Author Topic: saving cash vs. fear of investing.  (Read 2362 times)

Late_Bloomer

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saving cash vs. fear of investing.
« on: August 08, 2015, 02:21:53 PM »
So I was doing some basic calculations and realized if I really wanted I could just save cash and bypass the fear of losing the gains, or worse, losing my principle in index investing.  Now I'm not actually going to do that but this is what it would look like if I did.

Currently maxing a tsp (mine) and 401k (spouse). This amounts to 36k per year. We plan on hanging our hats 14 years from now which would be just over 500k guaranteed cash saved. with investing, it should come out around 800k IF the markets dont stagnate, or crash. That amount is also projected at a 7% annual gain each year for the next 14 years. As we all know, there is a lot of "if" in that statement. 

As far as our current living and future expenses are concerned, that 500k guaranteed savings is more than enough for us. Fire age for us is 57. Even if we draw social security early at age 62, we would still get 950.00 each (estimated from ssa.gov). I will also draw a small pension, should be about 600.00 after taxes. That amount totals 2,500.00. On a 3,000.00 per month retirement budget we would only need to draw out 50.00 per month from our saved cash.

From age 57 to 62 is the only gap where we would have to draw up to 2,400.00 per month from the cash account, so about 144k for those 5 years. Two ways we have to alleviate that is both of us working part time or one of us keep working full time for those 5 years.

As I said, not sure I could pass up the free money from investing but was curious if anyone else has done, or have thought about it due to market fears.

kaposzta

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Re: saving cash vs. fear of investing.
« Reply #1 on: August 08, 2015, 02:50:01 PM »
My opinion is that you shouldn't be afraid of investing your money. In case you want to be extremely careful, you can put 50% of your savings to safe ETFs, e.g. Vanguard's short- and/or intermediate-term bonds (and you can put the rest to a savings account).
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MDM

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Re: saving cash vs. fear of investing.
« Reply #2 on: August 08, 2015, 04:03:40 PM »
As I said, not sure I could pass up the free money from investing but was curious if anyone else has done, or have thought about it due to market fears.

Might look ok for the first year or five, but inflation will cause a loss of the entire $500K sometime in your mid-70s.  The specific year depends on how closely one assumes SS payments match actual inflation.  You stay solvent until age 80 if both the SS and pension keep pace with inflation.

Regarding the $950/mo from ssa.gov: does that assume you continue to work until you start taking SS payments?  That is the ssa.gov default, but you may have overridden and specified zero earnings starting in 14 years.

The starting $36K/yr might also need to be higher due to inflation but that may already have been considered.

See the table below with Excel calculations for the optimistic case (SS and pension increase at 3% to match the 3% inflation).  Copy and paste into cell A1, the copy the last two rows down to whatever age is desired.

AgeExpensesSSPensionWithdrawBalance
0.030.030.03500000
5536000=600*12=B3-C3-D3=F2-E3
56=B3*(1+B$2)=D3*(1+D$2)=B4-C4-D4=F3-E4
57=B4*(1+B$2)=D4*(1+D$2)=B5-C5-D5=F4-E5
58=B5*(1+B$2)=D5*(1+D$2)=B6-C6-D6=F5-E6
59=B6*(1+B$2)=D6*(1+D$2)=B7-C7-D7=F6-E7
60=B7*(1+B$2)=D7*(1+D$2)=B8-C8-D8=F7-E8
61=B8*(1+B$2)=1900*12=D8*(1+D$2)=B9-C9-D9=F8-E9
62=B9*(1+B$2)=C9*(1+C$2)=D9*(1+D$2)=B10-C10-D10=F9-E10
63=B10*(1+B$2)=C10*(1+C$2)=D10*(1+D$2)=B11-C11-D11=F10-E11



lbmustache

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Re: saving cash vs. fear of investing.
« Reply #3 on: August 08, 2015, 04:07:28 PM »
I like to keep some liquid cash on hand even though it's frowned upon. Gives me peace of mind. Maybe a few months expenses worth, invest the rest. In reality the money sitting in the bank is growing smaller, since the interest rate (no clue what mine is... feels like .00001%) is lower than the rate of inflation.

JLee

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Re: saving cash vs. fear of investing.
« Reply #4 on: August 08, 2015, 04:59:16 PM »
I like to keep some liquid cash on hand even though it's frowned upon. Gives me peace of mind. Maybe a few months expenses worth, invest the rest. In reality the money sitting in the bank is growing smaller, since the interest rate (no clue what mine is... feels like .00001%) is lower than the rate of inflation.

I don't think having a few months' expenses is frowned upon, especially here where most people drive their expenses as low as reasonably possible.

clifp

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Re: saving cash vs. fear of investing.
« Reply #5 on: August 08, 2015, 05:00:40 PM »
I like to keep some liquid cash on hand even though it's frowned upon. Gives me peace of mind. Maybe a few months expenses worth, invest the rest. In reality the money sitting in the bank is growing smaller, since the interest rate (no clue what mine is... feels like .00001%) is lower than the rate of inflation.

There is absolutely nothing wrong have with having an emergency fund of 2-6 months cash, especially while you are working. The benefits of having that relatively modest amount of money say $20k are pretty small.  The problem with having a big hunk of cash of like $500K sitting out of the market for years is you give up a lot. The OP could either have another $1,000 in retirement or retire probably 3 years earlier some combination.

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Re: saving cash vs. fear of investing.
« Reply #6 on: August 08, 2015, 07:19:53 PM »
... As far as our current living and future expenses are concerned, that 500k guaranteed savings is more than enough for us. Fire age for us is 57...

Make sure you have taken into account the cost of health insurance and its escalation, as well as the cost of long term care insurance and any other layers of cash flow safety that may prove to be necessary for you.

And, not to be a chicken little, but what if the economy runs into another inflationary cycle like we had in the 1970s?  The purchasing power of that non-invested $500K would start shrinking pretty rapidly.  Then what?

If you think about it, your investing fear should run both ways: fear of investing and fear of not investing.  In your shoes, I would hedge my bet.  ;)
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milesdividendmd

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saving cash vs. fear of investing.
« Reply #7 on: August 08, 2015, 11:15:38 PM »
Assuming you can't handle the volatility of stocks, why would you choose cash?

Even t bills should match inflation.  Why insist on a guaranteed real loss?

Are long term treasuries too rich for your blood?  A 10 year treasury is guaranteed to compound at 2.4 % annual for the next 10 years if held to maturity. That's a nominal 2.4% better than holding cash.
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Hey It's Moe

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Re: saving cash vs. fear of investing.
« Reply #8 on: August 09, 2015, 07:52:27 AM »
I don't thing there ever was a better example illustrating the "Safety is an Expensive Illusion" case. You're paying 300K for the illusion of safety. That's similar to assuming the economy will tank 60% and stay there in your case.

BlueMR2

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Re: saving cash vs. fear of investing.
« Reply #9 on: August 09, 2015, 10:23:14 AM »
Looking at the worst case scenario (in the past), a 2-3 year cash buffer would have covered it.  That's if it was taken out immediately before the crash, so doesn't include the loss of buying power over time.  I feel comfortable in the 1-2 year "safe cash" range.  I'm losing some buying power, but can weather longer periods of economic disaster while still making my number work out long term.