Why Cash Isn't Trash


Howard Gold Image Howard Gold Founder & President, GoldenEgg Investing

But some number crunching I did convinced me people can own a lot less stock and hold a lot more cash than many financial planners recommend.

Using the Retirement Income Calculator at troweprice.com, I tried to find out how much cash a fictional near-retiree named Joe Josephson of Denver, Colorado could hold and still not run out of money in retirement.
Joe is in his mid- to late fifties, earns $80,000 a year and has $500,000 saved for retirement. (That’s a lot bigger than the median Baby Boomer, but a reasonable amount after a lifetime of saving and investing.)

I also assumed he will retire at age 66 to get full Social Security benefits and will continue to save 20% of his income ($16,000) a year until he retires. Retirement living expenses amount to $5,000 a month, three-quarters of his pre-retirement income. To keep things simple, we didn’t include a pension or a spouse’s income or Social Security benefits.

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For Mr. Josephson, even a conservative preretirement portfolio of 40% stocks, 30% bonds, and 30% stocks and a retirement mix that includes 40% cash would give him at least an 80% chance his money will last until he turns 90. By tweaking the retirement portfolio just a bit (to a one-third stocks, bonds, and cash mix) and working an extra year, he should be OK until he’s 95.

In fact, after trying many different scenarios, I found the exact mix of stocks, bonds, and cash wasn’t critical in determining whether Joe would outlive his money.