Jan 25, 2017
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Cashing In In Retirement: Financial Advisors' Daily Digest

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By SA Gil Weinreich : Investing, as with life, is about trade-offs. We all want to make astute trades. One such trade that investors work to pull off is turning in a lifetime of human capital in exchange for financial capital in retirement. This makes sense since our knowledge, labor and skills can be effectively deployed while we have the physical stamina to work, while the financial capital they can purchase is of use to us when our skills are no longer relevant to the workplace or when our physical or mental endurance has declined.
On either side of the retirement dividing line, we channel our efforts towards long-term viability. Education and work are what fuel our pre-retirement years. When these become less viable in mid-life, we rely on our accumulated wealth to see us through our later years.
How that wealth is apportioned is always a big debate among investors. New SA contributor Brad McCarthy argues against doing so with cash :
There is a popular retirement planning meme t..

By SA Gil Weinreich :

Investing, as with life, is about trade-offs. We all want to make astute trades. One such trade that investors work to pull off is turning in a lifetime of human capital in exchange for financial capital in retirement. This makes sense since our knowledge, labor and skills can be effectively deployed while we have the physical stamina to work, while the financial capital they can purchase is of use to us when our skills are no longer relevant to the workplace or when our physical or mental endurance has declined.

On either side of the retirement dividing line, we channel our efforts towards long-term viability. Education and work are what fuel our pre-retirement years. When these become less viable in mid-life, we rely on our accumulated wealth to see us through our later years.

How that wealth is apportioned is always a big debate among investors. New SA contributor Brad McCarthy argues against doing so with cash :

There is a popular retirement planning meme that argues cash should be held in retirement accounts. The reasons given for this can generally fall into one of two categories: emergency funding, and market timing. Holding cash in an emergency fund to be used for unexpected expenses is a prudent idea for all adults, but is not an idea uniquely applicable to retirement accounts. Market timing has widely been shown to be ineffective, and should not be recommended for retirees."

In the main, I agree with him for the reasons I stated above. Investors should make astute trades. As McCarthy points out in his article, cash is a depreciating asset. So one should not trade assets that have a future (be they education, skills or stocks) for an asset whose best days were in the past (your cash before taxes and inflation have eroded their value).

That said, investors paradoxically stay viable by maintaining some goodly portion of their assets in cash or cash equivalents (such as TIPS or short-term Treasuries) for a reason beyond emergency funding and buying during market crashes. While the retirement income calculator McCarthy writes about in his article finds cash to be inefficient, the reality is that human beings, unlike calculators, have emotions. For that reason, owning an asset whose value is stable during a crisis can help an investor remain calm, and his portfolio viable. The stable asset also provides the investor with an asset to fund his retirement in down markets and so avoid the risk of selling long-term viable assets when they have lost value.

Selling shares in a business (i.e., stocks) for cash is generally a bad trade. But maintaining a liquid reserve large enough to keep you solvent during a crisis enhances your long-term financial viability.

Please let us know your thoughts in our comments section. And, herewith, today's advisor-related links:

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