.

Thoughts?

If your employer is offering you free money, you would be crazy to not take it. Heck, I think you're crazy for not contributing 12% in order to take advantage of the full 3%.

If you're really worried about your 401k going down, there's always stable value funds or cash-heavy funds you could elect.

 

[Red Cloud]

Re: Cash's role in a retirement strategy

 

[Almington]

Re: Cash's role in a retirement strategy

I'm a typical mid 40's working guy who has a 401K whose employer pitches $.25 for every $1.00 I put in, up to 3%. I put in 6% of my pay, so I essentially get $.125 for every dollar I put in. I also have an annuity from a previous job that I don't contribute to, it just feeds or eats itself. (I also will have SS (theoretically) when I retire, but I am not counting on that.)

Here's the thought. Would it be crazy to stop contributing to the 401K and just stick the money in the bank? If there was some catastrophic market meltdown, I could lose all my 401k and therefore most of my retirement gets wiped out, other than the annuity that has a guaranteed value. I'm not at all worried about spending this retirement cash on other things, we are very disciplined spenders.

I could still invest the cash at some point if I felt it was the prudent thing to do, obviously sticking it in the bank won't make me any money.

Am I nuts to consider cash as part of my retirement plan? Part of me says I am crazy for just following the herd and investing in the stock/bond markets when the markets/economies are entirely global and therefore more volatile, unlike 20 yrs ago. Part of me says I am crazy for thinking outside the box and not making any money on the money in the bank.

Thoughts?

The problem with sticking large sums of money earmarked for retirement in cash, when you are 20-30 years away from retirement is that you are just going to get killed by the impact of inflation eating away at the buying power of that cash over time.

You should be contributing at least up to what your employer matches in your 401K, that would require at least a long term 20% fall in the market for you to lose any of the principle of what you personally added. Given your investment options, unless they have a very high risk fund, you will never lose all of the value you have in the market, and as you get closer to retirement you can switch over to a more conservative investment allocation. If the market were to collapse to the point that everything that you have in the stock market were wiped out, that annuity would also be lost and inflation would quickly destroy the value of any cash you have saved (if you were even able to get it out of the bank).

What I would do is:
Cut my contribution on my 401k back to 3% of my pay to take advantage of my match.
Since you are a working guy, I suspect that your AGI is below $150k, start a Roth IRA at either Vanguard or Fidelity for both you and your wife with the objective for contributing another 7-12% (total retirement savings of 10-15%) of your take home pay, up to the annual contribution limit of $5000 each to your IRAs. You can be as conservative as you want with how you diversify with your IRAs, but with a 20-25+ year time horizon to retirement you really need to stay in the equities markets to try and build a large enough retirement fund.
If you have maxed out your IRAs and still have money to invest and you want something very safe, l'd look into Treasury Inflation-Protected Securities (TIPS). They are not as liquid as cash, but they will hopefully allow you to not have inflation completely eat away at buying power of what you have saved.

This is just a generalized suggestion, the details of would require knowing much more about your current financial state and where you want to accomplish in both the short and long term.

At the end of the day, you have to do what you feel is best for you and only take the risks that you are comfortable taking. No one cares more about your money than you do.

 

[unofan]

Re: Cash's role in a retirement strategy

If you are so risk averse that you're considering cash, then you should at least be looking at bonds or even a broad basket of commodities as hedges against inflation. You should be able to invest in either within the confines of your 401k program, or, as Almington pointed out, an IRA or Roth IRA.

 

[ScoobyDoo]

Re: Cash's role in a retirement strategy

Gold.

 

[Timothy A]

Re: Cash's role in a retirement strategy

Gold.

Not to drag hockey into the discussion, but I could never own anything gold, or maroon for that fact. I'd hate to give anyone the slightest impression I may me a rodent fan.

I'm not mega adverse to risk, but if there was a 1929 economic type meltdown, could the Roth be wiped out by that? That money ends up getting invested somewhere, correct?

 

[FlagDUDE08]

Re: Cash's role in a retirement strategy

Not to drag hockey into the discussion, but I could never own anything gold, or maroon for that fact. I'd hate to give anyone the slightest impression I may me a rodent fan.

I'm not mega adverse to risk, but if there was a 1929 economic type meltdown, could the Roth be wiped out by that? That money ends up getting invested somewhere, correct?

Depending on where you're invested, it's possible. Just make sure not to put all your eggs in one basket and diversify.

The money is with the companies where you hold certificates. If they spend it and don't get a return, it's been lost. There is a multiplier involved, so people can get rich and retire, and once it gets pulled out, the multiplied portion of the money is gone.

I'd say at this point, do research on stocks and funds to find the best one. You have a terrific case study in 4th quarter 2008 and 1st quarter 2009. However, we're definitely heading to 1937 at this point, so I'd try to see what happened there. Hopefully we don't need World War III to pull us out of this (although there's already been some fighting in the Bush era, which is where the prosperity came).

 

[Almington]

Re: Cash's role in a retirement strategy

Not to drag hockey into the discussion, but I could never own anything gold, or maroon for that fact. I'd hate to give anyone the slightest impression I may me a rodent fan.

I'm not mega adverse to risk, but if there was a 1929 economic type meltdown, could the Roth be wiped out by that? That money ends up getting invested somewhere, correct?

You sure sound risk averse. The money that you put into the tax advantaged retirement plans (IRAs and 401k plans (regardless if a Roth or traditional) are invested somewhere, but even in the case of a 1929 or 2008 type meltdown where the value is hit by up to 50% you will still own the underlying investment and provided that you are well diversified you will not be "wiped out".

After every large fall in the market: 1929, 1987, the tech bubble, or the financial crisis, the market has recovered with time. The key is the with time, if you don't need the money for 10 or 15 years, what impact do short term market fluctuation have on your day to day life? Short of the stress of worrying about them, they really don't. The thing is that you can tailor your holdings to reflect what your risk tolerance is and what type of long term financial goals that you have. Once you have done that you are best to just ignore them on a daily or weekly or even monthly basis and just periodically (like once a year or so) make sure that your holding match what you want in retirement.

Provided that you have a 10-15+ year investment horizon, keeping a large potion of you retirement savings sitting in cash long term (provided that you have a health emergency fund and no expected short term crisis looming for which you want a pile of liquid cash you can tap) is going to hurt you when it comes to the financial resources you have a retirement.

My personal feeling is that gold just isn't worth the risk, all the signs of a bubble market exist and it has the potential to blow up in an ugly way. Silver, on the other hand, greatly intrigues me given its wide range of industrial uses.

 

[unh_hockey]

Re: Cash's role in a retirement strategy

I built my 401k one piece at a time, and it didn't cost me a dime.

Unless you have the time and acumen to research stock/ bonds, the 401k is a perfect vehicle to generally beat inflation in the long term. Sure, you'll have down years - but these have been occurring since the 20s. The nice thing is that your company matches it AND your financial services will do all the work for you. As for investing in bonds, commodities and performing hedging practices, stay clear unless you have some knowledge about how financial products work. The stock market can and has crushed many novices.

Lastly, remember its you and only you who has something to lose. Listen to us at your leisure, but at the end of the day, be confident that the guy looking back at you in the mirror has to make the right choices.

 

[Almington]

Unless you have the time and acumen to research stock/ bonds, the 401k is a perfect vehicle to generally beat inflation in the long term. The nice thing is that your company matches it AND your financial services will do all the work.

My biggest issue with 401k and why I would only contribute as much as the match until I have max my IRA contribution is that 401k often have limited investment options and high expense levels. If you are not careful those two things will negate much of the tax advantages of the 401k.

 

[FlagDUDE08]

Re: Cash's role in a retirement strategy

My biggest issue with 401k and why I would only contribute as much as the match until I have max my IRA contribution is that 401k often have limited investment options and high expense levels. If you are not careful those two things will negate much of the tax advantages of the 401k.

Absolutely true. I have been investing post-tax for the most part (non-IRA), but I can actually claim loss with some of my distributions. Cash is good in the late game, but Tim, you're not even close to the late game yet. 30-year bonds if you really want, maybe some mutual funds that give you the best of all worlds, but I'd stick with stocks at this point (at least 80%, even if it's a mutual fund that's 80% stock investment). Get yourself some good paying dividends. What I'd recommend is to check out Morningstar's website and look to see the best performers in terms of profitability, growth, and financial stability. Invest based upon what is important to you. Be aware they won't consolidate all of this unless you pay, so you'll have to do some searching. Get companies that have been fairly stable with dividends even through the 2008-09 crash, but be sure to look at the companies' financial history (use Google) to see if they have the earnings ability to pay them (or if they pay according to the booms and bears, that's always good). Obviously if you want recommendations, I'd be happy to give them to you.

 

[dxmnkd316]

Re: Cash's role in a retirement strategy

Two words: Vanguard IRA.

 

[FlagDUDE08]

Re: Cash's role in a retirement strategy

Two words: Vanguard IRA.

Not a good plan. They have $20 commissions on stock trades (unless you invest in their limited number of funds (where I saw worse options than 401k), although there's probably a minimum trade amount to avoid that fee, it's gotta be up in the 6-figures).

 

[dxmnkd316]

Re: Cash's role in a retirement strategy

Not a good plan. They have $20 commissions on stock trades (unless you invest in their limited number of funds (where I saw worse options than 401k), although there's probably a minimum trade amount to avoid that fee, it's gotta be up in the 6-figures).

I suppose that would be a big deal if you're a day trader, but if we're talking retirement here...

I'm kicking in bi-monthly payments for $5k a year and each time I see the full purchase price going towards the funds.

 

[FlagDUDE08]

Re: Cash's role in a retirement strategy

I suppose that would be a big deal if you're a day trader, but if we're talking retirement here...

I'm kicking in bi-monthly payments for $5k a year and each time I see the full purchase price going towards the funds.

I guess it depends on what you buy. I make about 50-60 trades a year (the story changes with some companies, and I buy on a ladder as the price decreases), so those costs add up.

 

[Almington]

I guess it depends on what you buy. I make about 50-60 trades a year (the story changes with some companies, and I buy on a ladder as the price decreases), so those costs add up.

I dont think that either of us are advocating individual stocks. Even if the mutual funds have limited options, the expense ratio is low and even I'd you just get market returns its going to fit what the majority of people need as a basic retirement plan.

 

[Bakunin]

Re: Cash's role in a retirement strategy

A number of points to be made here:
1) Cash holdings = bad idea; you're decades from retirement and accumulation / growth ought to be your focus; don't worry so much about capital preservation until you are within 10 years of retirement (at that stage, your mix should be shifting toward a 60-40 stocks to bonds mix or perhaps even 50-50 as that's the time when you can no longer recover from severe market downturns).

2) 401k vs Roth - ideally, you'll have money flowing into both of these - it's called tax diversification (since no one knows exactly what the tax rates will be decades from now, it makes sense to have some money in tax deferred accounts and some money in a Roth which won't be taxed again). Of course, to contribute to a Roth, you must meet the income limits (most people do).

3) Amount to contribute to each: my suggestion is fully capture your employer match and then contribute as much as you can to the Roth. Once you've maxed out the Roth contribution, contribute more to the 401k (individual IRS limit will be $17k next year and is $16,500 this year).

4) Fund type and volatility: first off, any investment can lose money. Even if you had all-cash, you'd lose money due to inflation. My suggestion here is to research target date retirement funds and pick something with a really low fee (Vanguard was suggested earlier for precisely that reason). Also keep in mind that not all target date funds are the same - one company's 2030 fund might be far more aggressive than another's. It is essential to look into exactly what their asset mix is now and what it will be near/at retirement. Generally speaking, you want a fund that reduces stock exposure / increases bond exposure to the point you're around a 50-50 split at the time of retirement (this will smooth out the volatility, protect you from huge losses, and also give you a chance to continue earning returns that exceed inflation by a little bit).

Lastly, picking individual stocks is a fool's errand. Scooby's suggestion of gold is fine, but that should never be the main basis of a portfolio. I own shares of GLD, but that accounts for 5-10% of my overall retirement holdings. Not particularly significant.

 

[dxmnkd316]

Re: Cash's role in a retirement strategy

A number of points to be made here:
1) Cash holdings = bad idea; you're decades from retirement and accumulation / growth ought to be your focus; don't worry so much about capital preservation until you are within 10 years of retirement (at that stage, your mix should be shifting toward a 60-40 stocks to bonds mix or perhaps even 50-50 as that's the time when you can no longer recover from severe market downturns).

2) 401k vs Roth - ideally, you'll have money flowing into both of these - it's called tax diversification (since no one knows exactly what the tax rates will be decades from now, it makes sense to have some money in tax deferred accounts and some money in a Roth which won't be taxed again). Of course, to contribute to a Roth, you must meet the income limits (most people do).

3) Amount to contribute to each: my suggestion is fully capture your employer match and then contribute as much as you can to the Roth. Once you've maxed out the Roth contribution, contribute more to the 401k (individual IRS limit will be $17k next year and is $16,500 this year).

4) Fund type and volatility: first off, any investment can lose money. Even if you had all-cash, you'd lose money due to inflation. My suggestion here is to research target date retirement funds and pick something with a really low fee (Vanguard was suggested earlier for precisely that reason). Also keep in mind that not all target date funds are the same - one company's 2030 fund might be far more aggressive than another's. It is essential to look into exactly what their asset mix is now and what it will be near/at retirement. Generally speaking, you want a fund that reduces stock exposure / increases bond exposure to the point you're around a 50-50 split at the time of retirement (this will smooth out the volatility, protect you from huge losses, and also give you a chance to continue earning returns that exceed inflation by a little bit).

Lastly, picking individual stocks is a fool's errand. Scooby's suggestion of gold is fine, but that should never be the main basis of a portfolio. I own shares of GLD, but that accounts for 5-10% of my overall retirement holdings. Not particularly significant.

It's incredibly important to differentiate the type of account and the tax properties (401k vs IRA; Roth vs. Traditional)

A 401k is generally provided by your employer. An IRA, by definition, is an individual retirement account.

I'd also recommend reading this for the differences between a traditional and Roth account: http://en.wikipedia.org/wiki/Roth_IRA

For instance, I have a Roth IRA, a traditional 401k, and a Roth 401k. I make sure to balance the funds being put into each, although I tend to put more towards my Roth accounts because I'm so young (among other reasons).

 

[dxmnkd316]

Re: Cash's role in a retirement strategy

I dont think that either of us are advocating individual stocks. Even if the mutual funds have limited options, the expense ratio is low and even I'd you just get market returns its going to fit what the majority of people need as a basic retirement plan.

I agree. If someone is trading in a dedicated retirement account that many times a year, they are playing with fire unless they know what they are doing. A retirement portfolio should be extremely diverse. I like Vanguard because they have so many options and the expense ratios are rock bottom. As an added bonus, their website is second to none. I can get history all the way back to when my dad opened the account for me back when I was 10 (or so).