Time to Invest Your Cash for Retirement

Physician's Money Digest, June30 2003, Volume 10, Issue 12

This has been one of the mostdifficult bear markets of ourlifetime. The market has lostnearly 50% of its value over the past 3years. Cash-equivalent holdings forinvestors are at record high levels,currently estimated at $7 trillion. Butare cash equivalents your best strategy?Studies of historical returns suggestthat holding too much in cashequivalents can be detrimental toyour long-term wealth accumulationplan. From 1926 to 2001, cash equivalentshave earned an annualizedreturn of a negative 0.8% after taxesand inflation. This is compared to a0.7% annualized return for bondsand a 5% return for stocks.


The stock market can be a scaryplace to invest, but that's just thepoint. If you wait until the stock marketisn't scary, it means that you waituntil the market has moved upward,and you miss the recovery. This is particularlytrue if you have 5 to 10 yearsor more until retirement.

What is an appropriate guidelinefor cash holdings? As you might imagine,every physician's situation isunique and therefore the correctanswer will vary. The minimumreserves you should hold are equal to3 months of living expenses. If you arenot sure what your expenses are, simplytake 3 months of monthly income.The weakness of our economy overthe past 3 years has led to massive corporatelayoffs. If you feel your jobsecurity is threatened, and it wouldlikely take more than 3 months to findanother job, you should increase thisamount accordingly.


If you feel secure in your practice,you may want to consider a moreaggressive strategy that will let youminimize cash holdings while stillmaintaining appropriate access tocash reserves in case of an emergency.With interest rates at 40-year lows andbanks scrambling to increase revenues,now is an excellent time to geta home equity line of credit. With ahome equity line of credit, you don'tpay any interest until you actually borrowmoney. For example, let's assumethat you own a home worth $200,000and you currently have a first mortgageof $120,000. Thus, you haveequity of $80,000.You go to the bankand get an equity line of credit for$50,000. This $50,000 is available toyou when you need it but you pay nointerest until you actually access it.With this strategy, you're using yourequity line of credit as a substitute forcash reserves so that you can investyour cash for higher long-term returns.If you do have an emergency,simply write a check on your homeequity line of credit account and thenconcentrate on repaying the loan orselling some stocks to repay the loan.

Recently, a bank offered a homeequity line of credit at 3.25% interestthrough September and at prime(currently 4.25%) thereafter.

Stewart H. Welch III, founder of

the Welch Group, has been

rated one of the nation's top

financial advisors by Money,

Worth, and Medical Economics.

He is also the coauthor of J. K.

Lasser's New Rules for Estate and Tax Planning

(John Wiley & Sons, Inc; 2001). He welcomes

questions or comments from readers at 800-

709-7100 or www.welchgroup.com. This

article was reprinted with permission from

the Birmingham Post Herald.