This 1 Thing Will Rob You of Financial Success

This 1 Thing Will Rob You of Financial Success. Should you move everything to cash?

Today, we are going to talk to you about how to take advantage of these great rates on cash, but doing so in a way that doesn’t cause you to have a negative real return in retirement.

This 1 Thing Will Rob You of Financial Success


Full transcript:


Alex Okugawa 0:00
Four and a half percent interest on what is essentially risk free money. Who doesn’t want that?

What I’m talking about is cash. And the truth is being addicted to cash can be one of the greatest mistakes that will rob you of long term financial success.

So today, I’m going to talk to you how to take advantage of these great rates on cash. But doing so in a way that doesn’t cause you to have a negative real return in retirement.

Hey there, it’s Alex with one degree advisors, and we help you gain confidence in your retirement. So today, you can earn a pretty good rate of return on cash or CDs. And a lot of people like this because it’s something they know, it’s something that they are familiar with. Basically, when I have cash in the bank, I’m pretty much assured that I won’t lose anything, and I can earn some interest over time. That’s a nice feeling.

Now, this wasn’t always the case, at least, you know, earning great interest. If we look at the 2000 and 10s, you’ll see that inflation pretty much hovered around 2% for an entire decade. And if we look at the United States three month bond yield, I’m using this to try and give you a proxy for interest that you might be able to earn on cash. That pretty much hovered close to zero and really only bumped up a little bit in 2019, but was still hovering around that one to two and a half percent range. In other words, you were losing money on your cash, your real return was negative.

Now as we look at what’s happened to the the yield on the three month bond, we’ll see that through 2020, and through 2021, the yield was still relatively non existent. And again, this roughly translate to the interest that you would be earning either in your short term CDs or cash in the bank.

But that changed last year and 2022. Now we are thinking, well shoot, we can earn 5% yield and something that is relatively riskless. Why wouldn’t I begin to pile more money into things like CDs, or just keep stockpiling cash in the bank, I mean, 5% interest is a pretty good deal, I’m happy to earn 5% Plus, there’s no risk.

But you need to look at this with relativity. Let me explain.

If you were able to earn 5% on cash at the bank through 2010, that’d be a pretty good deal. And 5% nowadays is nice, but you have to remember where inflation is at.

As we will see in the inflation chart, things began to really change through 21, we had a lot of dollars flooding to the system supply chain issues COVID, the whole nine yards. And so inflation really began to ramp up and peaked in June 2020 to around 9% year over year. Now we have seen some inflation come down since then, but nonetheless still much more elevated than we’ve seen in the past.

Now, for the most part, you still have negative real returns. Now I know you’re thinking I’d rather lose a little bit to inflation than a lot of dollars in the stock market, which is still down and I get that. But this is where having a plan in place will help you not just be totally tunnel visioned on cash.

So what do you do?

Number one is you want to have an adequate reserve of cash. This video is not meant to bash on cash or cash equivalents. In fact, as a retiree cash and the equivalents is immensely important, and critical to your financial health to make sure that you can ride out stock market fluctuations, you need to think strategically about how much cash you may need. So for example, some folks might need a lot of cash and other folks may not need as much to for their living expenses. In retirement, it helps you write out the market fluctuations meet all your expenses in the short term, overtime markets should recover assuming that you are a globally diversified investor. And it’s an important note to make sure that not all cash savings are made equal traditional brick and mortar banks like Wells Fargo, JP Morgan, Bank of America, and a lot of these credit unions are just not paying the interest that you might be able to receive in the current environment. And that’s where you want to explore high yield savings accounts or money market accounts to make sure you’re getting good interest.

Number two, is you could incorporate what’s called a trend following strategies. And there are many people saying well, you know, I want to be in cash because I feel like an economic downturn is coming, or we’re already in one. So I want to hold a good amount of cash. And this is where incorporating what are called trend following strategies can be helpful and useful in times like this. Essentially, what trend following strategies do is when the trends are going well, you enter into the market and when the markets turned down, you move into safe assets like short term treasuries or cash equivalents. And the reason I like trend following is it removes the behavioral aspect of trying to you know, time the market perfectly.

The third and final thing is to be thinking about your income and portfolios in segments. I kind of alluded to this in the first point, but be thinking about how much do I need for my short term needs, and how much will I need in the next couple years and beyond? So think about your money in three different buckets. You know, maybe your first bucket is cash in the equivalent stuff for the short term, so that I need and that’ll be illustrated on the purple line and then maybe Money that you’ll be needing in the next couple of years, maybe three to five years can be illustrated by the green line, and then money that you’ll be needing over the long term, maybe 10 plus years, that can be illustrated by the blue line. And so we do this so that you can reduce your risk and help maintain your purchasing power over time.

Again, the biggest risk I see most retirees making is being addicted to cash. Usually, that occurs when you really don’t have a solid plan in place. And most of the time, you’re just winging it.

But these are the types of things that we help our clients get through and understand so that they’re not fearful and they’re not necessarily worried about every single day and what the stock market is doing. We’re able to go into the financial plan to say, Look, your plan is still on track. You know, the markets have definitely been scary, but between all your different investment buckets, you know, we can still provide income and make sure that we will be able to continue to provide income, even if the markets get a little bit scary.

We recently posted a video discussing the best place to put your money in retirement, folks can watch that above.

Once again, this is Alex Ogawa with one degree advisors. I hope you found today’s video helpful if you liked it, please make sure to drop a like or subscribe to the channel it helps us grow and reach more retirees. If you have any comments, leave those below. We also created a free guide called Five retirement mistakes to avoid and we found that these are the most crucial and critical mistakes we find most retirees make. It’s a free complimentary guide you can download that in the description below.

Transcribed by

The One Degree Blog

Not signed up yet? Get weekly financial insights right to your inbox.
Subscribers also gain access to our private monthly client memo.

We will keep your email safe. You can unsubscribe at any time.

This does not constitute an investment recommendation. Investing involves risk. Past performance is no guarantee of future results. Consult your financial advisor for what is appropriate for you. Disclosures:

Retirement Recap.

Join the 1,000+ other retirees and receive weekly articles and videos to help you retire with confidence.

Subscribers also gain access to our exclusive monthly client memo that we don't share anywhere else.

We don’t spam! You can unsubscribe at any time.