As I wander toward near-retirement and wrestle with a bunch of decisions, another money question keeps nagging me:
Where should I put my retirement cash?
We’ve paid off cars and our house, have no credit card debt, and have been running a healthy surplus for a while. My first idea was simple: open a Vanguard account and dump the extra into VTSAX. It was easy to set up and I’ve seeded it a little over the past few months. Here’s the snag: the market is on a wild run.
If I keep adding money now, am I just buying high when I should be waiting to buy low? Yep. I’m the guy who keeps waiting for the next market correction so I can buy bargains. Reminds me of the Tesla short-sellers — people who bet on it failing got burned as the stock soared. I don’t want to be that guy.
And yet, that’s where our cash mostly sits for now: idle in the bank while I try to figure out the best place for it to grow. Savings and checking accounts aren’t helping — you’ll be lucky to find a bank paying 1% these days, and many pay far less. With inflation around 2.0% (as of Aug 2022 it hit 8.0%), letting money sit in a low-rate account is basically losing money. Ouch.
Some self-styled experts say keep 3–6 months of expenses in a savings or checking account for emergencies. My take: if you own a home and have your finances together, a home equity line of credit (HELOC) can be a better emergency fund. Interest is low and the available amount often covers six months of expenses. If you don’t own a home, consider one or two zero-interest credit cards for short-term emergencies — only if you’re disciplined and will pay them off before the promos end.
Since I can’t just let cash waste away, I need other options. Investment options. A quick note: don’t stash your cash under the mattress. Banks are insured by the FDIC — keep your money in the bank, not in your sock drawer.
This is where things get real for early-retirement hopefuls like me. If you’ve saved a big chunk in a 401(k), you can live off that plus Social Security and IRAs when you hit 59½. But what if you want to retire early at, say, 49½? That creates a gap—years where you can’t touch retirement accounts without penalties.
That’s why I like rental income (including short-term Airbnb) to fill the gap. It helps, but as a small landlord it only goes so far. Luckily, my wife is ten years younger and plans to keep working, so we can count on that income too.
Right now we could cover about $60K a year in expenses, but that leaves no room for big trips, home projects, or saving for the kids’ college. That’s part of why I hesitate to leave my job: I want a cushion for fun trips or a remodel, and I don’t want our kids to graduate with a mountain of debt. They’ll contribute, but we want to help shoulder the cost.
Planning for those gap years — whether 5 or 20+ years — is the key exercise, even for frugal savers. Maybe you’ve saved half a million by 40, or $250K by 30 in a 401(k). Great. But the years between early retirement and traditional retirement need careful thought and backup plans.
I’d argue you should aim to cover the income that supports a baseline level of happiness. That number is subjective and depends on where you live, but many studies put it somewhere around $75K–$95K a year. You don’t need money to avoid boredom, but you probably want the freedom to travel or take adventures now and then.
For me, that means finding about $20K more per year to cover the gap. First-world problem, I know.
I’ll probably keep using the Vanguard ETF as my main gap-year income vehicle. That said, I’m still waiting for a market dip to feel better about adding more. Any day now…