Hi, there. If you’ve come across this blog and it’s interesting to you, I’m honored. I now write and speak via brianherriot.com. I’m also a financial advisor for entrepreneurs at Herriot Financial, LLC. I hope to see you soon!
Holding cash can be a strategic investment move! Cash helps you take advantage of market downturns. With cash, you can shop for value when others are selling at a loss. Look no further than Warren Buffett for how to take advantage of this strategy.
Imagine your cash savings like a red fox standing watch over a gopher hole. It stays there quiet…for an excruciatingly long time. Then, at a moment’s notice, when the gopher’s head surfaces…it pounces!
In this post, you will learn how holding cash in your investment portfolio creates wealth. Cash savings is a key part of the Idols Framework for wealth building. Cash provides a “margin of safety” which keeps you in the investing game. Experts teach you to have a strong defense and build an emergency fund.
But cash - which to most appears boring, tired, and too low-yielding - is also a stealthy and opportunistic investment.
1.0 Why keep cash savings?
1.1 My 1997 cash savings example
1.2 Warren Buffett is the master
1.3 More historical examples
1.4 Deals come along often
2.0 Earning the best possible return
2.1 Defining the term “best”
2.2 High-yield savings accounts >$250,000
2.3 Short-term treasuries (T-bills)
2.3.1 TreasuryDirect.gov
2.3.2 Treasuries via your brokerage
2.3.3 Ultra-short-term bond funds
2.4 Money markets backed by the U.S. government
2.4.1 Sweep accounts
2.4.2 Purchased money funds
2.5 Summary table with recommendations
2.6 Point-in-time analysis: April 2023
3.0 How much cash to hold?
3.1 Emergency fund and more
3.2 Opportunistic mountain of cash
3.3 Real-world considerations
4.0 Cash savings summary
5.0 Related posts
Charlie Munger, Warren Buffett’s wise partner at Berkshire Hathaway, said “It is not brains but temperament that makes you rich. Have patience! And don’t do anything stupid.”
Holding cash in your portfolio is the ultimate exercise in patience and levelheaded temperament. It is hard to sit on a mountain of cash when stock (or crypto) investments go up and up in the final years of an expansion. “Blow-off tops” can run for years!
Why quietly stare at that gopher hole for so long?
Let’s explore a scenario at a point in time: 1997, the year I graduated and started working. Imagine we are 7 years after the most recent market correction (October 1990).
Seven years post-crash, the economy and markets have likely recovered. It is when growth starts getting a little crazy and too much money floods the markets. (It would for another 3 years through 1999.)
In this example, let’s invest $100,000. (This part does not reflect my personal reality in 1997 upon graduating!) A single $100,000 investment keeps the math simpler. Later, I’ll show that markets turn south every ~10 years. So, at this point, our investment will grow for 3 years.
Consider these two cases:
Case 1: What I did in 1997
Case 2: What I could have done in 1997
In Case 2, I’m up $45,000 over Case 1. In 2003, I move my cash into a stock index fund that is on sale.
In this example, I’m looking backward. You could argue that I’m cherry-picking data to prove my point. That is true. But the key point is this: “Markets turn south every ~10 years”.
In 2023, a correction could come soon. The stock market has expanded for 15 years! As bubbles form, smart investors set aside more of their portfolio in cash. Cash gives you options, and options are valuable. With cash, you are able to move fast when you find an edge.
How much cash to stash varies with your specific situation and other investment opportunities. (More on that later.) But, the lesson here is that you should hold some!
Berkshire Hathaway keeps 10-20% of its investment portfolio in cash. The money is ready when great companies become available to buy at great prices.
Charlie Munger reminds us:
In other words, markets will crash. You’d be irresponsible not to prepare for it.
Berkeley Hathaway flips a market crash on its head. It’s not horrific, but delightful:
In 1988, Warren noticed a unique opportunity in Coca-Cola’s tragic New Coke experiment. He began to accumulate shares of the beaten-down stock. As of this writing, COKE’s stock price is $61. His $1.3 billion stake has grown to $24.2 billion in 27 years. That’s an almost 19-fold gain.
Here’s another example. Warren swooped in during the 2008 financial crisis. He invested $5 billion in Goldman Sachs. In 2011, Goldman Sachs redeemed the shares, earning Berkshire Hathaway a profit of $3.7 billion.
While Berkshire has perfected this approach, it is not new. The smartest investors learn from history. Here are three more:
Recent history reminds us how often deals come along. We experienced major market drops in 1973, 1987, 2000, 2008, and 2020. That is 5 times in the last 50 years or roughly once every 10 years. Ten years is a long time. This is a true lesson in patience!
Before 1973, crashes were even more frequent. These earlier crashes (known then as “financial panics”) include the 1929 Crash (and the ensuing Great Depression). The worst crash in history resulted in the Dow Jones index losing 89%.
I’m not going out on a limb to say that we can expect a crash of 30-50% or more, and likely soon.
There are several places where you can stash your cash. The recent run on Silicon Valley Bank reminds us that every option must be safe and as riskless as possible.
The options I examine will be either:
I’m not messing around here. These cash investments are safe.
Thus, I’ll examine:
These 4 criteria combined make up my definition of “best”.
My analysis searches for the optimal combination of 1) net yield (return after fees) and 2) ease of holding and transacting. The U.S. government backs all options and guarantees their safety.
I will assess various cash savings options first without considering point-in-time investment yields and costs. Then, I will include these details as of April 2023. I share current net yields with Fast Follow Investor community members.
Let’s get started.
Let’s start with the passbook savings account you got as a kid from your hometown bank. Now, we’ll make some improvements to it:
An example:
MaxMyInterest or MAX is a service that rotates customers' savings account balances to maximize yields. Always earning the highest savings yield would be too difficult without such a service.
With MAX, you set up a series of savings accounts in your name one time. Then, you pay a fee based on cash savings invested for MAX to move your savings to the highest yielding accounts (in amounts less than $250k) each month.
Here is a list of 18 banks that work with MAX as of this writing:
Ally Bank, American Express Bank, Bank of America, Barclays, BrioDirect by Webster Bank, Charles Schwab Bank, Citibank, Customers Bank, Discover Bank, Fidelity CMA accounts, First Republic Bank, JPMorgan Chase, Marcus by Goldman Sachs, Quontic Bank, Synchrony, UFB Direct, USAA, and Wells Fargo.
My analysis:
With a service like MAX, you can realistically earn a high savings rate each month. Its practicality makes me comfortable analyzing it.
To do so, I’ll take the average of the top 5 high-yielding savings accounts for a given month using the list at Investopedia. By choosing the top 5, I’m making an assumption that while MAX may not achieve the top rate, it will be close. To arrive at a net savings yield, I subtract the fee for the service MAX provides.
This savings option is easy to use. It requires time up front to establish a series of bank accounts. After that, MAX moves money automatically for you each month. If you’re the type of person who likes to optimize your credit cards for points, you could be a fit for this service.
High-yield savings accounts are a valid option for stashing cash. Later, we’ll look at specific, point-in-time yields and fees to help you decide if it’s for you.
Note: Robo-advisors like Betterment, Wealthfront, and Robinhood have a different take on the MAX service. As of this writing, Wealthfront brokerage sweeps uninvested cash among 12 partner banks each offering $250,000 in FDIC insurance ($3 million total). The three Robo-advisors offer yields that are ~85% of the top 5 banks' average savings yield. That’s pretty good, especially given the convenience.
This option for holding cash is Warren Buffett’s favorite. He recommends that the average investor hold cash savings equal to 10% of their portfolio in U.S. Treasury bills.
Unfortunately, I find it difficult for the average investor to hold T-bills. There are three ways to do it, and I’ll examine each.
Individuals can buy T-bills directly from the U.S. Treasury in amounts as low as $100 at TreasuryDirect.gov or by visiting a Federal Reserve Bank. First, you must establish an account online with the U.S. Treasury. It is incredibly tedious, and the site looks like it’s from the late 1990s.
Beyond struggling to navigate the site, purchasing T-bills requires a lot of coordination. You must calculate how much to buy, when T-bills come due, and repeat the process monthly (unless you choose auto-reinvestment for up to 2 years).
An example:
This is what it looks like to access a personal TreasuryDirect account.
To log in, enter your password by clicking virtual keys on a keyboard viewable on the screen- it’s clunky! Then, elect to buy Treasury bills. You can buy bills offered in 4, 8, 13, 26, or 52-week durations. The shorter duration bills (up to 13 weeks) have the lowest interest rate risk and are less likely to decrease in value if rates spike. Select Yes to “Schedule Reinvestment” to simplify the process.
My analysis:
Treasury bill rates are pure since the U.S. Treasury sells them directly. The yields are decent. Fees are zero.
The most significant downside to stashing your cash in this way is the inconvenience of it.
Some finer details:
According to the TreasuryDirect.gov FAQs: “You can transfer any security in TreasuryDirect to an account in the Commercial Book-Entry System. If you hold your security in the Commercial Book-Entry System, contact your broker, dealer, or financial institution or investment advisor. Normally there is a fee for this service.” I couldn’t bring myself to dig deeper to find out more. It’s too complicated.
Individuals can also buy Treasury bills within their brokerages (e.g. Vanguard for no fee, or Public.com which charges a small fee). The key improvement over TreasuryDirect is the user experience. Yet, several downsides still exist. And the same complexity exists for selling T-bills before they mature.
From the Vanguard website:
“Vanguard Brokerage doesn’t make a market in Treasury securities. If you wish to sell your Treasury securities prior to maturity, Vanguard Brokerage can provide access to a secondary over-the-counter market.” Complicated.
An example:
This is what you see when you access the “Trade Bonds & U.S. Treasuries” section of the Vanguard Brokerage site.
My analysis:
This method is also very safe and nearly risk-free. T-bill rates are pure, so the yield is decent. Fees are zero at best, and minimal at worst.
The most significant downside continues to be its inconvenience. Your broker’s user interface is likely better than TreasuryDirect. But mine (Vanguard) isn’t much better!
It is possible to buy an ultra-short-term bond fund to stash your cash.
Buying a low-cost ETF that holds very short-duration bonds is an easy way to own Treasury bills. Treasury bills reach maturity within 1-3 months. So their returns depend primarily on the stated yield (interest rate). The value of the ETF itself can increase or decrease, but not by much.
An example:
Two high-performing ETFs are SGOV and BIL. You can buy both inside a brokerage account.
Why are they great options? Their basic structural factors are sound:
Again, the goal here is to be 100% safe. BIL is the largest in the industry, but SGOV is very competitive and growing.
For a full assessment of both and others, see this link.
My analysis:
The two best options in this space are indeed:
SGOV and BIL buy U.S. Treasury securities which are riskless.
Yields and fees will vary at specific points in time, so I won’t discuss that here. On average, yields are right below the pure yield on Treasury bills. And fees are very low… like “Vanguard bond index fund” low.
Purchasing either ETF via a brokerage account is easy. The funds themselves handle the more tedious purchasing (and selling) of individual lots of Treasury bills auctioned by the U.S. government.
Also worth mentioning for my Vanguard fans: VUSB is Vanguard ultra-short-term bond ETF. But it invests in investment-grade corporate bonds, not U.S. Treasury bills. I recommend not using it.
Money market funds aim to keep a $1.00/share value and pay a 7-day yield in line with the short-term Federal interest rate. You can buy money market funds at your brokerage. Some even offer check-writing features.
A convenient way to own them is via the “sweep” account inside your brokerage. The sweep account is a money market account that holds excess cash after making other investments. For example, let’s assume you have $5,000 available to invest and buy shares in a stock ETF worth $4,960. Your remaining $40 flows to your sweep account, earning interest at the money market rate.
An example:
If you invest at Vanguard, you’ll recognize that it has replaced its sweep account within the last few years. Its Prime Money Market is now the Federal Money Market (VMFXX). And 99.5% of VMFXX’s invested assets are U.S. government-backed. It’s very safe!
Fidelity’s sweep account is its Government Cash Reserves (FDRXX) and is also 99.5% guaranteed.
My analysis:
Let’s assess VMFXX and FDRXX. Both are extremely safe and essentially riskless given their federal government backing.
Yields and fees will vary at specific points in time, so I won’t discuss them yet. Like ultra-short-term bond funds, yields are usually right below rates on Treasury bills. And fees are very low, especially Vanguard’s VMFXX.
The big “watch out” is if you use Schwab for your brokerage. Schwab’s sweep account pays much, much less. Schwab’s business model relies on earning a spread on customers' sweep accounts. (Vanguard and Fidelity do not. Their business models rely on fees from mutual and exchange-traded funds.)
Stashing cash in your brokerage account without having to buy a money market fund separately is extremely convenient.
This assumes that you do not use Schwab as your brokerage. In that case, you could buy a money fund with cash available in your sweep account. It’s a bit less convenient. If you must stay in the Schwab ecosystem, I would buy the Schwab Government Money Fund (ticker: SNVXX). If not, the Vanguard Federal Money Market Fund (ticker: VMFXX) is a better option.
All options for stashing cash discussed so far are safe. To pick the best solution, look at net yield and ease of managing the account. Individual situations (e.g. the institution that holds your brokerage account) also play a factor.
Here is a summary and also my recommendations.
Strong choices:
Best
A money market sweep account is the absolute easiest way to earn a very safe, near-riskless, strongly competitive net yield on your cash. It works best for those using Vanguard’s brokerage. It’s pretty darn good for those with a Fidelity brokerage account. It is so easy, you don’t even need to think about it.
Very good
After a one-time set-up, optimizing cash holdings across many savings accounts is a very good solution. This works best if you’re the type of person who likes optimizing your use of credit cards for points. If you are, you should investigate MaxMyInterest.
Very good
Two other good choices are buying:
Both require a bit more work. You should look across products to understand net savings yields at specific points in time. To make it easy, I do this for members of the Fast Follow Investor community. If you’re interested, you can sign up here. This solution works best if you cannot drop Charles Schwab as your brokerage.
Here is a summary of net interest yields as of April 5, 2023.
The highest-yielding cash investments (after fees) are:
The worst yield is Schwab’s sweep account. Schwab’s “uninvested cash in your brokerage or retirement accounts” yields 0.45% net interest.
When choosing your optimal cash savings solution, always consider:
Links to cash investment product research:
And always remember: this analysis is in no way financial advice. It’s financial education.
Before diving in, let’s take stock of what we know.
So, now: How much cash should we hold?
The short answer:
It depends on your personal situation and what opportunities exist to earn better returns.
A better answer:
How about a general rule gleaned from the greatest investor of all time?
So, a general rule of thumb: Hold 10-15% of your investment portfolio in cash, on average. Hold up to 20% when markets become overheated.
The best answer:
A detailed analysis can be conducted at certain points in your investing journey.
This is especially important when early in your investing journey.
Many personal finance pundits recommend building an emergency fund. Do this immediately after paying off non-mortgage debts. This is good advice, but for different reasons than often cited.
Financial advisors recommend putting aside 1-3 months of living expenses into cash savings. Some suggest 3-6 months and others 6-12 months. Its purpose is to “give you a cushion to find another job”.
But I look at an emergency fund differently. I’m solving for something even more important.
Let’s flip this scenario on its head: A job loss (whether forced or chosen) is not negative. In fact, it can be a huge opportunity. So, how can you position yourself to be ready?
I recommend saving up to 3 years of living expenses. Why so much? It’s not because it will take you 3 years to get a job. If you read this blog, you are smart and resourceful.
I recommend extra cash savings for two reasons:
An example:
Assume an individual is early in her investing journey. With a $150,000 portfolio where she spends $60,000 a year, she should continue saving ($30,000 more). Save until reaching $180,000 (3 years of expenses) in cash before investing in retirement and other higher-yielding accounts.
As shared earlier, this is not what I did in 1997 when starting my career. Instead, I maxed out my 401(k). But, I wouldn’t do it that way again.
This is especially important when late in your investing journey.
I’ll start this analysis in the same way. Many personal finance pundits recommend staying fully invested. This means holding only enough cash for a small emergency fund. They say that cash savings' low(er) yield is a drag on your investment portfolio.
Why hold cash when it drags down your return for most of the time you hold it?
Again, let’s flip this scenario on its head. A stock market loss is not a bad thing! It can be a huge opportunity. So, how do you position yourself to take advantage?
I recommend saving up to 20% of your entire investment portfolio in cash. Why so much?
I recommend holding extra cash for two reasons:
#1 - If you are later in your investing journey, you are close to retirement. Holding extra cash reduces the chance you must withdraw from investment accounts when they are down. This is called sequence of returns risk. (Please ignore that confusing term. The term is not important.)
If you invest alongside the Fast Follow Investor portfolio, any negative drawdown in value will recover within 3 years. Thus, if you can cover 3 years of living expenses and not withdraw from investments, you’re set.
This is especially helpful during the “retirement risk zone”. The risk zone is the 5 years before and 5 years after your retirement date. If you are heads-down saving and investing, you likely haven’t thought about this 10-year span. But, it will make or break your retirement.
#2 - You can be greedy when others are fearful. Having cash after markets drop lets you buy wonderful investments on the cheap! Selecting high-performing investments during market downturns is smart.
An example:
Remember the individual from the earlier example? Assume she is now further along on her investing journey. With a $2 million portfolio where she spends $120,000 per year, she should save up to $400,000 (20%) in cash. Invest the remaining $1.6 million (80%) of her portfolio in Fast Follow Investor or buy & hold indexed investments.
This is what I’m doing. Apart from the pure financial arguments for doing so, having cash on hand helps me emotionally. I sleep better at night. I’ve learned it is really hard to stomach large portfolio swings of tens and sometimes hundreds of thousands of dollars as markets move…and I’m a pretty even-keeled guy. I have to think that holding cash will help you too.
That said, I don’t recommend stashing any more than 20% in cash. Greater expected returns are indeed found elsewhere. This argument is absolutely valid. Your wealth growth will lag with a cash position greater than 20%.
In the earlier example, I recommended holding between $180,000 and $400,000 in cash throughout life. When could it be less?
While there are no hard and fast rules, I can offer several situations to consider. There is nuance here (as in most areas of life).
The first two consider opportunities. Here, you play offense with your cash.
The next two consider the insurance that cash provides. Cash is defensive, but how much insurance do you need?
Some examples are:
There are other options too. But I don’t recommend credit cards…the interest you pay is too high.
In the late-stage example, assume she borrowed $100,000 in total from her 401(k) and her spouse’s 401(k). Instead of holding $400,000 in cash, she now needs only $300,000 or a little more to account for interest charges.
In summary, I recommend holding cash in an amount greater than 3 years of living expenses or 20% of your investment portfolio. Your cash will drop upon pursuing an opportunity where you have an edge. This could be a micro-business or other higher-yielding market investment. You can also get away with holding less if you have access to cash through a 401(k) or cash-value life insurance policy.
We have covered a lot. And now you know the importance of cash savings when ascribing to the Idols Framework for building wealth.
Cash is king! Don’t let anyone tell you otherwise.
Read more about the Idols Framework for wealth creation.
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Buy the dip? No. Dollar-cost average? Maybe. This is a case study in second-level thinking.
You were 44 years old. It was Apr 1, 2020, and in March, the stock market crashed. The S&P 500 stood at 2,470. It was down 20% from its high four months earlier.
You knew stocks offered the best return, and it’s exciting to get them on the cheap. In fact, in the last 10 years, the S&P grew by 3.5X. The market had become inflated. Many were calling it a bubble. Finally, a buying opportunity…
You moved some cash and bond funds into stock funds. It wasn’t extreme…enough to get your stock allocation back up to 80%.
Well done! As of this writing in March 2023, the S&P 500 index has just eclipsed 4,000 for a 3-year return of more than 60%. You’re now 47 years old and riding high.
You were 44 years old. It was September and in January, the stock market crashed. The Dow Jones Industrial Average (the Dow) was down 23% from its high eight months earlier.
You knew stocks offered the best return, and it’s exciting to get them on the cheap. In fact, in the last 20 years, the Dow grew by 5X. The market had become inflated. Many were calling it a bubble. Finally, a buying opportunity…
You moved some cash and bond funds into stock funds. It wasn’t extreme…enough to get your stock allocation back up to 80%.
But wait, this was 1966!
The differences continued.
This was September 1966 and in January 1966, the stock market started tumbling. The Dow now stood at 7,083.
Ready for a rebound?
Unfortunately, no:
Really? Yes! Humans have a difficult time remembering the distant past.
I’m not cherry-picking this scenario, unfortunately. Assume you joined the workforce in 1943, and you too invested your lifetime savings in the Dow. Your return over the next 40 years -your entire working career- was 1%.
Thank goodness for pensions.
Imagine your 60-year-old self in 1982. You started work at 20 years old in 1943. You earned 1% in the stock market over your entire 40-year career.
What was conventional wisdom then?
It’s easy: “Do not invest in the stock market!”
The crazy thing? Using 1982 conventional wisdom, you would have missed out on 40 years of incredible gains in U.S. stocks.
What to do?
1) Refresh your study of second-level thinking.
Ignore sound bites and look for the more nuanced, deeper truths.
Be wary of what you want to believe!
2) Pose some questions.
In the year 2023, are we in a 1982 situation? Or is it more like 1966? When will we recover? Will it take 27 years? Will U.S. stocks continue to be dominant? Is there something else? How would I handle a stock market return of 0% over 10 years or longer?
Consider that we are sitting on 40 years of U.S. stock market growth since 1982 (when I was 6 years old!).
3) Next, answer all the prior questions with “I don’t know”.
I don’t know what the future holds. Nor does anyone else (without getting lucky).
4) Devise an investing strategy that gives us options and allows those options to flex as financial conditions change.
Hint: it’s Fast Follow Investing.
My main takeaway for you: Think twice. We are so very colored by our past, especially our recent past. It’s another one of those human biases that we need to overcome!
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Use these 3 strategies to shave 70% off your supposed retirement savings.
Your retirement savings target (your “number”) is less than you think you need.
In 2019, personal finance guru Suze Orman announced you need $5 Million to live a happy retirement.
That’s wrong, wrong, wrong, wrong, wrong. Very wrong.
Suze is misinforming those of us working hard to achieve financial independence.
In this post, I will show you how to shave $3.4 Million off this misguided $5 Million savings target. All you must do is 1) Review your large expenses, 2) Turn your hobby into a micro-business, and 3) Invest smarter.
Before we dive in, think about this:
“How much longer would you need to work to save an additional $3.4 Million dollars?”
I hope the answer is “far too long to even consider it!”. In fact, it’s likely not even possible for most of us.
First, let’s clarify a $5 Million retirement.
The often-used 4% rule translates $5 Million of retirement savings to living on $200,000 annually for 30 years. (More on this 30-year timeframe, later).
Next, we can reduce this $5 Million savings target by ~70% using three strategies.
To do so, we’ll build a case to adjust needing $200,000 annually. Then, we’ll back into the reduced savings target. And, we’ll do this all without sacrificing quality of life in retirement.
What is the best way to reduce the income needed in retirement? The best way is the most direct way: eliminate unnecessary living expenses.
Please take note! This is not an act of frugality or meant to reduce your quality of life in retirement. I’m willing to bet that you can comfortably live on 20% less. Let’s shave off $40,000 in spending without feeling it.
Exercise #1:
Look at your annual expenses and do the necessary work to curb your spending. Start with the big expenses: home, car, and health. Can you refinance your mortgage? How about selling a car and biking instead? Have you signed up for a subsidized Affordable Care Act (ACA) health plan at healthcare.gov?
Exericise #2:
Imagine you are an entrepreneur, and it is “Day 1”. Assume that you can only afford 25% of what you had planned for. In this scenario, your $200,000 annual spend becomes $50,000. What unique changes can you make? This exercise results in extreme ideas that you could later change to be less severe.
Exercise #3:
Learn from others who have come before you. Here are 10 ideas that members of the Fast Follow Investor community have shared with me. You need NOT downsize your home, reduce the # of vacations you take, or eliminate a daily coffee habit!
Instead, you might:
Total annual savings: $40,000
And don’t fret about inflation. Even with inflation, studies show that the average retiree’s spending drops by 25% for every 10 years in retirement. If you retire early, you should adjust that assumption. But, in case you don’t believe me: think about how much your 85-year-old mother spends on travel, for example. Spending in real terms declines as you age.
Calculation:
($200K less $40K saved = $160K needed)/4% = $4M savings target, updated.
With reduced spending, we are now living a $5 Million retirement on $4 Million in savings.
That’s $1 Million less savings required! How many fewer years of work is that? 10 years? More?
But we can do better…
Any income earned in retirement is that much less you need to save!
I often hear this concern: “But wait, if I’m working then I’m not retired.” Yes and no. It depends on how you’re earning this retirement income. Also, after relaxing in retirement for a while, you may realize you need some purpose back in your life. Earning money on your terms this time is a way to get it. For example, why not work a few half days at a local cafe? It’s a great way to stay connected with friends and the community.
My grandfather and my father-in-law both worked in retirement for reasons beyond money.
I can think of several options for making money when retired.
The options are endless.
Here are a few opportunities that add up to $80,000 per year:
Calculation:
($160K less $80K earned = $80K needed)/4% = $2M savings target, updated.
With some income in retirement, we are now living a $5 Million retirement on $2 Million in savings.
That’s another $2 Million less savings required! Wow. Let’s find more…
The final strategy is the easiest to implement. You need not cut spending or monetize hobbies. Instead, just invest your nest egg smarter.
Let’s revisit the 4% rule that I used earlier. The rule first appeared in 1994 after studying a 60%-40% U.S. stock-to-bond portfolio over different 30 years periods in history. But, using a 4% safe withdrawal rate (SWR) is inaccurate for two important reasons.
Instead, let’s use 5% as the corrected, perpetual withdrawal rate (PWR). To do so, the Fast Follow Investor strategy is necessary. I break it down further in this [post](to update with SWR/PWR post).
So, our $80,000 annual income in retirement no longer requires $2 Million in savings.
Calculation:
$80K needed/updated 5% withdrawal rate = $1.6M savings target, updated.
This is $400,000 less savings required.
In total, the three strategies reduced our retirement savings required by $3.4 Million.
So there you have it: with a little work, your $5 Million nest egg need only be $1.6 Million!
$1.6 Million still requires work to build. To do it, I urge you to follow the Idols Framework for smarter wealth creation. But it is calming to know you needn’t stay in your job decades longer to save an unnecessary, extra $3.4 Million.
Please, do this analysis for yourselves!
I suspect many of you reading this are financially independent NOW. But, you may not have realized it. Make the jump. Take the plunge. You can do it.
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What is Fast Follow Investing?
Start with buy & hold passive indexing. Then, expand beyond stocks and bonds & cut off severe market losses at the knees. Grow your lifetime savings at 12% to enjoy a 5% forever rate of withdrawal in retirement. Fast Follow Investing (based on Tactical Asset Allocation) is finally here for small investors like you and me. So join me!