Retirement Strategy: Cash Could Set You Free And Make You Money

by: Regarded Solutions


With a seemingly endless bull market, investors who have lots of cash reserves are almost laughed at by the "big guys."

Retired folks as well as those with near-term time horizons can build cash reserves while making more money extremely safely.

A CD ladder is very underage these days.

I hear it every day from some of the smarty pants investors who always know everything: "You are 50% in cash? Are you crazy? Look at all the money you're losing by not being fully invested!"

Sound familiar? Well, here is what I have to say about my own situation.

  • My investments are paying me an income stream that I am comfortable with.
  • I am already retired and not only am I focused on income, but capital preservation as well.
  • 50% cash reserves is my comfort level.
  • I have been buying every dip for a decade, and now that I have a solid income stream, I can afford to keep cash for an inevitable downturn.
  • I have no crystal ball to tell me when the next deep downturn will be, but I am prepared to take advantage of it.
  • I refuse to keep buying every dip these days because I am saving up for the next "liquidation" sale. If it never comes, well, then, so be it. I am financially sound already anyway.

I have heard plenty of professional gurus think 10-20% in cash is plenty and point out the cost of lost opportunities by trying to "time the markets." To me, that is hogwash because I have what I need and hope to get some bigger prizes at some point. The main reason I launched the model Dividend King Retirement Portfolio was because I wanted a model portfolio that held old, boring stocks that have paid and raised their dividends for at least 50 years in a row, and my research tells me these companies will continue doing so for the long term.

The model Dividend King Retirement Portfolio currently consists of Coca-Cola (KO), Procter & Gamble (PG), Johnson & Johnson (JNJ), 3M (MMM), Emerson Electric (EMR), Cincinnati Financial (CINF), Lowe's (LOW), Hormel (HRL), Colgate-Palmolive (CL), Dover (DOV), and AT&T (T).

If You Have Time, Keep Putting That Cash To Work

Let me make clear that it is my feeling that if an investor has a long time horizon such as 10, 15, or 20 years or more, keeping just enough cash on hand for immediate emergencies and investing the rest makes more sense than keeping a grip on all cash.

History has shown repeatedly that markets recover from even the worst of corrections and bear markets. I went into more detail in this article. That being said, capital preservation and keeping lots of dry powder makes just as much sense to me. The amount anyone has in reserve is a personal decision, but for me, as long as my income stream satisfies my needs, I prefer more cash right now and to wait for a major pullback. If your situation requires more income, then a lower percentage of dry powder might be right for you, especially with a longer time horizon.

One More Point

I would also like to point out that in today's world, even younger folks (millennials) are savers rather than investors. The reasons are all across the board, but the percentage of difference is rather staggering.

A 411% difference is off the charts as far as I am concerned, but this study by Fidelity Investment goes into great detail along with the chart above. Given that there is so much cash floating around, I thought it would be a good idea to offer my own suggestions for how to make some decent income, in an extremely safe, FDIC insured way, with your cash - while having the money available in a reasonable time frame for opportunity buying.

The CD Ladder Is Easy And Makes Sense Within A Dividend Growth Investor's Portfolio

So what would I do with the cash I have set aside for the next big real correction that lasts longer than 12 seconds? Personally, I like a short-term CD ladder in 3-month increments, up to one year.

Right now an investor can select an "auto-pilot" ladder from Fidelity for one year, in three-month increments with an interest rate of 1.83%:

All an investor needs to do is have a Fidelity account and push that "build" button. It will ask how much you want to invest, and if you want to roll over the CD when it matures into a 12-month CD, or if you want to just take the cash. If you do the automatic rollover, each CD will be rolled into a 12-month CD and will continue rolling over every three months. If you intend on keeping the cash for that length of time, or longer it makes sense. Keep in mind that since we are entering an increasing interest rate environment, the rates paid by the CD should rise accordingly.

For myself, I like to select the CDs that I use to build my own ladder. I look for the following:

  • I want the interest paid monthly.
  • I need to use different banks.
  • I do not want the rollover option. I want the matured CD back into my account so I can see my options at that time.

There are literally thousands of new CDs issued every week, and you can invest up to $250,000 to have it FDIC insured (couples would be $500,000). If you have more than that, then I would definitely urge you to use different banks for your CDs, and the internet makes it simple. In the old days, we would have to go to each bank for their CDs, and if there was a lot of money involved, it might have meant 5-10 banks or more, to be insured. The FDIC level back then was just $100,000.

For the millennial savers or anyone else who prefers not to invest in equities, I would look for the highest yielding ladder, and Fidelity has "auto-pilot" ones for 60 months, using a CD for every 12 months:

Nearly 1% higher interest right away and each year the CD would roll over into the 5-year (60-month) CD, and you would not only have a continuous flow of money but you would be taking advantage of what I consider the longest time frame CD rate that makes sense in our current environment.

Keep in mind that you can also build your own ladder to fit your needs all the way out to 20 years if you so desire (even longer, I think). Rates have been moving up, and here are the latest Fidelity rates:

Personally, I prefer to go shorter term because I believe my stock "shopping spree" will be more imminent than some others believe, but that's just me. Actually, the Wall Street Journal had an article recently in which it also believes that investors should be more aware of what lies ahead:

Long periods of calm lead investors and companies to make silly assumptions, leaving them dangerously exposed to shifts in fundamentals. With the economy now appearing to be in the last phase of the cycle, in which the Fed starts worrying about too much growth rather than too little, some of the easy assumptions of recent years are starting to be challenged - and could threaten the most popular stocks.

As a dividend growth investor, I want to jump IN when the blood hits the street! Of course, many retirees and folks simply not willing to invest might want to look for the highest-yield CD for the longest period of time that pays monthly, quarterly, semi-annually or annually, and sit back and live life.

Fidelity has some 20-year CDs at 3.50%. There are plenty of other banks and brokerages having appealing rates as well. Fidelity is not the only game in town, just in MY "town."

There Are Other Options To Stash Cash, Of Course

I wrote an article not long ago about different places to keep cash, and I would urge you to refer back to it:

Retirement Strategy: What Are You Doing With New Cash To Invest?

For some additional ideas, I like this article for your consideration as well. All of this being said, I would love to hear what YOU are doing with your "dry powder?

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Disclaimer: The opinions and the strategies of the author are not intended to ever be a recommendation to buy or sell a security. The strategy the author uses has worked for him, and it is for you to decide if it could benefit your financial future. Please remember to do your own research and know your risk tolerance. The long positions held are based upon what the model portfolio holds, and I personally could have held all of the stocks noted at one time or another.

Disclosure: I am/we are long CINF CL DOV EMR HRL JNJ KO LOW MMM PG T.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The portfolio is for educational purposes only and not an actual portfolio. The long positions are based on the model portfolios.