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Hi all,

I was wondering, is it a good idea to keep part of our retirement portfolio in "cash" as asset allocation pie charts for our risk tolerance say we should? I think it would be 5% that they say we should have in cash.

And if so, what might be a good thing to do with that cash, aside from a money market fund paying something like 0.01%? I am considering:

CDs

Municipal Bonds

And if we buy some of one or the other, it may be on the secondary market. Is AA considered safe enough for Munis for that cash?

Thank you so much!
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I keep my "cash" in the Vanguard short-term bond fund.

https://personal.vanguard.com/us/funds/snapshot?FundId=0539&...

Haven't left any funds in a Money Market Fund or CD in years.

intercst
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Thank you!

You said, "Haven't left any funds in a Money Market Fund or CD in years." Why is that? Are you getting better returns in the short-term bond fund?
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gogreengo asks,

You said, "Haven't left any funds in a Money Market Fund or CD in years." Why is that? Are you getting better returns in the short-term bond fund?

Yes.

The yield on Money Market Funds is essentially zero. The highest yielding 3-yr CD according to bankrate.com is 1.46%. The Vanguard fund's SEC yield is 1.54%.

http://www.bankrate.com/partners/sem/cd-rates-v6-nl.aspx?ec_...

Of course, a CD is FDIC-insured and you can always lose money in a bond mutual fund if interest rates rise, but for now I'm willing to take the risk. (I'm only holding 6-month's worth of living expenses in the account.)

intercst
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Thanks!

It sounds like you are holding "emergency fund" cash in that account? Do you have any cash as part of your retirement allocation? Just curious.

I remember the good ol' days when money market accounts were paying around 6%!
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gogreengo asks

Do you have any cash as part of your retirement allocation?

Very little. My asset allocation is 96% stock, 4% fixed income (mostly I-bonds I bought years ago.)

intercst
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Thanks! Oh, I-bonds! We bought some years ago too, before rates went down, thankfully.
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I was wondering, is it a good idea to keep part of our retirement portfolio in "cash" as asset allocation pie charts for our risk tolerance say we should? I think it would be 5% that they say we should have in cash.
And if so, what might be a good thing to do with that cash, aside from a money market fund paying something like 0.01%? I am considering:
CDs
Municipal Bonds
And if we buy some of one or the other, it may be on the secondary market. Is AA considered safe enough for Munis for that cash?


We have "cash" in several places. One is "cash" in our brokerage account. Against that we can write checks, transfer it electronically to our local checking accounts, or whatever. It's a good chunk, sitting waiting for an opportunistic buy on a great stock, the purchase of a new car for me, or to ransom one of my cats if stolen.

Another place is in CD's, via Ally, which has the best rates I've found with the smallest penalties for breaking it (3 months loss of interest.) Those are laddered across 3, 4, 5 years, IIRC.

And we have "Savings Bonds" which are redeemable at any bank for actual cash. Most of that is in I-bonds, although there are a few oldies - some of which actually come due this November. Those are paying a pretty fat rate, and I will be sorry to see them go.

We do not have any Muni bonds, as that can be an illiquid market and if you have to sell at a distress time you are at the mercy of someone with "cash." We used to have a bond fund, but at some point interest rates are going to rise and that will decimate the par value of the bonds. Short term enough and the managers will be able to get out of the way. Sudden shock and they won't, and there will be a rush for cash, just like a bank run, and if they have to liquidate at the bottom they'll break the buck, so to speak.

(For those who pine for the days of 6% MM rates, just remember that at the time inflation was eating up most of that 6% anyway. You were a bit ahead of where you would be today, but it's not as though that 6% was a discrete 6% and you were getting it all. Today rates are low, but inflation is low. Not quite the same difference, but close.)
 
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Thank you for all the good info!

I had peeked at Ally before, looking at MMAs. Will have to think about their CDs.

I see what you mean about the interest vs. inflation. Hmmm.
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Why do you need a cash position? Most emergencies can be handled with a credit card. Then you have until the end of the billing cycle to decide where to come up with the needed cash. Perhaps you have stocks that can be sold at a profit? Or cash coming form other sources etc.

When you have assets and available credit you have many choices and cash position is much less necessary.

I would interpret that cash position as a fixed income requirement. A CD is a good choice. When the need comes up, you can decide if its worth it to pay the early withdrawal penalty. You can also do several of them with staggered maturities so hopefully you won't have to cash more than one to cover your cash need.
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Why do you need a cash position? Most emergencies can be handled with a credit card. Then you have until the end of the billing cycle to decide where to come up with the needed cash. Perhaps you have stocks that can be sold at a profit? Or cash coming form other sources etc.

Paul-

To each his own, I think.

I feel much more comfortable having actual cash around instead of having to figure out where to get money from. It may be a slight drag on my overall returns, but it just "feels better" to me. I don't really like charging things on a credit card at all. I'd rather just pay for things.

D.
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DolonAltekar writes,

I feel much more comfortable having actual cash around instead of having to figure out where to get money from. It may be a slight drag on my overall returns, but it just "feels better" to me. I don't really like charging things on a credit card at all. I'd rather just pay for things.

</snip>


I charge everything I can on my credit card, get my 2% cash back bonus, and then pay the bill in full at the end of the month.

It's interesting to note that the 2% cash back exceeds the 1.54% yield I get on my Vanguard Short-Term Bond Fund.

intercst
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intercst-

How do you feel about the studies that show that people tend to spend a lot more if they use credit cards vs paying cash?

http://seekingalpha.com/article/20333-guide-to-credit-cards-...

I do find it's easier for me to spend money if it's just plastic versus green pieces of paper.

As always, your mileage may vary.

D.
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I charge everything I can on my credit card, get my 2% cash back bonus, and then pay the bill in full at the end of the month.

...

My asset allocation is 96% stock, 4% fixed income


I didn't know that I had a twin brother!

'cause if I showed those posts to my wife she would swear that I wrote them. ;-)


When we had our house built (custom-built), we had specific items we wanted for lights, fans, whirlpool tubs, faucets, etc. After seeing my list the builder said, "Y'know what? Instead of telling me what to order, why don't you just go ahead and order them and we'll adjust the house price to account for that money." Turns out we charged over $100,000 that year on the Discover card, and we got a WHOPPING cash-back amount. Of course, every monthly bill was paid in full so I paid no interest.

I always pictured some accountant at Discover going over our account and wondering how a $10,000 credit limit account turned over $100,000 in charges.
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How do you feel about the studies that show that people tend to spend a lot more if they use credit cards vs paying cash?

http://seekingalpha.com/article/20333-guide-to-credit-cards-......

I do find it's easier for me to spend money if it's just plastic versus green pieces of paper.

As always, your mileage may vary.


Indeed. OTOH, I have read that about half of the CC accounts pay the balance in full every month.

I think it depends on how you view your credit cards. We view them as a check that you swipe instead of write.

Evidently plenty of people view them more like magic wands that you wave to get free stuff. They view now as now and next month as somewhere far away lost in the mists of time.
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How do you feel about the studies that show that people tend to spend a lot more if they use credit cards vs paying cash?

Personally, I don't base my decision to buy something simply on my ability to pay for it. Credit cards do not cause a spending spree for me.

I put myself through the first two years of college by working as a bank teller. Caked so much dirt on my thumbs from the daily drawer count that if I never touched a bill again I would be thrilled. Money is filthy. Give me plastic every day of the week. Better yet, implant a chip in my thumb.

IP,
much preferring the protection credit cards give me over debit or cash
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How do you feel about the studies that show that people tend to spend a lot more if they use credit cards vs paying cash?

I don't put much faith in those studies. I can tell you that I always spend more when I use a credit card than when I use cash. That's because I only use cash if the expense is less than $10, but for anything over that, I use a credit card. That's for a lot of reasons, not the least of which is that I like to get that cashback bonus, but also that I don't particularly like to carry a lot of cash, and so for expenses over $10, I might not even have that much cash on me and so choose to use my credit card for convenience.

So I choose the way I pay (cash vs. using a credit card) based on how much I have spent, but I don't spend more because I am choosing to use a credit card, so I find those studies to be flawed.

I get a ton of money back from my credit cards every year, and like Ray, we also used our Discover when we were building the house and got a ton back that year. I also used my AMEX to pay for my son's college tuition, and that 1.5% cash back on tuition really added up. I had to use an ACH transfer from my checking account for my daughter's tuition because her school charged a fee to use the credit card, and that was more than the cash bonus I would have seen.


I do find it's easier for me to spend money if it's just plastic versus green pieces of paper.


Since this is your particular behavior, then I agree with you that for you, it works better if you use cash than a credit card. It does not work that way for me, however, and so I am able to take advantage of the cash back bonus, and always pay my bill in full each month.
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2gifts used Discover to actually build the house-paid things off after charged to be able to use the credit limit to the fullest. I'm guessing she topped $100k.
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Great minds and all-lol
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DolonAltekar asks,

How do you feel about the studies that show that people tend to spend a lot more if they use credit cards vs paying cash?

</snip>


I think that's true for the majority of the population. Of course, I'm a notorious tight wad who's definitely not spending any additional money because I'm using the credit card. I'm just in it for the cash-back, once the cash-back ends, or they impose an annual fee for the card, I'll cancel it.

intercst
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I charge everything I can on my credit card, get my 2% cash back bonus,

What card are you using to get 2%? I have a 1.5% and a 1% from Amazon which I like just because they make it so darn easy to use the reward poinnts.

We do the same as others here: charge everything - even the under $10. We try not to use cash for anything.

Also, I grocery shop on Wednesday, when Kroger knocks 5% off my bill because I'm over 60. It may not seem like much, but that $10 or $20 a week means at the end of the year I'm $500 to $1000 ahead. That's a new TV, iPad, or a bunch of new plants for the garden, and I'd rather have that than let Mr. Kroger have it.
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What card are you using to get 2%?

Fidelity American Express.
You get 2% cash back if you set up the cashback to get auto-deposited into a Fidelity account. I then manually transfer the money to my checking account, but you could just like it stay in the FIDO account.

Best of all, they automatically give you the cash once a month. Like PenFed does, exept that PenFed lower their cashback percentage.
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What card are you using to get 2%? I have a 1.5% and a 1% from Amazon which I like just because they make it so darn easy to use the reward poinnts.


The Fidelity American Express pays 2%. Problem is nobody takes American Express. We have a Fidelity Visa that pays 1.5% up to $15,000 and then 2% after that. We run every possible bill we can through it. The rewards get dumped into a Fidelity brokerage account I call my change jar. Every time I get $50 or $100 cash in the change jar I buy a no commission ETF. The change jar has a pretty decent amount of money in it these days.
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I see no reason to have any cash at all in the account, unless you see no opportunities in the stock market. Certainly there are times when you should just be out of the market. And of course, you need to go to cash when you need to make a withdrawal.

Asset allocation is bunk. You need to be in the strongest assets and ride them as long as they are strong. Then move to something else.
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When we had our house built (custom-built), we had specific items we wanted for lights, fans, whirlpool tubs, faucets, etc. After seeing my list the builder said, "Y'know what? Instead of telling me what to order, why don't you just go ahead and order them and we'll adjust the house price to account for that money." Turns out we charged over $100,000 that year on the Discover card, and we got a WHOPPING cash-back amount. Of course, every monthly bill was paid in full so I paid no interest.

My friend at work was telling me about how he uses credit cards. He told a story about going into a dealership and buying a new car. After he and the dealer negotiated the price, he charged it on his card -- which caused to dealer to cry out that he himself could do better than the interest rate charged by a CC. But my friend pays off his CC each month, which is exactly what he did then. The use of the CC was not for financing but for the cashback, which would in effect be an added discount on the price of the car.

Comes from LBYM.

culcha
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It's a nice idea, but I don't think many car dealers will accept credit card payments for larger sums like that - at least in my area. Perhaps in the past they did.

One dealer allowed 2K by credit card and a check for the rest. Another allowed 4K plus a check.

They have to pay a processing fee of 2 - 4% on the transaction so they limit the size to some value (so that cards can be used for down payments I assume). They don't really care whether you are getting cash back or airline points.

Of course if you are paying full list price they might take one. You can be sure that if they are accepting the card, you didn't get the best price...

Never hurts to ask though.
Les
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Thanks for all the discussion!

*

"I see no reason to have any cash at all in the account, unless you see no opportunities in the stock market. Certainly there are times when you should just be out of the market. And of course, you need to go to cash when you need to make a withdrawal.

Asset allocation is bunk. You need to be in the strongest assets and ride them as long as they are strong. Then move to something else."


I am kinda wondering the same thing, why have cash in a retirement portfolio?

I guess maybe we were thinking that there should be some amount in there that has no chance of being lost (ie due to stock market going down).

On the other hand, it seems it would be prudent to put it into stocks since they are going up now.
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It's a nice idea, but I don't think many car dealers will accept credit card payments for larger sums like that - at least in my area. Perhaps in the past they did.

One dealer allowed 2K by credit card and a check for the rest. Another allowed 4K plus a check.


I think they allowed us to pay $3-$5K, something like that on the card. Still better than a poke in the eye.
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. Problem is nobody takes American Express.

Yeah, that's an issue.

Dollar General doesn't.
Sams Club only takes Discover.
Walmart does.
Kroger does.
Cranford's does. (who?? Our local grocery store.)
Airlines do.
Paypal does (for almost all merchants)
Orbitz does.
Cruise lines do.
Amazon does.
Thriftbooks does.
AbeBooks does.
My doctor does.
My dentist does.
Walgreen's does.
Village Healthmart #2 (local pharmacy) does not.
Our local hospitals do.
AT&T/Uverse does.
Our electic company does.
Our POA does not.
Our local golf courses do not.

Out of the US, nobody takes anything but Visa and MasterCard.

Anybody who doesn't take AMEX, we pay with the CapitalOne card at 1.5% cashback. Except gas, PenFed gives 5% on gas.
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It's a nice idea, but I don't think many car dealers will accept credit card payments for larger sums

Always wanted to do that.
We tried it when we bought our Toyota. The salesman turned green and rushed out to get the finance manager. Who came in all read in the face stuttering and said that they can't take plastic because the processing fee would eat all their profit on the car.

We played with him for a while, and finally relented and pulled out the checkbook. His relief was palpable.
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He told a story about going into a dealership and buying a new car.

Several dealerships I've been in lately have a posted limit of $2500 for a credit card transaction.

Used to buy I bonds with CC and got cash back for it, but that got eliminated. Ditto for paying college tuition, since they now tack on a 3.5% surcharge for CC.

IP
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Problem is nobody takes American Express.

I keep a Visa in my wallet for those occasions when I encounter a merchant who doesn't accept American Express. I think that's happened twice this year. Where are you shopping that doesn't accept AmEx?
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Problem is nobody takes American Express.

Sadly, Costco only takes American Express, (or debit card, checks and cash itself.) Really hate that.

IP
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Goofy,

I just picked up a Barclaycard "Arrival+" that pays 2% for travel expenses plus gives you back 10% of the points when used for crediting travel expenses. No fee for the 1st year.

Bill
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