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How Much Cash Reserves Do You Have?


How much cash reserves do you have? Let’s talk about our cash reserves today. I feel a tiny bit of guilt because 7 in 10 Americans have less than $1,000 in savings, according to a recent survey by GoBankingRates. Hey America, wake up and learn about Financial Independence! You need to save more so you won’t be so dependent on your employers. Anyway, I’m sure our readers are in a much better position with their cash reserves. Please take the RB40 survey at the end of the post to see if I’m right!

Hoarding Cash

Earlier this year, I decided to build up our cash reserves because the stock market valuation seemed too high to me. The stock market has been on a great run since early 2009, but the earnings haven’t kept pace with the price. The easiest way to value the stock market is to look at the price-earnings ratio.

P/E ratio = price / earnings for the most recent 12 month period.

The PE ratio is an important tool for investors because it will eventually revert to a historical mean in the range of 15 – 20. Currently, the PE ratio for the S&P 500 is around 25. That means earnings will have to grow by a large amount or the price will have to fall to get back in line to historical mean.

*Important* High PE ratio doesn’t necessarily predict a stock market crash in the next few years. The market could keep climbing higher for a while like in the late 90’s. Or the earnings could catch up with the price. High PE ratio just tells us that the stock market is more expensive than usual and the long term rate of return will be lower than usual.

Shiller PE chart

The Shiller PE uses 10 years average earnings in the denominator instead of 12 months.

Nervous investors

I think more and more investors are getting jittery. I see more articles in the main stream media about the stock market being overvalued. Personal finance bloggers and investors like me are starting to scale back on new investments. It just feels like investors are getting more nervous, but it could be just me projecting my feelings onto the world.

I am a big believer of the buy and hold strategy (for the most part). Over the long term, a diversified portfolio of stocks and bonds should do well. I believe you have to stay invested through any market condition and avoid selling when the stock markets crash. We plan to stay invested in the stock market even if the S&P 500 drops 50%.

We are still adding to our investments regularly, but at a slower pace than usual. We are contributing to our 401k every month. However, I’m not buying much in our dividend account. High PE also means lower yields. I’d rather wait to buy in at a lower price point and shoot for more dividend income.

Example: Stock XYZ is $100 and pays out $3 in dividends every year.

  1. If I have $1,000, I could buy 10 shares now and receive $30 in dividend income annually.
  2. If the stock drops to $50, I could buy 20 shares and receive $60 in dividend every year.

Of course, you never know what the stock market is going to do next year. XYZ could double in price.

Cash reserves

So that’s why I’ve been trying to build up our cash reserves. However, I am not working full-time anymore so it’s not easy. Let’s see how much cash we have at the moment.

  • Checking and savings accounts: $49,200
  • Money market funds: $7,200
  • I Bonds: $5,200

So we have about $61,600 in our war chest right now. That may seem like a lot of cash, but you’ll see why that’s not true in a moment. Most of this pile of cash is already allocated toward something.

Cash allocation

  • $11,000 to our Roth IRAs. We need to contribute to our Roth IRAs before the next tax day in April 2017. We could put the money in the money market fund if stocks are still too expensive.
  • $21,000 to our dividend portfolio. I’ve been putting off dividend reinvesting this year and the cash has been piling up. I’m comfortable holding off until the end of 2017.
  • $15,000 property tax. Taxes for our primary residence and 2 rentals are due in November.
  • $10,000 in emergency fund. We need to keep some cash to pay bills and deal with any emergency that comes up.

Wow, that’s $57,000 already allocated to various buckets. We only have an extra $5,000 to play with. See, it is tough to hoard cash when you’re not making a good income.

*Important* Our cash reserves are just a tiny part of our net worth. All this planning and thinking will have very little impact on our overall finance. So why do this? It gives me something to do. It’s really hard for me to sit still and “do nothing” when the stock market is so volatile. I’m messing with just a tiny portion of our net worth. I think a lot of investors will be surprised by a big stock market crash and they will do something dumb like dumping their stocks. By giving myself a sandbox to play with, I can be psychologically prepared for a big crash. Also, it gives me something to write about.

Cash deployment strategy

So how will I deploy our cash reserves? Here is my strategy. I’ve revised it a bit to be more incremental since the last post – Create Your Own Buy Low Strategy.

S&P 500 drops from peak RB40’s deployment strategy
15% Invest 1/3 of cash reserves
20% Invest 2/3 of cash reserves
25% Invest all of our cash reserves
30% Sell 1/3 of bond funds and invest
35% Sell 2/3 of our bond funds and invest
40% Sell all bond funds and go all in with stocks


Notice what happens if stocks decline 30% or more. I plan to sell our bond funds and gradually move into stocks. We have about $170,000 invested in bond funds in our retirement accounts. This is the last bit of reserve we have and hopefully, we won’t need to use it.

Also, if I see a good deal on a dividend growth stock, I probably will buy into it regardless of what the S&P 500 is doing. Everything seems overpriced now, though.

What if there is no crash in 2017?

Of course, there is no guarantee that stocks will drop in 2017. Stocks could continue to climb higher like they did over the last few years. That’s fine with me because the bulk of our net worth is already invested. Our cash reserves is just a small part of our net worth. I will have to evaluate the situation again in 2017. If earnings improve and the interest inches up, then maybe we could revise the plan and start deploying some of our cash reserves.

Are you building up your cash reserves to prepare for the next big stock market pullback? Or do you have a better strategy?

How much cash reserves do you have right now?

View Results

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If you spent more than 5 minutes figuring out how much liquidity you have, then you need to try using Personal Capital to help manage your accounts for free. Personal will aggregate all your accounts and give you an overall view of your savings and investments. Try them out if you don’t have an account.

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, he hated the corporate BS. He left his engineering career behind to become a stay-at-home dad/blogger at 38. At Retire by 40, Joe focuses on financial independence, early retirement, investing, saving, and passive income.

For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.

Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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{ 90 comments… add one }
  • Mr. Tako @ Mr. Tako Escapes October 13, 2016, 12:49 am

    Roughly 10-15% of our net worth is in cash right now. It’s not really intentional, it’s just hard to find rational purchases right now. This will increase in Q1 of 2017.

    Saving your pennies makes sense when you consider the financial environment we’re in — essentially flat earnings and an average PE of 24 (for the S&P 500).

    • retirebyforty October 13, 2016, 8:32 am

      Wow, that’s a big percentage. You’ll be a great position to take advantage of a pullback. You’re right about find a good purchase today. Everything has gone up so much.

  • Michael @ Financially Alert October 13, 2016, 1:00 am

    We’re holding 9% of our NW in cash at the moment. I’ve been trimming back positions the past few months so I can pick up some bargains in the future (hopefully).

    I like that you already have a cash deployment strategy ready to go… very smart!

    • retirebyforty October 13, 2016, 8:33 am

      I should take a good look at our investments and trim back a bit more too. I need some losses to offset my gains from INTC. I don’t like see our dividend shrinks, though. 🙁

  • Greg Gee October 13, 2016, 2:03 am

    I have a little over $100,000 sitting in cash. There is an opportunity cost to every decision, so holding too much cash is also problematic from a wealth erosion perspective. But it gives me “dry powder” to pursue other opportunities. I do see some short term volatility ahead, and fear of course always means opportunity.

    The main problem right now is that the laws of finance are being turned on their head. Meaning the primary basis on which all securities analysis is based is the time value of money. Or in other words, the idea that a dollar today is worth more than a dollar tomorrow, all else being equal. However, we see around the world negative yielding debt instruments of over $10 Trillion, which essentially means that a dollar today is worth less than a dollar tomorrow, since people are essentially paying for the privilege of parking their money.

    In a low or negative interest rate environment, equities actually are not that expensive, since the risk free rate of return (10 yr Treasuries) yield so little. It could be that in fact we are in for an era of exceptionally low interest rates. I mean, we owe over $19 trillion in debt – what would happen to our debt payments if interest rates increase just a little? Thus I think the central bank talks a big game but at the end of the day may not do much for a while.

    I get there is a lot of fear in the market. There is uncertainty in the world. Global growth is anemic. We have the elections. These all present opportunities. But there’s also a lot of cash sitting on the sidelines, since there’s no other good place to put it now. The real moment of reckoning will come however, when we see meaningful inflation start to pick up, at which time interest rates will have to rise, and at which point we’ll have to make some tough decisions and capital flight from the markets. I don’t see that happening anytime soon, so there’s still room for this bull to run.

    Then again, like Warren Buffet says, forecasts tell you more about the forecaster than the future. So all of the above could be completely wrong. I still like holding cash, even recognizing that it’s probably better riding in the market for potential gains to the upside.

    • retirebyforty October 13, 2016, 8:43 am

      Thank you for your thoughtful comment. The low interest rate is propelling stocks ever higher, but can it really last? Can they keep it low forever? Next year is a good year to raise it a bit. If the economy heads south, the government will have 3-4 years to fix it. I sure wouldn’t want a stock market crash or a big recession in an election year.

      • Revanche @ A Gai Shan Life October 14, 2016, 4:16 pm

        I was just reading WSJ and a note stated that while they’ll leave the interest rates low for the rest of the year, the Fed will be raising them next year. We’ll see if that really happens!

        • Martin Stone October 16, 2016, 4:15 pm

          My prediction (FWIW) is that the Fed will raise rates a small amount to say 1% max, the economy will start to turn south again, and the time to start putting cash to work will be in that time frame.

          I also heard a good discussion on the radio this morning that made sense. With the stock market up 200% since 2008 (and close to all time highs), and interest rates so low, investing in bonds is not such a good idea, and the overall stock market is unlikely to increase at the 8% historical average. Therefore, the best you can expect in the next 5 – 10 years from a stock portfolio is 3-4%. So, what should you do with cash?

          I think there are three ways to look at things. First, keep your cash position and be happy that you are neither gaining or loosing money. Second, assume that the stock market is going to stay moderately flat for many years to come and average into high quality dividend stocks (maybe a 1/4 every quarter). Third, look at sectors that are not near all time highs and consider that they will come back during the next cycle.

          I favor the second option at this point in time.

  • Ernie Zelinski October 13, 2016, 2:22 am

    You ask, “Are you building up your cash reserves to prepare for the next stock market crash/correction?”

    I have a bit of cash in one of my bank accounts. In fact, it is around $310,000 Canadian (approximately $238,00 US) and does not include another $50,000 or so of cash I have for operational purposes in another bank account.

    The fact that I have this amount of cash has nothing to do with any strategy I employ. It has most everything to do with my prosperity — and my laziness!

    But as Gregory Nunn proclaimed, “Never underestimate the value of cold cash.”

    In short, I would rather have a lot of cash lying around rather than a lot of debt. I haven’t had any debt since 2011 (when I paid off my mortgage) and it feels great. I am no longer haunted by these words:

    “No one wants to talk about debt, but it comes home and roosts on your doorstep like a big, fat, clucking hen from hell.”
    — Leah McLaren (writer for “The Globe and Mail”)

    • retirebyforty October 13, 2016, 8:44 am

      Good point. Sometime laziness is good, especially when it comes to the stock market. Leaving things alone tend to work out better than messing around with them.

  • The Green Swan October 13, 2016, 2:24 am

    Thanks for the detail on the cash deployment strategy, looks like a good plan.

    I don’t get caught up in all the media stories about the market being overvalued… That’s what sells so that’s what they’ll keep reporting.

    I pay attention to a few economists an in particular and some say while the bull market is long in terms of time (8 years or so) it is short in terms of other real indicators. Folks aren’t as levered as they used to be and neither are businesses. And governments all over the world still have expansionary policies in place.

    I tend to agree with them that the economy still has room to grow which will help balance out the PE ratio in time so I’m not hoarding any excess cash.

    • retirebyforty October 13, 2016, 8:46 am

      That’s great. Thanks for your input. Who do you follow?

      • The Green Swan October 15, 2016, 5:23 am

        Since I work at one of the bigger banks, they have a pretty well built out team of economists and I follow them for the most part. I get a lot of their weekly and monthly commentary sent to me which makes it easy to keep track of.

  • Jon @ Be Net Worthy October 13, 2016, 3:17 am

    Love the breakdown on your strategy. For me, I don’t like to have cash sitting idle, so most of it goes to paying down our mortgage early. For emergency funds I have a $100k HELOC. Once our house is paid off, I will probably hold a larger cash position so I can pounce on any market opportunities.

    • retirebyforty October 13, 2016, 8:46 am

      I don’t like cash sitting idle either, but I’m not in a hurry to pay down our mortgages. 🙂 I should look into getting a HELOC.

    • Michael October 13, 2016, 9:04 am

      HELOC for emergency funds is on my to do list. Once done, I plan to invest my emergency cash reserve.

  • Roadrunner October 13, 2016, 3:18 am

    We have 10k in euro and not planning to increase it. Instead I’ll keep continuously investing, without trying to find the ideal timing on the market.
    I like that you already have a plan for a market pull back. I was wondering when it comes to allocating bonds to equities, would you re-allocate again when the market raises? I was also thinking first that it might be a good strategy, but when I investigated a sample period, the example showed a different result.
    If you’re interested, have a read (hope you don’t take it as an ad): http://www.theroadtoonemillion.com/searching-for-the-perfect-portfolio-part-6/

    • retirebyforty October 13, 2016, 8:50 am

      Thanks for your input. That’s very interesting. I will read up on it further. It sounds like reallocation isn’t worth the effort.

  • Apathy Ends October 13, 2016, 4:36 am

    We have a 10k Emergency Fund and about 8k in cash right now in our Roth IRAs – I have been unloading stock from my ESPP plan and moving it into the Roth’s. I don’t plan to sit on it very long though, probably buy by the end of this week on a mini dip

    • retirebyforty October 13, 2016, 8:53 am

      Good idea unloading some ESPP. You don’t want to build up a big position with your employer stocks.

  • MoneyAhoy October 13, 2016, 4:48 am

    We try to keep our cash reserves at about 6 months of living expenses. Everything else goes into investments. If something goes crazy, we will also have the option to pull our contributions out of our Roth IRAs without penalty, so there’s another several months there.

    We have not gone the HELOC route yet, and I suspect we never really will open one up. I like the feeling of having a bit of cash just a reach away.

    • retirebyforty October 13, 2016, 8:55 am

      6 months is pretty conservative. That’s a great way to prepare for a recession and other economic hiccups. We haven’t gone the HELOC route either. I’m undecided about it. I don’t want more debt…

      • Slashkbm1 October 13, 2016, 5:36 pm

        HELOCs aren’t debt unless you need to use it. We keep 6 months emergency fund and a $30,000 HELOC accessible for use in emergencies. This way we are able to feel a little flexible.

  • Maria Martoral October 13, 2016, 4:56 am

    $20,000 cash and after Hurricane Matthew I am glad we did cause our the freezer on our fridge died from electrical short circuits! However, my handy and frugal husband is going to google how to repair the freezer on our 10 year fridge which we bought discounted because it had a few minor dents. Let’s all pray we can . Also his 12 year old Jeep Cherokee is acting up with a leak. Let’s pray he can fix that too. However, I thank God our 10 year old roof is intact after Hurricane Matthew and we purchased a home touted to be Hurricane proof!!

    • retirebyforty October 13, 2016, 8:55 am

      I hope you’re safe. It looks pretty crazy on the TV. Good luck fixing the fridge and Jeep.

  • Nicoleandmaggie October 13, 2016, 5:06 am

    Currently aiming for 21k. Currently have 24k in main account, 16 k in secondary account and 3k sitting as uncashed reimbursement checks waiting to be deposited. I’m figuring I will do another stock market investment once we get to 10k excess in the main account.

    I am regretting a little the 30k we put in taxable stocks this summer. They’re worth less now and I have to pay taxes on the dividends that dripped. But need to remember they’re long term. Just usually I wait until October to invest extra money.

    • retirebyforty October 13, 2016, 8:57 am

      Thanks for sharing. I’d say don’t worry too much about the dividend stocks. It’d fall further if the stock market crash. Yeah, I don’t like paying tax either, but we didn’t have to pay any tax on our dividend last year. We were in the 15% tax bracket. 🙂

  • Matt @ Optimize Your Life October 13, 2016, 5:06 am

    I don’t tend to keep a large cash reserve. I have been expecting a market downturn for a few years now, so I have completely given up on my ability to predict the market. I’m sure there will be one sometime in the next few years, but I will get the benefit of it by continuing to dollar cost average into it rather than stressing myself out about whether or not to wait for a dip. It may not be the method that ends up with the most money, but having a simple plan makes me feel more comfortable, which I think is worth it for me.

    That said, I have built up some extra cash reserves so that I can max out my 2017 IRA on January 2. If there is a significant drop before that, I may throw some or all of that money into my taxable account to take advantage of it.

    • retirebyforty October 13, 2016, 9:02 am

      I love dollar cost averaging. That’s the easiest way to invest and that’s what we’re doing with our 401k. We’ll keep contributing until we don’t have the income to continue. A simple plan is usually the best – KISS. 🙂

  • Jay @ ITF October 13, 2016, 5:13 am

    Thanks for sharing your thinking on this. I’m especially interested in your scenario planning for a potential market pullback. I think that’s a great way to be prepared and appreciate you showing us how you’re preparing. Personally, as I have a long investment horizon and regular cash coming in I am happy to keep shovelling money at the markets. While good stocks trading a reasonable valuations are becoming harder to find, I’m still seeing pockets of opportunity. I keep a small cash reserve for emergencies (certainly more than the average American!) but substantially less than you have.

    • retirebyforty October 13, 2016, 9:03 am

      We have a long investing horizon too, but not much money coming in. We’re maxing out our 401k and there isn’t much left over. Good job staying in the market. That’s the easiest and probably best way to invest.

  • Jim @ Route To Retire October 13, 2016, 5:32 am

    We have a HELOC as a backup for emergencies. But we carry between $15k-$50k in cash reserves, but that is also the pot we’ll be using for the down payment for our next rental.

    We’re going to focus though on building it up though over the next few years since we’ll be relying on that to help carry us for the first 5 years during our Roth IRA Conversion Ladder. We’ll have other income coming in, but it will be a little tight for those years.

    — Jim

    • retirebyforty October 13, 2016, 9:05 am

      You’re right. We need to build up the cash reserves a bit more for the Roth IRA conversion ladder. It’s going to be tight for a few years, but I think we’ll pull through okay as well.

  • Alberto October 13, 2016, 5:34 am

    Interesting. It’s always good to have a plan. Old adech says, “If you failed to plan, you plan to fail.”.

    We have about 5% to 15% in cash depending on how we count. We set aside about $170K or 7 years of cash in a VIP Stable Fund to replace social security payments if we deem the full retirement age (FRA) benefit was worth it. We since have decided that it is not worth spending the $170K for an additional $700 a month. The ROI would be over 12 years.

    Since we already have a pension and rental. Pension covers 80% of expenses and rental has 40% net profit so our need for cash is not great as someone in their 40s.

    Point is, age is a factor in the strategy and plan. Our long term strategy and plan has been to be cash poor (relative to employed income) and asset rich. This minimize tax liability and hedges for inflation so less risk and age appropriate.

    Although don’t see market tanking more than 10% due to low interest rates in the US and negative around the world, we like your plan to purchase high dividends stocks if market goes down 10% to 30% since one of our goals is to increase our dividend growth portfolio. There is always a deep in any market and we should be ready for it.

    • retirebyforty October 13, 2016, 9:08 am

      Thanks for sharing! You’re right about the age factor. It’s great that you have your pension and rental to cover your living expenses. Can we keep this low interest environment up? That’s the last tool to combat economic melt down and we already used it. What if something big happens? The fed won’t be able to help prop the economy up. I guess we could print more money…

      • Alberto October 13, 2016, 1:30 pm

        A lot has to do with who gets elected and the market perception of it. Not a fan but believe we can keep the low (against normal averages) for a while. Main reason is that there is a lot of money overseas coming into this country due to negative and higher risk interest rates abroad. Not to count in all the money seating overseas waiting to come in.
        US Citizens own about 1/2 of the debt, if something big happens we would issue bonds and print more money to deal with it. Higher interest rates is a killer to US Debt and economy as businesses struggle to finance investments.

        There is another side of this. Technological advances will have changes in the social lifestyle and economy. Those are the ones we are watching for. For example, self-driving cars as a subscription service instead of a purchase. Cognitive computing is another disruptive technology such as IBM Watson that will help the 10x information today to make decisions. There are a lot of these coming along silently in many cases such as mobile healthcare.

        Our main observation is GDP growth 100 years ago require 90% employment. Today we are having 1% to 2% with about 50% employment. In the future we see 3% to 4% GDP growth with 20% to 30% employment. The future is going to be different for sure.

  • Sam @ Financial Samurai October 13, 2016, 5:38 am

    Good to see everybody has a lot of cash! Could be a signal that a downturn really won’t happen because so many people are cashed up.

    Looks like we are thinking along the same lines Joe.

    I’ve got about $200,000 in cash and I am investing or paying down debt everything about 200,000 because in 2017 I will have more than triple that due to my last severance check and a expiring CD.

    • retirebyforty October 13, 2016, 9:09 am

      You might be right. Too many people are fearful right now. The market usually crash when everyone is all in. That’s a lot of cash coming in next year. Great!

  • Physician on FIRE October 13, 2016, 5:50 am

    You might be on to something, but only time will tell. I’m not convinced that P/E ratios must return to a mean of 15. There are no laws governing them. Historically, that has been the case, but it’s not an absolute.

    Since I don’t market time, I don’t hold large amounts of cash. I’m holding a bit more than usual now, because I am saving a recent production bonus to deploy in early January, 2017 when I plan to fund two backdoor Roth IRAs and dump more into the 529s. In retirement, I may reconsider holding a larger cash reserve, but I don’t love the idea.


    • retirebyforty October 13, 2016, 9:10 am

      I changed the PE to a range – 15 to 20. That’s probably more realistic. 15 is too low now.
      I don’t like holding a large cash reserve either. I’d get itchy fingers when it get close to $100k. I’ve never held that much in cash.

  • Thomas October 13, 2016, 6:20 am

    Great article…one comment though….you mention that “The PE ratio is an important tool for investors because it will eventually revert to a historical mean of about 15. Currently, the PE ratio for the S&P 500 is around 25. That means earnings will have to grow by a large amount or the price will have to fall to get back in line to historical mean.”

    The world is a VASTLY different place than it was before the television or internet was invented. I’m not sure if the average PE ratio of 15 really applies to the current world we live in…When the market crashed in 2009, it STILL barely was below 15. I just don’t think 15 is what we can expect anymore. I think 20 is far more “normal” moving forward. Just my opinion…

    • retirebyforty October 13, 2016, 9:12 am

      Thanks for your comment. I changed the PE to a range of 15 to 20. You’re right about the PE. 15 is too low now.

  • Financial Panther October 13, 2016, 6:45 am

    At first, I was going to talk about my issue with market timing. But I have no issue with keeping a small portion of your net worth in cash. If the vast majority of your money is working for you, totally fine to keep some money on the sidelines for when you see an opportunity.

    • retirebyforty October 13, 2016, 9:12 am

      Yes, it is just a tiny portion. 🙂

  • CoupleofCents October 13, 2016, 7:27 am

    I used to have the mindset to keep my cash reserves as low as possible. While both my wife and I worked, anything more than 2-3 months living expenses was overkill. Now as my wife has transitioned to be a stay at home mom, I’ve ramped up our cash to 6 months expenses.
    Like others have said, I keep thinking the market will crash but it keeps going up. I’ve decided to continue to invest as the money comes in. I’m not going to touch any of the money for at least 15 years so I’m not worried about the ups and downs.

    • retirebyforty October 13, 2016, 9:13 am

      That’s great! I think that’s the easiest way to invest when you have a long investing horizon. Everything will be good in 15 years if you keep investing consistently.

  • Fiscally Free October 13, 2016, 7:52 am

    Our cash reserve is uncomfortably low right now due to the very unusual situation we are in with our cars. We just paid cash for a new car (you can read about that here: http://www.fiscallyfree.com/2016/08/why-we-bought-brand-new-car.html ) but we cant’t return our diesel Golf to VW quite yet, so our “cash” is just sitting in the driveway. That is unfortunate, because we can’t pay the property tax bill we just received with a polluting Volkswagen.

    • retirebyforty October 13, 2016, 9:14 am

      Hopefully, you can return your Golf soon. I’m not looking forward to paying our property tax either. That’s a huge chunk of cash…

  • ChrisCD October 13, 2016, 8:12 am

    I believe time in the market is more important so don’t really have cash sitting around waiting to be invested. I am still in the building phase and have a monthly contribution that is matched by my employer. Occasionally, I hold on to a couple of months to make an individual stock purchase go further (I pay $9.95), but usually I just by into one of the ETFs I like.

  • freebird October 13, 2016, 9:15 am

    I think your cash deployment strategy would have worked well for the 2008-2009 dip, but what if the S&P 500 behaves in a manner similar to the Nikkei 225 decades ago?
    That index peaked around 39000 at the end of 1989. At your trip levels you would have “gone all in with stocks” around the middle of 1992 or so. Fast forward to today and I think you would regret having tried to catch the falling knife, especially if your cash income has been low relative to your investment portfolio.

    Of course this kind of ‘black swan’ extended crash may have been far less likely than a full recovery over the course of a few years, and in such case your strategy would come out well ahead (depending upon your asset allocation at the peak). A more conservative approach would be to rebalance every year to maintain a consistent asset allocation over time. Never go all-in– or all-out for that matter. Whether this auto-rebalance strategy is ‘better’ depends on your point of view, but I would argue that it’s less risky.

    FWIW I have several bank accounts up to the FDIC limit. That’s my retirement spending money until I start RMDs and Social Security at age 70; it isn’t for investing. I keep money market balances in my brokerage accounts to buy shares when I feel like it.

    • retirebyforty October 13, 2016, 10:56 pm

      You’re right about the Nikkei. I don’t think we’re at that level of valuation, though. It was a crazy time for Japan in the 80s. They were taking over the world! The valuation must have been sky high. I was too young back then and didn’t know about investing.

  • savvy October 13, 2016, 10:00 am

    For the five people (thus far) who voted $500k or more, I’m curious as to why. That seems to be excessively risk-averse.

    • Joe October 13, 2016, 2:36 pm

      Because of net worth in the 8 figures.

      • savvy October 14, 2016, 10:02 am

        That explains how the *can* but doesn’t explain the *why*. Is that their emergency fund of X number of months’ living expenses? Are they holding cash in case an interesting investment opportunity comes along? Is it just what helps them sleep at night?

        • Adam and Jane October 14, 2016, 1:51 pm

          We dont have an 8 figure networth. I cant speak for the others but for us….

          1. It provides financial security.
          2. 500k provides for 7.5 years of living expenses.
          3. My wife will be laid off at the end of the year and my fate at work is unknown. This money can bridge us to 59.5 and then we can collect our 401K if we choose so.
          4. To prepare for laid offs 6-7 years ago, We invested our life’s savings to buy municipal bonds that are federal and state tax free which generates 84K passive income a year. If there is any chance that we lose all of our muni bond money then the 500k will bridge us until we can collect our 401Ks.
          5. Our state is financially stable so I am not worried. If there are 4-5% muni bonds around PAR in the future then I will deploy 300-400K to buy more. We want a min of 100-200K in savings for unexpected expenses. We have NO money in the stock market. We Just do brut force savings.
          6. This amount of savings provide financial options and we are able to sleep at nights.


        • Joe October 16, 2016, 12:20 am

          I voted $1 million or more. Relatively speaking, cash position is not that high as it’s less than 10% of net worth. I feel comfortable that if stock and/or real estate markets crash, I have 10+ years of living expenses. I also don’t find any passive investments very appealing at this time, waiting for a better opportunity.

      • Mike October 15, 2016, 9:25 am

        Agree: Poll should have been a percentage of Net Worth. That would have been a more accurate depiction of where people are with their overall cash and strategy.

  • John October 13, 2016, 11:10 am

    Where are you holding your cash? I’m always interested to find ways where cash can be stored so it at least beats inflation

    • retirebyforty October 13, 2016, 10:56 pm

      In money market account, reward checking, and I Bonds. I Bond is probably the best out of these. You can put in just $5,000 per year, though.

  • Rock the Casbah October 13, 2016, 11:49 am

    Hey Joe, good topic. Seems like one where different folks can have different viewpoints that are arguably legit for their different situations.

    For me, I like a thick safety net. Plus, I hold almost NO bonds. Excluding cash and I bonds, I’m almost 100% equities. I actually split my cash equivalents into 4 “buckets”: an emergency fund, a future automobile fund, an auxiliary fund and my I-bonds. In my mind, the emergency fund is made up of 2 parts: 12 months’ worth of “full” living expenses (including discretionary and COBRA health insurance premiums) and 10-15K for house maintenance emergency expenses. I keep about 20-25K for the purchase of a future automobile (I would also have the trade-in value of my current vehicle to add). And finally I am building up my auxiliary fund. It could be used for expensive travel, home improvements and/or market opportunities. It currently sits at about 25K but ideally I would like to get it up to about 40-50K. Then, finally I have about 15K of I-bonds that I purchased about 15 years ago (I regard these as a possible last line of defense in an extreme emergency).

    Most of the cash equivalents are kept in laddered CD’s (usually somewhere between 12 to 24 month terms). I have most (about 60%) of these in my credit union (which usually offers “specials” which give good rates relative to other banks). However, I do kept some in a couple of other banks for diversification. I usually keep about 10K in a Money Market/Savings for quick access.

    I’d like to discontinue my high stress, salaried employment to transit to an hourly, reduced hour job. I have more than enough dividend income from my portfolio of dividend paying stocks to do this. However, as I stated above, I am almost 100% equities so I want to build up a solid reservoir of cash equivalents as a fairly thick safety blanket. Once I transition my job, I will have a limited ability to save a lot of extra cash. AS you said, hard to hoard cash if you’re not pulling in a good income. So I want to have my “ducks in a row” with sufficient cash saved prior to doing this.

    • retirebyforty October 13, 2016, 11:00 pm

      Good idea with building a cash reserve before you transition. We had about 18 months of living expense when I retired. After 2 years, I reduced it down to a smaller level because we didn’t need it. Nice job with your cash.

  • Jo October 13, 2016, 11:53 am

    Harry Brown permanent portfolio includes 25% cash, 25% gold, 25% long term bonds and 25% equity. You can see that in the last 40 years performance was quite defensive with very low DD so if someone wants to sleep well he should take a look at this portfolio.

    • retirebyforty October 13, 2016, 11:01 pm

      I don’t like the permanent portfolio. It’s too defensive for me. We’ll be in the market for 20+ years and I can sleep fine with our current allocation. Maybe when we’re older, I might become more conservative.

  • Brian - Rental Mindset October 13, 2016, 12:27 pm

    I like that buy low plan! I am saving up for my next rental property and hope to be in a better position (more cash) to take advantage of the next crash, whenever it happens.

    • retirebyforty October 13, 2016, 11:01 pm

      I hope that’s a few years off yet. I want to sell some properties while the price is high. 🙂

  • Brad, helping Maximize Your Money October 13, 2016, 12:35 pm

    We have about six years’ worth of living expenses in cash right now… too much really but we recently “retired” (in mid-40s) so have taken an evenly cautious stance short term while things settle in. We plan to deploy a bunch in the next year or so and come down to about 2 years’ expenses.

    • retirebyforty October 13, 2016, 11:02 pm

      Wow, that’s a lot of cash, but I think it’s great. We had about 18 months when I retired. Cash is king in uncertain environments.

  • John October 13, 2016, 3:12 pm

    We hadn’t been saving up cash reserves but may now after reading your post.

    Was actually thinking of selling off some overpriced stocks to build our cash.

    Thanks for sharing

  • PatientWealthBuilder October 13, 2016, 6:35 pm

    Cool post. What I’m wondering is why people don’t talk about hedging? I have a much much lower net worth than all of you heavy hitters. I would have thought that the big boys would be using index futures as a hedge on their investments. Or some sort of put option strategy or selling call options. How about putting in a buy stop order on a “short” ETF fund? I just checked my NW post http://www.patientwealth.com/september-index-update/ where I also publish my portfolio allocation and I am in 12% cash. I’m dollar cost averaging this into my stock investments. But I always keep my stock investment hedged in the case of a big crash. If that happens my hedges will make enough money to cover the losses!

    • retirebyforty October 15, 2016, 10:35 am

      I don’t hedge because I don’t know how to do it well. I need to learn more about it, but I don’t like betting against the market. The problem with hedging is that it will depress your growth. All the hedge funds have been lagging the index funds for many years now. It’s probably a good time to hedge now.

      • PatientWealthBuilder October 30, 2016, 7:23 pm

        A simple hedge could be to put a stop order (an order that automatically buys a stock or fund at a certain price) on a short ETF. A short ETF makes money when the stock market goes down. The good thing about that approach is that while the market is flat or going up there is no drag on your gains.

        Hedge funds do a variety of strategies which could really be anything. They don’t generally do such simple hedging. The annoying thing is that for investors that the government does not deem to be “qualified” you don’t even have the freedom to invest in them!

  • Dan October 13, 2016, 6:43 pm

    Creating a cash deployment strategy is a great idea. Especially as you have laid out. Because it’s important to have a strategy in place before panic sets in.

    For psychological reasons I have been reviewing old financial videos and news articles to see the shear panic at the worst periods of time. (I’ve been doing this a couple times a year for many years, not a prediction for the immediate future) To prepare myself for the next one. But it’s quite possible that we won’t see a crisis like the great financial crisis again in our lifetimes.

    If I had to guess it might be more of a slow several year decline/sideways market. But as many wise people have said it’s a waste of time to try and predict where the market will go and instead one should focus on if the investment is over or undervalued.

    • retirebyforty October 15, 2016, 10:37 am

      I should do that too. The financial crisis was pretty scary. I think it’s best to ignore the news during those times. A slow decline/sideway market would be fine with me. Dividend should work well in that market, right?

  • James October 14, 2016, 3:08 pm

    This question depends on how rich someone is. If someone has around$25million to $10 million liquid investments, excluding primary residence, that person can keep it all in cash as long as he or she is content in living a very very upper middle class to semi rich lifestyle. However,for rest of us and also for the very rich, if their goal is to constantly increase their net worth even at 50 to 10 million levels, then probably 1 year of expenses is a good buffer.

    • retirebyforty October 15, 2016, 10:38 am

      That’s a good point. When you’ve won the game, why keep playing? Cash is king at that point.

  • Revanche @ A Gai Shan Life October 14, 2016, 4:32 pm

    Our cash reserves are too high and I was starting to shift them to the market, but then it got too pricey for my taste. So for now, I’ve decided that they’re just fine where they are in advance of maxing out our retirement funds, IRAs, and picking up any real estate bargains that might pop up. And if the market takes a dive, I’ll have plenty of cash on hand to pick up some deals there.

    • retirebyforty October 15, 2016, 10:39 am

      I like your plan. 🙂 I love a good bargain too.

  • andy October 14, 2016, 8:13 pm

    I just sold part of my business for 100k. I have to pay a few debts that I have so after that I will have around 65k, maybe send the 15k tax check already in advance for next years taxes. That would leave me with about 50k.

  • Susty Themes October 14, 2016, 10:38 pm

    Great post – it’s interesting to hear everyone’s thinking.
    At 4 years retired, age 55, I find I’ve gotten more risk averse than I was 5 years ago. I don’t have a pension (…I should have one, but my former company of 29 years took it away at just the wrong time for me). My strategy is to hold enough cash/equivalents to sleep well at night, and cover expenses for multiple years of a down market if needed. Currently, we hold about 4 years of expenses in CDs and cash accounts earning 1%, which is about 9% of our portfolio. I’m not a market timer, but I am prepared to invest some of this on a dip of 10% or more.

    • retirebyforty October 15, 2016, 10:42 am

      That’s a good amount of cash and it sounds like you have a plan. 4 years of expenses is perfect. That should be plenty to weather a normal bear market. Sorry to hear about your pension.

  • Erik @ Hippies de Land Rover October 15, 2016, 1:00 am

    Hey Joe, great post, Cash is king! we are preparing for the next big correction and then allocate the cash in Stocks. Hopefully after that we can retire 🙂

  • Ten Factorial Rocks October 15, 2016, 8:27 am

    Years of being in the market including 2 major crashes this millennium have taught me that I am poor at timing the markets. Everything looks obvious in hindsight but foresight is where the big money is made. With so many people worried and raising cash, I do think this bull market will continue to climb a wall of worry with occasional small corrections that may actually be buying opportunities. Stock PE ratios cannot be viewed in isolation in my view, prevailing interest rates and yields on other assets also matter a lot. Everything is relative, including the word ‘expensive’.

    • retirebyforty October 15, 2016, 10:44 am

      I think you maybe right about the investors. We are all worried and are saving cash. The market usually don’t crash when investors are fearful. It still feels like a house of cards, though.

      • Joe October 17, 2016, 12:20 pm

        I can’t tell if investors are fearful or greedy at this point. Worldwide debt is at all time highs! Margin debt is near all time highs (was at all time highs in 2015)! Those numbers point to greedy not fearful…

  • Britboy007 October 15, 2016, 11:11 am

    I have rouughly $42k in cash currently. I also tend to keep a high balance in my regular checking acct ($15k). I put $1k monthly in a target date mutual fund for retirement which I’m considering suspending for a while. Also fully funding two Roth IRA’s. Like other readers, I’m not seeing anything truly safe (except CD’s) that I want to invest my money in. I’m also prepaying an extra $250 a month to retire my mortgage early. Still debating whether or not to pay that off.

  • Mustard Seed Money October 15, 2016, 6:41 pm

    I love your chart when you are going to deploy cash into the stock market. I have been stock piling cash as well. I’ve been saving cash since August 2014 and deployed some cash earlier this year in February when I thought that oil and the S&P 500 looked like good plays.

    I plan to start deploying 10% of my cash reserve at 10% drop, 15% of cash at 15% and then 25% for each 5% drop there on out.

    I’m not sure it will drop by 30% but am definitely prepared if the market panics 🙂

  • Mr. Enchumbao October 16, 2016, 5:45 am

    Whether to hoard cash or not has been a big question in my mind lately. We have a couple of CDs maturing by January and might just keep them in cash for short-term goals that we have planned over the next three years. Since we’re planning to retire during that time period, we might hold off on investing in the market for now and save the cash that we’ll need for early retirement instead. Since we’re still working, our 401(k) investing will resume in January (we front-load them).
    Great strategy for cash deployment. We recently started following an asset allocation that works for us and we rebalance as we buy or quarterly if there’s a 5% deviation from the allocation.

  • Your First Million October 16, 2016, 11:54 am

    Right now I have about $56,000 in cash reserves in a savings account, but I also have about $90k in physical precious metals(gold and silver). I consider this cash reserves because gold and silver are actually very liquid. I also have a few thousand dollars in cash at home just in case I am not able to access my savings account for some reason.

    Having cash reserves is very important. Opportunities come unexpectedly sometimes and you want to put yourself in a position where you can jump on it right away if it’s the right deal at the right time. In my earlier years, I had several opportunities come my way that I could have made a killing on, but because I did not have the cash reserves I was not able to participate. I never wanted to let that happen again.

  • connie munoz October 18, 2016, 7:09 am

    we have 350,000 sitting in a money market savings, I know crazy right:( 300,000 sitting in 457…..we are getting ready to retire to mexico…we have enough cash to live on for 10 years and then collect on our fed/city retirement and SS….retiring at 55:)

  • Noah Morgan November 8, 2016, 7:14 am

    What is the average Age of RB40? What is the average AGI? This is such a great blog been following your for over 7 years!

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