How a 100% cash position can put future at risk

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Cash is king, the saying goes, but it’s not always the best long-term strategy.

But cash has been embraced by Randy, 68, and Pam, 50, and it has been for a long time.

Cash may keep the couple safe from stock market gyrations, but it leaves them vulnerable in other ways.

More on that in a moment.

The couple is contending with some big college costs. They have three kids — a college junior, a college sophomore, and a 15-year-old who also has higher education in the future.

They’re anticipating bills of $46,000 times two for 2015 and 2016, a bill of $35,000 in 2017 and a cost of $35,000 for four years from 2018 to 2022.

That’s a whole lot of tuition to pay.

Randy is already retired but does some consulting on the side, as does Pam. They see no big changes in their lifestyle, but they do have an age difference to contend with.

“I want to create a long-term, sustainable investment/income financial plan for my family,” said Randy.

Steven Gallo, a certified public accountant with U.S. Financial Services in Fairfield, reviewed Randy’s and Pam’s plan for

“Overall they are in much better shape than most due to the significant pension Randy receives, coupled with the Social Security they will both receive in time,” Gallo said. “The only obvious issue is the lost opportunity costs and high inflationary risk they are experiencing based on the assets sitting in cash.”


Gallo started by looking at the couple’s cash flow. He determined they will have some deficits, but that’s because of the college costs, which they plan to pay for by pulling money from their IRAs.

That will work, Gallo said. The bigger issue is what happens to all the money that’s left.

Gallo looked at the couple’s retirement income prospects, assuming an inflation rate of 3.7 percent, and a rate of return on investment at zero because they’re 100 percent in cash.

Based on the current scenario, the couple’s portfolio is projected to be worth $1,43 million at Randy’s age 90 and Pam’s age 72.

That doesn’t sound so bad, but if Pam lives longer, there could be trouble.

“If they stay invested in cash, at the wife’s age 87, their savings would be depleted,” Gallo said, noting the projections show only a 7 percent chance of success under the current scenario.

If the couple instead invests conservatively, receiving a 4 percent return through a diversely allocated portfolio, the projections show the portfolio would still be worth $1.3 million at Pam’s age 90.

That was a 100 percent chance of success.

“Obviously having all your savings in cash, especially in the low interest environment we have experienced for the past 10 years, will result in zero growth,” Gallo said. “This leaves them highly vulnerable to inflationary risk.”

Gallo took a look at the couple’s risk tolerance, which is moderate, not the ultra-conservative their current asset allocation seems to indicate.

Based on that, plus their long time horizon and significant guaranteed income, Gallo recommends an asset allocation of approximately 60 percent equities and 40 percent fixed income, which he said would allow them growth opportunity while attempting to minimize volatility.

The lack of opportunity presented by an all-cash investment can’t be stressed enough.

“Inflation risk is the loss of purchasing power due to the value of the dollars you hold in cash being less
valuable over time as the cost of goods and services rise,” Gallo said. “While cash can be viewed as a zero-
duration fixed income instrument, historically, it has had zero or negative real return.”

It’s also important to consider that, if the couple doesn’t make changes, they may be unable to leave any
assets to their children, Gallo said.

If the couple decides to invest their cash, Gallo suggests they keep $50,000 in cash as an emergency fund.


Gallo looked at the couple’s life insurance, which he said is sufficient because of their savings level and income prospects. But they may want to consider additional insurance for goals other than income replacement.

“I would recommend they consider a ‘second to die’ policy to offset the cost of estate taxes and perhaps the desire to create a financial legacy for their children and /or grandchildren,” Gallo said.

Randy also has a long-term care policy, which is worth going over to make sure it provides the benefits the couple may need.

This is especially important because of the age difference between Randy and Pam.

“There is a significant age difference between spouses and with their current investment allocation — cash — there is a risk that their assets could be depleted based on current life expectancies,” Gallo said. “One other concern is the potential cost of long-term care, the husband has insurance, which should be adequate to offset any costs he may incur, however his wife has no coverage.”

Without a plan for Pam, long-term care costs could significantly deplete their savings.

Gallo recommends the couple meet with an estate planning attorney to make sure they have the documents they need.

“Everyone should have a will, power of attorney and living will or health care directive,” Gallo said. “These three documents are instrumental in reducing the both the financial and emotional costs of probate.”

Right now, the couple isn’t in danger of owing federal estate taxes because their estate value is less than the $5.43 million exclusion per spouse, but the news isn’t as positive for New Jersey estate taxes.

“Since New Jersey’s exemption is only $675,000, there would be a New Jersey estate tax due,” he said, noting that when combined with administrative and burial expenses, the bill would be about $308,012.

So within their will, they should have a disclaimer provision that allows for maximum flexibility should estate tax laws change over time, Gallo said.

Discussions about the estate taxes are where an estate planning attorney can be very helpful.

This story was first posted in July 2015.

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Net Worth:


  • Checking: $1,000
  • IRAs: $1,050,000
  • Brokerage Account: $35,000
  • Primary Home: $650,000
  • Personal Property: $30,000
Total Assets: $1,766,000


  • HELOC: $21,000
Total Liabilities: $21,000
Total Net Worth: $1,745,000


Annual Income:

  • Randy pension: $90,000
  • Randy Social Security: $24,000
  • Randy consulting income: $14,000
  • Pam consulting income: $20,000

Monthly Expenses:

  • Income Taxes: $1,135
  • Housing: $1,750
  • Utilities: $1,300
  • Food: $1,050
  • Education: $4,700
  • Personal Care: $400
  • Transportation: $1,010
  • Medical: $50
  • Insurance: $520
  • Entertainment: $200
  • Vacations: $1,000
  • Gifts: $100
  • Misc.: $100