Q&A: Sitting on Extra Cash

Aug 2020


Dear Rick:
A few years ago, the company that I worked for was bought out and I was let go. At that time, I talked to you about whether I should take a lump sum or the traditional pension. You recommended the pension because you said at the time it would cover all my living expenses and give me lots of flexibility with Social Security and my IRA account. I followed your advice and it was great. My pension more than covers all my living expenses and, in fact, I am accumulating money on a monthly basis. However, I need to make a plan regarding Social Security now that I am eligible. I’m curious if I should delay it until age 70. I don’t need the money and it would just end up in my savings account. Since I’ve retired, I have been accumulating cash and I now have over $100,000. I’m looking for suggestions of what I can do with the money. I am debt free and I have a diversified portfolio within my IRA. My feeling is that I should buy some CDs with the money, but I’m not sure what. Maybe 5 years? What do you think?

Thank you.


Dear Keith:
You are in excellent financial health, and you’re in a situation where you almost can’t make a bad decision. That being said, my feeling is that it does pay to delay your Social Security. When you compare the rate of return you are receiving by delaying Social Security versus the rate of return that you’ll get by leaving the money in the bank, the return by delaying Social Security is much greater. By delaying Social Security, you are in effect getting an eight percent return per year. Unfortunately, if that money was in the bank, you’ll probably earn a one percent return. From a pure financial standpoint, if you can delay Social Security, why not?
The one caveat to delaying your Social Security is when considering your life expectancy. If because of family history or your health situation, your life expectancy is below average, then it may make sense to begin collecting your Social Security benefits early. If health is not an issue, my recommendation is to wait until you are 70 to collect.

One last note, although it doesn’t apply in this situation, one other factor to take into consideration is for married couples. Delaying Social Security can have a positive impact on spousal benefits.

With regard to the cash you are accumulating, I would not recommend a five-year CD at this point in time. Interest rates are currently very low, and it doesn’t seem to make economic sense to lock money up for five years. Currently, a five-year CD is only paying a little over one percent. In other words, you’re not getting a substantial bonus to lock your money up for long periods of time. Therefore, if I was going to go the CD route, I would only go into one-year CDs.
As opposed to buying a CD, you may want to consider an effort, on a year-by-year basis, of converting a portion of your IRAs into Roth IRAs. The advantage to you is that Roth IRAs are not subject to required minimum distributions. This means that when you turn 72 you would not have to begin withdrawing money from your IRA. The money can stay in your Roth IRA and grow tax free for as long as you choose. I believe from a pure economic standpoint, using your excess cash to do a Roth conversion every year would be a much better use of the monies as opposed to a CD.
Because the money that you convert from a traditional IRA to a Roth IRA is taxable, I think you should only convert enough every year to keep you in the same tax bracket. This may mean that it will take a few years to convert your entire traditional IRA into a Roth IRA; however, it’ll also mean that you’ll pay less in overall taxes, and as far as I’m concerned, the money you save looks better in your pocket than it does anywhere else!

For those of you sitting on extra cash, you should consider doing a Roth conversion. Having money in a Roth IRA gives you greater flexibility than a traditional IRA, in the fact that you do not have to take required minimum distributions. In other words, you can leave money in a Roth IRA for as long as you choose. In addition, the money is not growing tax deferred like in a traditional IRA, but rather it is growing tax free.

Good luck!


Rick is a fee-only financial advisor.  If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.