Is There a Good Rule of Thumb for Savings vs. Stock Market Investments?

Tom Vaughan is a Certified Portfolio Manager and CEO of Retirement Capital Strategies. Retirement Capital Strategies is a registered investment advisor located in San Jose, California.

The opinions voiced in these presentations are for general information only and are not intended to provide specific advice or recommendations for any individual(s). The information provided herein is obtained from sources believed to be reliable, but no reservation or warranty is made as to its accuracy or completeness. Statements and opinions are subject to change without notice. Asset allocation and portfolio diversification cannot assure or guarantee better performance and cannot eliminate the risk of investment losses. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. Accordingly, you should not rely solely on the information contained in these materials in making any investment decision as the material does not take into account your particular investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. You must make an independent decision regarding investments or strategies mentioned in this presentation. Before acting on information discussed in this presentation, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment advisor. Prospectuses, investment objectives, risks, charges and expenses of any investment product should be reviewed carefully before investing. This platform is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Retirement Capital Strategies and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Tom Vaughan or Retirement Capital Strategies unless a client service agreement is in place. “Likes” are not intended to be endorsements of our firm, our advisors or our services. Please be aware that while we monitor comments and “likes” left on this page, we do not endorse or necessarily share the same opinions expressed by site users. While we appreciate your comments and feedback please be aware that any form of testimony from current or past clients about their experience with our firm is strictly forbidden under current securities laws. Please honor our request to limit your posts to industry-related educational information, comments and questions. Third-party rankings and recognitions are no guarantee of future investment success and do not ensure that a client or prospective client will experience a higher level of performance or results. These ratings should not be construed as an endorsement of the advisor by any client nor are they representative of any one client’s evaluation. Investment positions mentioned in these videos may be held in some of our existing portfolios. Tom Vaughan and Retirement Capital Strategies are unaffiliated and separate from those companies whose investment positions are mentioned and is not liable for their products or services.

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Transcript:

Easan Arulanantham:

Is there ever too much money in like a bank savings account? Or like a high yield savings account? Not in the market? And are there any rule of thumb that you should follow?

Tom Vaughan:


Yeah, well, there’s rules of thumb, and then there’s just what really happens. So, I’ve been doing this for a long time, I get asked a lot that I get asked that a lot. And in fact, I just got that asked last week. And so here, here’s, here’s, you know, one rule of thumb is have, you know, three months worth of, of need. So if I, if I need to just make up a number here, you know, $5,000 a month, I would have 15,000 in savings. Okay. So that’s one rule of thumb see that quite often. Another rule of thumb would be to figure out, you know, what you need after your other incomes are coming in. So let’s just say I’m retired, and I have $2,000, coming in from Social Security, and I’m spending a total of 5000. So I need 3000 coming in from my investments, well, investments can kind of you know, fall and come back up, right, and depends on how much you have in bonds as to how fast it might come back up, because that really determines how much it might fall. But if you look at the S&P 500, for example, in, you know, 2002 1008, it was really five years from the peak, you know, in 2000, to getting back the peak of 2008, which was actually 2007. But to get back, it was five years. And, you know, the three big downturns that have happened since World War Two that are 40% or more, the average recovery time is 58 months. So there you go, it’s basically five years. So you could say, well, that I want to make sure that if the market falls, I have five years worth of, of my net need, which is 3000 months. So 3000 times 60 months is 180,000. So there’s another number you could use as far as that goes. So these are kind of the rules of thumb.

Now, you might reduce that, and I only have 50% of the market and 50% out, I could probably cut that in half and say 90,000 works, because it doesn’t fall as much comes back faster, right. But anyway. But you could throw most of those out the window, sometimes they’re useful. They’re good, they’re good thoughts, that the calculation behind them make some sense. And I get it as far as that goes. But what I have found is that how much money is in cash is, is an emotional response, not so much a calculated, you know, response. So, you know, I have clients that think $5,000 in the bank system is too much, because they like to have everything invested all the time. They’re just very aggressive. I have clients that think 500,000 is not enough, because it just makes them uncomfortable to not have enough money, right. And so I think that’s where I would start. If I’m sitting there thinking about my financial situation, and I think about how much I have in the banks. What makes me comfortable. I mean, retirement is partly about your experience. And being uncomfortable is not, you know, ideal, right? It happens. But that’s an area that you might be able to get to a comfort level.

And so when I whenever I talk to clients, I’m just trying to determine what it is what makes them feel comfortable. So if that 500,000, if we go back to a rule of thumb, and they only need, you know, 180,000 or 90,000 or something, then theoretically, they have too much. And they should have that in there. If their plan still works with that 500,000 sitting there, because that’s another issue, right? What if your plan doesn’t work, because you have too much cash, then you’re going to end up in another uncomfortable situation at some point in the future. So some of your plan works, then hey, ask yourself, Is that too much or not enough? When I think about it, do I feel good? Or I feel like yeah, I should have more of it working? Then that’ll answer your question, you know, so if you think 500 makes you feel good, then that’s the number. If you think it’s too much, and maybe be the rules, you should only have 100,000, then yeah, you can you can probably invest some of that. But it is it’s a complex answer. Again, you have to calculate also whether or not it’s too much in terms of your plan, Mr. Plan is going to fail, because you have most your money in cash, because you can’t keep up with inflation with cash, then you got a different problem. Right. So it’s an interesting question. It really is. So it comes up all the time. It’s a big one.

Easan Arulanantham:


Do you ever see like a change in state or how much have people have in the bank when they hit retirement age versus like when they’re kind of accumulating money? So like, maybe when I’m working I only have three months of expenses. But now that I’m retired, and I don’t plan on ever going back, I’m gonna keep 12 months of my expenses.

Tom Vaughan:


Yeah, no, I do see that. Yeah, because I think people in general, not always but I think people tend to be a little bit more aggressive when they have a paycheck. Right? I mean, it makes it easier. You know, as far as that goes to to be a little less cash. And a lot of the assets that you have that you would invest in still are liquid You could get to them if you needed to, you know, so that’s good, too. You’re not locking it up where you can’t get it at all, for most things, at least what we deal with. Yeah, no, that’s a good point. Actually, I do see more safety, desire, at least mentally from somebody who is retired. I wholeheartedly encourage that, you know, there’s lots of scary things heading into retirement in the first few years of retirement. If you can have a nice cash buffer, ideally have no mortgage either, right. So that would be ideal scenario to be in, then you could really do well, as far as that goes. So yeah, I think I think that it’s a good point. Actually. It’s definitely a little bit different, but still sort of personal. You know, again, there’s there’s lots of exceptions to that rule. I got young kids that are really, really want to gather a lot of cash, you know, and then I got older people that are much more aggressive, but generally I’d say that’s true.

Tom Vaughan is a Certified Portfolio Manager and CEO of Retirement Capital Strategies. Retirement Capital Strategies is a registered investment advisor located in San Jose, California.

The opinions voiced in these presentations are for general information only and are not intended to provide specific advice or recommendations for any individual(s). The information provided herein is obtained from sources believed to be reliable, but no reservation or warranty is made as to its accuracy or completeness. Statements and opinions are subject to change without notice. Asset allocation and portfolio diversification cannot assure or guarantee better performance and cannot eliminate the risk of investment losses. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. Accordingly, you should not rely solely on the information contained in these materials in making any investment decision as the material does not take into account your particular investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. You must make an independent decision regarding investments or strategies mentioned in this presentation. Before acting on information discussed in this presentation, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment advisor. Prospectuses, investment objectives, risks, charges and expenses of any investment product should be reviewed carefully before investing. This platform is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Retirement Capital Strategies and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Tom Vaughan or Retirement Capital Strategies unless a client service agreement is in place. “Likes” are not intended to be endorsements of our firm, our advisors or our services. Please be aware that while we monitor comments and “likes” left on this page, we do not endorse or necessarily share the same opinions expressed by site users. While we appreciate your comments and feedback please be aware that any form of testimony from current or past clients about their experience with our firm is strictly forbidden under current securities laws. Please honor our request to limit your posts to industry-related educational information, comments and questions. Third-party rankings and recognitions are no guarantee of future investment success and do not ensure that a client or prospective client will experience a higher level of performance or results. These ratings should not be construed as an endorsement of the advisor by any client nor are they representative of any one client’s evaluation. Investment positions mentioned in these videos may be held in some of our existing portfolios. Tom Vaughan and Retirement Capital Strategies are unaffiliated and separate from those companies whose investment positions are mentioned and is not liable for their products or services.

By participating in any of these live streams, you agree that any questions submitted by you might be used by us in the future on this YouTube channel. We will not share your personal information.

If you have questions, please write to us at: asktom@talkmoneywithtom.com.

  • MoneyGuidePro®
  • Advent Software/Black Diamond Reporting
  • Riskalyze, Inc.
  • thinkpipes®
  • Right Capital
  • YCharts, Inc.