Time to read: 6 min

The term “Cash is King” has been around for a long time. While some people are staunch believers that readily accessible money is the key to financial health, others are vehemently opposed to the idea, believing that assets and investments are at least as important as cash.

All of this begs the question, should cash be prioritized, or are riskier, but often faster growing, investments the way to go? Is cash really king? The answer is more nuanced than you may think. Keep reading to learn more.

What Does “Cash” Mean?

When people talk about cash, they aren’t simply referring to bills they keep in their wallet or locked in a safe – although that would certainly be included. “Cash” is usually used as a broad-spectrum term referring to any liquid asset reserves. This includes checking accounts, savings accounts, CEDs, money markets, and more. Any money that people have immediately access to and can draw from without penalties would be seen as “cash”.

The Role of Interest Rates

In the early 2000s, a 5-7% interest rate on a money market account was fairly standard and, at that point time, it certainly did feel like cash was king. If somebody in retirement had $500,000 in their account, they could feasibly take out 5% annually – essentially, exactly the interest that had accrued, to cover their expenses. Because only interest gains were being removed, the principle would remain the same – meaning year after year, they could simply rinse and repeat the process.

Of course, this plan relies entirely on interest rates remaining high – something nobody can control or predict.

Leading into 2019, interest rates were at record lows, with many accounts receiving as little as .5%. The same account that previously generated $25,000 in interest annually was suddenly only generating $2,500 – making it impossible to cover expenses without dipping into the account’s principle. This quickly becomes a compounding problem. The first year, the retiree would need to take $22,500 in principle to supplement the $2,500 in interest, leaving $477,500 in the account. The next year, the same interest rate would apply to the same principle, creating $2,387.50 in interest – resulting in an even larger amount removed from the principle. In just a matter of five years, the account that started at $500,000 would have $386,379.93, and would continue to deteriorate more rapidly each year.

In 2024, rates are back up again, so people are able to utilize the same interest model as the early 2000s – but there is no guarantee the rates will stay up. In fact, the only thing we can count on is that they will change. The question is when.

The amount of cash may seem like a big pool of money, but nobody can accurately predict how long retirement will be – and it’s important that the amount of cash outlives the person living off of it.

While cash is important to have and sometimes certainly may feel like the king, it simply isn’t a reliable long-term solution when planning for retirement.

Other Components Matter

All of this is not to say that cash isn’t important – having savings that are readily accessible does matter, before and during retirement. Before retirement, having an emergency fund that fully covers 3-6 months of expenses allows you to live more securely, while other cash savings may be reserved for one-time purchases or special occasions, like a luxury vacation or buying a new home. In retirement, a large cash safety net provides both security and an ability to have experiences that may not fit into a typical monthly budget.

However, in an ideal situation, cash is just that – a safety net, and not the primary component of one’s finances.

The Importance of Cash Flow

While folks are working, the paycheck they receive each month covers living expenses, contributions towards savings and retirement, discretionary funds, and “fun” money. This consistent, reliable cash flow is largely what we structure our finances around.

Entering retirement, the shift from receiving a paycheck every week can be difficult to grapple with mentally. While working, we know how our bills are being paid and that our retirement accounts are adding up, even if we aren’t monitoring them closely. However, once we know we are dipping into the accounts, watching them slowly shrink can generate a lot of anxiety. And, as we already determined, their growth can be very unreliable.

This is why cash flow is just as important as cash itself.

Those who have pensions may find that that their monthly income still covers all of their monthly expenses, but for most people, social security checks alone are not enough to live off of. When planning for retirement, finding avenues that will provide steady and reliable cash flow is just as important as accumulating cash.

Planning is King

Cash matters, and so does cash flow – but if one thing is king, it’s thorough planning. Having a well thought out plan for retirement that both generates income, preserves cash, and outlines what situations dictate dipping into the cash accounts will have the largest long-term benefit.

This is where our Growth and Income Bucket Strategy comes into play. The Income Bucket aims to have investments that are structured in a way that generate enough dividends to cover annual expenses. Meanwhile the Growth Bucket is dedicated to preserving and increasing wealth for emergencies and large one-time expenses.

Of course, even the best, most thorough plans may experience detours and road bumps. Unexpected expenses and windfalls alike may require changes to the carefully detailed plans. A medical emergency may result in higher monthly expenses. A car accident may require a vehicle to be replaced sooner than anticipated. A roof may need to be replacement.

These situations don’t negate your plans – in fact, they make them all the more important. Outlining a system gives you extensive, intimate knowledge of how your finances are structured, allowing you to make informed decisions and weigh different options if you do need to pivot.

Start Planning Early

The early people start planning, the more prepared they’ll be both for retirement, and for their day-to-day lives.

While everybody has different financial situations and goals, the first thing everybody should be thinking about is creating an emergency cash fund. This account should cover 3-6 months of living expenses at a minimum, and never be touched unless absolutely necessary.

Once the emergency savings is at a healthy amount, it’s important to set a new financial goal. Perhaps it’s an account dedicated to purchasing a new car, upgrading a home, or taking a luxury milestone vacation, but determining what the goal is, how much money is needed, and a date you’d like to hit that number by will give you something actionable to work towards.

Depositing money into these savings accounts, as well as retirement accounts, should be considered just as mandatory as any other required bill. Just as a mortgage or electric bill is paid each month, retirement invests are made, funds are contributed to, and money is set aside for the future.

With any money that is left over each month, we recommend practicing guilt-free spending. As long as you are diligently putting aside the money you’ve committed to each month and paying all of your living expenses, any excess money is for your own enjoyment. You may choose to put a little more towards one of your goals – but it’s also okay to spend the money on yourself. You can and should have a special date night with your spouse, splurge on a fun activity with children, or get a massage, without feeling guilty about the expense.

Retirement planning and finances in general are too complicated to label just one component as the most important, taking precedence over all others. Instead, having a solid plan that includes steady cash flow to cover monthly expenses and readily accessible cash for the unexpected will create the stress-free mindset we all want in retirement.

This blog is for informational purposes. Certain information contained herein (including any forward-looking statements and economic and market information) has been obtained from published sources and/or prepared by third parties and in certain cases has not been updated through the date hereof. While such sources are believed to be reliable, The Tranel Group does not assume any responsibility for the accuracy or completeness of such information. The Tranel Group does not undertake any obligation to update the information contained herein as of any future date.