FIRE and Holding Cash – What We’re Doing

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These are the show notes for both our original discussion on holding cash, and our follow-up episode where we react and respond to the feedback from our viewers. You’ll find links to both videos below as well. Show notes may be found below the two videos.

Original episode:

How much cash in your portfolio is enough – or too much? In this episode, Eric + Jason discuss the idea of holding cash allocations pre- and post-retirement. Topics covered include emergency funds, the temptation to invest in a down market, bonds, and building cash reserves. Join us as we discuss this essential retirement topic.

We respond to your feedback:

Are you worried about holding cash in this high inflation environment? In a recent video, we talked about the role of cash pre- and post-retirement. In this episode, Eric + Jason review and react to YOUR ideas that you shared with us. Topics covered include bond ladders, high yield savings, real estate, gold and other cash alternatives, and emergency funds. See the links below for the show notes and our earlier episode about what we’re doing about cash.

Show Notes

Essential Background:

We referenced several recent Two Sides of FI episodes in this video. Our interview with Karsten Jeske, “What the FIRE Community Gets Wrong”, and the follow-up video, “Karsten Spoke, We Listened. Here’s What We Learned” are great places to start. In these, we discuss the core concept of safe withdrawal rate and how that influences our FIRE numbers and asset allocation.
In this video we also talked about our experiment earlier this year to hire a fee-only advisor to look at our portfolios. If you haven’t seen it, you won’t want to miss “We Each Hired a Flat Fee Financial Advisor. Was it Worth It?” for all the details on what we learned. Emergency funds and bond allocations are part of this, but there’s a lot more to share.
Wondering how Eric decided to move from a 100% stock allocation and add bonds to his portfolio? You won’t want to miss the two-part series: “I Rebalanced My FI/RE Portfolio and I Hate It!” (Part 1) and “Buying Bonds. Still Not Convinced I’m Doing the Right Thing!” (Part 2). As a bonus, check out the conversation with Eric + his wife Laura, “FI-nancial Decisions – Transitioning to FI with Laura + Eric”, for a behind the scenes look at how they decided on their revised asset allocation.

Bucket Strategies are a topic we’ve covered numerous times on the show. If you’d like to learn more, we’d recommend the article “How To Build A Retirement Paycheck“. This is the first of three great posts on Fritz Gilbert’s (The Retirement Manifesto) implementation of this approach. The other two articles in the series are linked here too.

Equity Glidepaths are a type of dynamic asset allocation plan often discussed in retirement planning. In Karsten Jeske’s words, “if we start with a relatively low equity weight and then move up the equity allocation over time we effectively take our withdrawals mostly out of the bond portion of the portfolio during the first few years. If the equity market were to go down during this time, we’d avoid selling our equities at rock bottom prices. That should help with Sequence of Return Risk!”. He covers glidepaths in Part 19 and Part 20 of his Safe Withdrawal Rate series of blog posts.

How does gold perform vs. stock indices? Many people believe gold and other precious medals are “safe havens” to run to during periods of stock market volatility. This chart from Index Fund Advisors shows the reality of the situation. In this example capturing data from 1978-2021, the y-axis shows the rate of return, and the x-axis the annualized standard deviation. You’ll see gold has similar volatility (SD) as the S&P 500, but about half the annual return. Silver is much worse, at twice the annual volatility as the S&P index but twice the volatility.

Bond (or CD) Ladders are one of the topics we touched on in todays episode, and are commonly used by many retirees as part of their fixed income strategy. This post from the Bogleheads wiki is a good resource to understand this instrument better. These days most brokerages make it easy to set up ladders, via simple to use tools you can access on their websites.

Sitting out market volatility may sound like a good idea to some people, taking their money out of equities seeking less volatile investments. But this is really just attempting to time the market. And articles like this one from CNBC demonstrate just how risky a strategy that is. Considering market data going back to 1930, a Bank of America study found that if an investor sat out and missed the S&P 500′s 10 best days each decade, their total return would be 28%. If, on the other hand, the investor stayed in the market all through the ups and downs, the return would have been 17,715%!

Interest rates on savings accounts are always a hot topic when thinking about holding cash – particularly when these far trail the rate of inflation (i.e. cash losing value over time). As an example of how quickly things can change, the interest rate has already doubled in the few months since we originally recorded this episode. Today, there are banks offering >2% interest on high yield savings accounts!

You can find information on the tools we mention in each episode along with additional information in the Resources section of this site.