Is cash really safe?

[kork13]

A Look at Long-Term Returns on Cash Savings - WSJ.com
I thought you all might find this article of interest.

[PetMom]

That is a good article. That is true that we are being told to get more and more and more emergency liquid savings and everyone does tend to go to the 0.43% interest rate savings acct.s or 1.9% CD's. Which when you really crunch the numbers as in this article is not that great.

Thanks for posting this!

[disneysteve]

Good article overall, but I take issue with:

Third, it's another reminder to make full use of your tax shelters. Roth IRAs are especially useful because your original contributions can be tapped without penalty or taxes

It implies that your Roth could be your EF since you can tap it penalty-free. That's true, but that doesn't make it a good idea. Retirement funds should be for retirement - period. Unless there is some catastrophic event and I've exhausted every other option, I'm not touching my retirement savings for anything but retirement.

I do think the article makes a valid point about your EF, though. It doesn't ALL need to be in cash. You are highly unlikely to ever need your 8-months of savings all at once, but rather over a period of 8 months or more. Keep some in cash but the rest can be in relatively low-risk things that earn a bit more interest.

[LuxLiving]

Thanks for the article. A topic which has been a matter of MAJOR discussions here at home for months!

[am_vanquish]

Originally Posted by disneysteve

Retirement funds should be for retirement - period. Unless there is some catastrophic event and I've exhausted every other option, I'm not touching my retirement savings for anything but retirement.

This seems like a Dave Ramsey statement I would disagree with - ignore the math for the sake of philosophy. I agree that it's not very good advice in general, but for a disciplined saver, there could be an advantage to doing this (albeit, a very small advantage).

In fact, I'm going to consider this concept for my own financial plan:
Current EF: ~ 10k (7,500 earning 1.5% & 2,500 earning 0.50%)
Target EF: ~ 18k

We estimate our current 10k EF would last us just about 6.5 months in an "emergency" situation. If job loss is our "emergency" (which seems like the most probable emergency for us) - then unemployment should extend that to ~10 months. Therefore, why not put the remaining 8k into a more risky asset? 10 months seems like plenty of time to unwind the more risky investments.

We're currently maxing my Roth IRA, but we're only using about 1k of DW's Roth IRA (she's still in school). With 401(k) and matching, we're already saving about 20% for retirement - so our current retirement savings rate is more than decent (especially for 22 yo's). Therefore, it seems like fair game to utilize the tax shelter of that remaining 4k.

If we decide to put the 8k in riskier assets, why not use the remaining room in DW's Roth contributions to shelter this investment from taxes? I'll admit that the advantage would be pretty small (how much tax savings can I possibly get on a 4k investment?) - but over time ... seems like it could have benefits.

Obviously this isn't a long-term philosophy, as DW will need to max her IRA contributions as soon as she graduates ... but why not take advantage of the next 2 years while she's in school to top-off our EF? If we're disciplined enough to "quarantine" the rest of our retirement savings in the event of an emergency, it seems okay to me.

[disneysteve]

am vanquish, my situation differs significantly from yours. My Roth is my ONLY tax-sheltered retirement plan. I don't have a 401k or other employer-sponsored plan or pension. I would tap my taxable investment accounts first before even thinking about touching my Roth and losing the tax benefit of that account.

[jIM_Ohio]

Since 1964, money held in short-term savings accounts, such as one-month CDs, has earned average annual interest of about 6.15%.

over the same period the Consumer Price Index has risen from 31 to 218

Someone paying 15% tax would have earned net interest of 5.2% instead of 6.15%. Since 1964, their $100 would have grown to a more modest $1,040 in nominal terms. But as each dollar today is only worth about 14 cents in 1964 money, their actual reward for saving $100 for almost 50 years was to see it grow to just $146 in real purchasing-power terms. That's a rate of return of less than 1%

next time you hear an investment–like a stock or a bond–described as "risky." All investments come with risks or drawbacks, cash included. (The "risk" here is that you will end up with too little saved for your retirement.) As an old investment saw has it, there is no such thing as a "safe investment"–only one whose risks are not yet apparent.

I have been stating the last quoted portion for years. All investments have risks. If you think you have a risk free investment, you are ignorant, a fool, or possibly both.