Of course, we all want a healthy bank account. Having a good amount of dollars within easy grasp is helpful in the case of emergencies or for medium-sized purchases where you don’t want to have to liquidate assets. But is it counterproductive to have too much cash on hand? We’ll explore that idea and other pressing questions about the role that cash plays in financial and retirement planning.
Important Links
Website: http://www.yourplanningpros.com
Call: 844-...
Of course, we all want a healthy bank account. Having a good amount of dollars within easy grasp is helpful in the case of emergencies or for medium-sized purchases where you don’t want to have to liquidate assets. But is it counterproductive to have too much cash on hand? We’ll explore that idea and other pressing questions about the role that cash plays in financial and retirement planning.
Important Links
Website: http://www.yourplanningpros.com
Call: 844-707-7381
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Transcript Of Today's Show:
Speaker 1: Hey everybody, welcome in to Plan With The Tax Man. Thanks for tuning into our podcast. As always, with Tony Mauro talking about all things investing, finance, retirement, taxes, all that good stuff here on the show. As always, we appreciate your time. And Tony, buddy, what's going on? How are you?
Tony Mauro: I'm good. Glad to be back from the holidays and getting busy.
Speaker 1: I know, yeah, it's been hectic already. So we are in, this is our first, technically, this is our first podcast of the new year. So obviously the new year kicked off a little heavy, a little busy. So lots to catch up on and get into. We've got several things we're going to talk about. But before we jump into our main topic, let me ask you a question. Speaking of the new year, IRS contribution limits changed.
Tony Mauro: Yeah.
Speaker 1: So let's discuss that real quick. $6,000 for any type of IRA, 7,000 to 50 and older. Correct? Is that right?
Tony Mauro: That is correct.
Speaker 1: What else have we got?
Tony Mauro: We've also increased the limits for the 401ks and some other retirement plans.
Speaker 1: Okay.
Tony Mauro: They're doing a $500 increase. 19,500, and then if you're 50 plus, all the way up to 26,000. And they've also bumped up the contributions on the Seps and the Simples and even the HSA. So, I would encourage everybody to check with their financial advisor or their tax man or woman to see what those are. Because those are an important piece of hopefully what you're doing to save for retirement.
Speaker 1: Yeah. And it seems like they do this, what, about every other year it seems like we're touching on the fact that it's $500 bumps or so. Because I don't think it was last year, was it?
Tony Mauro: They didn't do much last year, but generally they're doing something every year, just bumping them up for probably just inflationary purposes.
Speaker 1: Right.
Tony Mauro: Which, like I say, for those of us that are at or near those limits, I always encourage people that if they can to, you bump yours up too.
Speaker 1: Right, right.
Tony Mauro: Bump up the limits. Yeah.
Speaker 1: Yeah. And a lot of times people feel like they're maybe behind the eight ball. I think we all get to let's say 50 and we're like, "Yeah, I probably should be putting more away." While it may not necessarily set you for retirement, let's say for the example of the 26,000 if you're 50 plus. I mean if you did that for the next 10 to 15 years, let's say from 50 to 65, that's a pretty good chunk of change you're able to put away.
Tony Mauro: True. It sure is. You take the 260 and then you add a little bit of some sort of reasonable rate of return to that. And yeah, by 65 it's going to be well worth your time and effort to do that. It, more than likely if it's invested properly, diversified and all that, it's going to be well worth more than the 260 that you started with. So. [Crosstalk 00:02:33].
Speaker 1: I mean, you're probably somewhere, what, 300 to maybe 450, maybe even a half a million dollars depending on how it's invested and how the markets do over that time obviously. But certainly half a million dollars goes a long way towards a healthy retirement.
Tony Mauro: It goes a long way.
Speaker 1: That's [crosstalk 00:02:47].
Tony Mauro: I tell you once I turned 50 you really start thinking about that more than you ever have. So.
Speaker 1: Very true. Very true. All right, so folks, again, the contribution limits have increased yet again. So, if you are not working with Tony and you're checking out the podcast, give him a call and see how he can help you out with getting yourself planned correctly for retirement. That's what he does at Tax Doctor Inc. Of course, he is an EA and a certified financial planner as well.
Speaker 1: All right, so let's get into our main topic on this first one here, our podcast today. And we are going to talk a little bit about good old cash. Good old Benjamins. You've got to like the Benjamins.
Tony Mauro: You've always got to like having a lot of cash. Most people wish they had more.
Speaker 1: Oh, very true. All right, so we all want a healthy bank account, right? We all feel that definitely. I mean I get it. And we all have like this, I don't know, it's like a magical number that somehow seems to exist in each person's head that they want to see in their savings account or in their... Whatever, right? Like, "Oh, I don't feel comfortable if I don't have X dollars." Or whatever the case might be. And of course, like you said, we always want more.
Speaker 1: But it can be counterproductive, especially again, from our standpoint here on the podcast, we're typically talking to retirees and pre-retirees. So, too much cash can get you in a little bit of trouble there because it's, not necessarily trouble, but it's just not being effective. It's not doing as much as you'd like it to do.
Speaker 1: So, with that in mind, what are some of the possible uses of cash that make it a good idea to have that sufficient amount on hand? And are we talking about simply an emergency fund, Tony? Are we talking about above that where we're just, it's basically just sitting there doing nothing.
Tony Mauro: Well, I think we're talking about above that. What I've seen in most people is the first thing they'll do is say, "Well, I do have a savings account." But it's just one account and that's supposed to cover their emergency fund when things break down in the house, their vacations, their Christmas fund. And so to me, I think it's more important to break off into separate accounts for every little thing. You should have your emergency fund in one account that should be funded for, if you are working, the emergency happens, you lose your job.
Speaker 1: Gotcha.
Tony Mauro: You've got to have living expenses for so long. But you should break up your "home repairs" fund, your travel fund, and then fund those just like you were in your own little mini business. So that way you know how much you've got to have in each of those every year, so that you don't have to stress out about when the dishwasher goes out or you want to take a vacation. Things like that.
Tony Mauro: So I think the more of those you have and can fund properly over time, you're going to be much less stressed about cash. Now above those things, I don't think you should have just another, say, 40, 50... I've seen people with as much as $100,000 sitting in a checking or savings because there's just no earnings on them.
Speaker 1: Yeah. And that's the counterproductive side, right? It's just basically you're losing money safely.
Tony Mauro: Yeah. You're losing money safely. And if you've got all those other things covered, you probably should move that into something that at least gets you a little bit of earnings. Even if it's a CD money market, some short term type of thing.
Speaker 1: Right. Yeah. I mean because when was the last time anybody had $100,000 emergency? I mean, I guess some people do depending on your lifestyle, but still. Yeah, that's not, I mean, and again, I get it. There's an emotional component to looking at it and going, "I just feel better seeing X number of dollars."
Speaker 1: So that begs the question then, how much is an appropriate amount to have? I know it varies from person to person. Is there, I don't know, is there... I know for emergency funds sometimes some people will say 6 months worth or 12 months worth of expenses should you lose your job or whatever. I don't know. What's your thoughts?
Tony Mauro: Well, my thoughts for emergency fund, it really runs along the general consensus with most planners is 3 to 6 months of your living expenses for an emergency fund. The key there though is that should only be for emergencies. We shouldn't be tapping that for vacations and my car breaks down. Because I think you should have a separate fund for that and that should be, everybody's different but 5, 7, $8,000 in that one, just to cover things that come up. Then beyond that, again, I'm a big different funds guy. I'm the old Dave Ramsey, the old envelope system. I like to have a fund for everything and a little bit gets allocated to each one and then I'm covered.
Speaker 1: Right.
Tony Mauro: But most people don't think like that but I try to get them to think like that. Because then that way once you have all that covered, you shouldn't really have a lot of cash on hand other than to pay your expenses and go out and I call it have fun with.
Speaker 1: Now I hear people say stuff like any other investment, no more than 5 or 10%. You'll hear things like that as well.
Tony Mauro: Right.
Speaker 1: Does that fall in that same line? Okay, so you've got your buckets for your different things, emergencies and whatnot. And then additionally, sitting in cash, let's be smart and not do more than 5% or so, because again, it's not working hard for you if you have much more than that. It's just sitting there.
Tony Mauro: That's right. I generally use between the 5 and 10 when we're doing planning. After, if we can get clients to use the different buckets and/or envelopes, then yeah, after that you've got enough to pay your bills every month. And you have a little bit of a cushion just in case. Then the rest should be working for you somehow.
Speaker 1: Okay. Well I'm going to jump to this last question here because I think the other one we've already answered. So for maybe a client or a potential client, Tony, that comes in and talks with you, who's gotten used to having a large amount. Let's say that $100,000 person we were just talking about. And you're trying to talk with them about, okay, this is just too much sitting there. What's a way they can invest more efficiently without necessarily giving themselves a heart attack because they're watching... Let's say they're jumping into the market right now, obviously when it's new highs every other day it seems like. What's some smart ways to maybe peel that ridiculously too much cash back? Any ideas there, something you can share with us?
Tony Mauro: Well, I would say the first thing is, of course, before you even put the money in, is decide on some conservative type of investment, if you will, just to get started. Of course, and everybody's different, it depends on their goals and their risk appetite and all that. But all that being aside and once you have that determined, really, I still like the old fashioned dollar cost averaging, so that depending on what you are going into, you're not just throwing $100,000, let's say into a bond fund for example.
Speaker 1: Right.
Tony Mauro: And then all of a sudden rates go up and the prices of the bond fund go down and then you can't figure out what happened. And that's, again, too much stress. We have all this stuff coming at us already every day. We don't need that. So that's what I recommend, is just going slow and especially in high markets, like you said, no reason to just jump on in.
Speaker 1: Well, it's, what is the adage, how do you eat an elephant? One bite at a time.
Tony Mauro: A little bite. Yes.
Speaker 1: Yeah. So same thing. If you do have way too much cash sitting there, don't just, and you're working with an advisor and they're deciding to do that, yeah, like you said, don't maybe just go ahead and just break it all down. Do things gradual too. Because that will help you deal with the stress or the would be "heart attack" of seeing it all go down. It's not necessarily going down, it's just going into different, hopefully, allocations and investment vehicles that are just going to make it work a little harder for you. Because I mean, interest rates are still, let's be honest, they're still pretty much garbage.
Tony Mauro: Yeah.
Speaker 1: So, you're not getting anything at the bank, right?
Tony Mauro: No. You're not getting anything there. And we talk about, a lot about having it work for you, but at the same time preservation of principal, return of principal is, at least for most of our clients, is the number one goal.
Speaker 1: Right. Yeah, I was talking with somebody a while back and they were talking about, they look at their money as different types of... Well how did they word that? Kind of different groupings of the military, like the soldiers, if you will. And each soldier, each division of money has its job to go out and conquer, so on and so forth, and be effective in recruiting more soldiers. So making more money basically. Right?
Speaker 1: So you want to have jobs... Your money needs to have a job just like you have a job. What's its job, what's it doing and is it being effective in growing? And of course, some of that stuff's going to sit there. But again, if you have too much, you have what we call lazy money and you're just losing purchasing power and all that kind of stuff.
Speaker 1: So that's the idea of not getting too enamored with the Benjamins. We all like looking at him, that's for sure. But we want to make sure that we're being effective and not just having too much cash, and it's sitting around not doing us any good.
Speaker 1: So that was our main topic this week on the podcast with Tony. If you've got questions or concerns, as always, make sure you check them out online. You can go to yourplanningpros.com. That is yourplanningpros.com. Subscribe to this podcast while you're there at Google, Spotify, iHeart, Stitcher, lots of different platforms that you can choose from. We make it easy for you to hopefully share that as well as subscribe. And if you do have questions, always, always, always check with a qualified professional before you take any action. And you can call Tony if need be at 844-707-7381. That's 844-707-7381.
Speaker 1: All right, my friend, now I've got an email question here before I let you go this week from Beth in West Des Moines. And Beth says, "Tony, I could sell the house right now for a half million and I only owe a thousand, a hundred thousand, excuse me on that. So, and I'm 57 but I'm thinking about selling it, downsizing and then using that extra cash, roughly 400,000 or so to retire now. Is that a bad idea?
Tony Mauro: Well, I would say without knowing any more facts right off the top, yes. I wouldn't agree with that idea at all.
Speaker 1: Okay.
Tony Mauro: But there could be other extenuating circumstances. But off the top of my head, so you sell it for 500, you owe 100, so you're going to net 400,000. Granted, assuming she's lived there for two of the last five years, the gain's not going to be taxable. So throwing that aside, your first inkling is well, 400,000, that sounds pretty good. But at 57 there's a lot of life left [crosstalk 00:00:13:09]
Speaker 1: A lot of retiring years, yeah.
Tony Mauro: Yeah, ahead of you. And even if you can put that money to work at let's say 4 or 5%, that's going to be depleted, assuming you live to 75, 80 years old, which is the norm these days. So, if it were me... And then we're not even addressing the fact that you've got to put some of that money maybe into another place, unless you go back into a mortgage, which I don't particularly like. So I don't know how much you'd even have there to even invest. It sounds good right off the top, but I think there's more to think about there and I would definitely get some advice on that.
Speaker 1: Yeah. And there's, I mean, granted she doesn't mention, we have no idea if she has any other savings set aside or retirement accounts, a 401k. We're assuming that maybe she probably does.
Tony Mauro: Right.
Speaker 1: So there's probably some other things in there. So definitely need some more information. And the one piece that I would definitely toss out there, Beth, as well as what are you going to do from a medical standpoint from 57 to 65?
Tony Mauro: Exactly. Exactly. I mean, if you're retiring from somewhere you can't get on Medicare, so you're going to have to-
Speaker 1: That's 8 years, man.
Tony Mauro: ... go out and purchase insurance.
Speaker 1: That's a long time. Yeah.
Tony Mauro: It's expensive and so you're going to have to take that into account. So again, you've got to plan all that out and take all that into account. And then if it's still a good idea, if you think it is, then you can make that decision with all the facts.
Speaker 1: Well, and Beth, you may already have answers to some of these, you just didn't share those with us. So based on this information, I would definitely say talk with your advisor and spend more time chatting about that. And look at all your numbers or reach out to Tony as well.
Speaker 1: And I was thinking about it, we mentioned the medical side, Tony, it's so funny now that things are so out of skew. Remember how it used to be that if you said, "Well, I'm going to have to do COBRA for a certain amount of time." You're like, "Oh my gosh, it's going to be so crazy expensive." Isn't it wild that COBRA is not the craziest option now because things are so out of control. Isn't that nuts?
Tony Mauro: It's crazy. I think, we still have to fix this-
Speaker 1: Oh no, for sure.
Tony Mauro: ... as a nation because it's just, it's out of control.
Speaker 1: Mm-hmm (affirmative). Yeah. I was looking at some stuff the other day and it was somebody was pointing out that COBRA's not the worst option. I was like, "Wow, who would've thought that?"
Tony Mauro: Yeah.
Speaker 1: So there you go. So Beth, all right, so check into those things. Definitely the medical side as well, because eight years is a long time to not have something in place.
Speaker 1: All right, so that's our show for this week. Thanks so much for tuning in to Plan With The Tax Man. As always, please, please, please subscribe to the podcast. We certainly would appreciate it. Share the message with someone who might benefit from that as well. That's just basically sharing the podcast with them and see if they can enjoy a little, a few nuggets of useful information that we do here from time to time on the podcast.
Speaker 1: And Tony, my friend, thanks so much. I'll catch you in a couple of weeks. I hope you have a good one.
Tony Mauro: All right, take care.
Speaker 1: We'll talk to you next time here on Plan With The Tax Man with Tony Mauro, Des Moines' professional alternative at Tax Doctor Inc. Don't forget to go to yourplanningpros.com. That's yourplanningpros.com.
