I Keep $10 Million of My $13 Million in High-Yield Savings Accounts and CDs. Am I Too Conservative?

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The more money you have, the more that security matters. It’s an almost universal truth.

High-net-worth individuals are smart to diversify their portfolios and avoid unnecessary risk. But there’s such a thing as being too conservative as well.

What percentage of your net worth should you keep in high-yield savings accounts and CDs? And at what point should you decide to invest more money into the stock market?

Money expert Clark Howard recently answered that question.

I Keep More Than 75% of My Net Worth in High-Yield Savings and CDs. Is That Too Conservative?

I have an eight-figure net worth but I keep more than three-quarters of it in high-yield savings and CDs. Am I too conservative?

That’s what a listener recently asked Clark.

Asked John in Florida: “I’m 44 and my wife is 43. We own a small business and are considering early retirement. We have a net worth of $13 million consisting of $1 million in real estate, $2 million in taxable brokerage accounts and $10 million in high-yield savings accounts and CDs.

“At our age are we nuts for having this much in conservative investments? I know we should probably have more in the market but with the current interest rates we are making $500,000 in interest from risk-free investments. Your thoughts?”

Clark almost delights in calling himself a “boring” investor. Diversification and low risk are important to him, especially for wealthy individuals and families. Still, even for Clark, John’s current portfolio allocation is a little too cautious.

“You are too conservative at 44 and 43 years old,” Clark says. “You have been enormously successful not only with your business but in living on less than what you make. That’s how you now have $13 million.

“You’re in a position where if you want to do just this, that’s fine. But you’d be better off even at low risk doing other things.”

Why the $500,000 Annual Income From High-Yield Savings and CDs Is a Mirage

Although adding $500,000 a year to your net worth virtually risk-free sounds fantastic, John and his wife could be doing even better without much additional risk.

Right now, John is checking his accounts and watching his balances rise by more than $41,000 every month. And more than $1,300 every day. However good that sounds, it’s a little misleading.

“At a net worth like you have and with the income you must be generating from your business, the $500,000 you’re earning is really being reduced by taxes to under $300,000,” Clark says. “Because you’re having to pay ordinary income tax on the money you have in the savings accounts and CDs.

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“The result is you’re not keeping up with inflation with that.”

CPI, the number that the Fed uses as a proxy for U.S. inflation, soared to 9.1% in June 2022. But the most aggressive interest rate hikes in more than a generation wrenched year-over-year inflation down to 3.0% as of June.

That may be the best number we see in 2023, as CPI has run back up to 3.7% as of August.

That means that if you were to stuff a $100 bill under your mattress, right now, the “purchasing power” of that money would decline nearly 4% year over year.

As Clark pointed out, John’s after-tax gains are less than $300,000 per year. Account for this loss of purchasing power due to inflation and he may doing little more than running in place.

Clark’s Advice: Hire a Fee-Only Fiduciary Financial Advisor

A full-service financial advisor is one of the more confusing concepts in personal finance.

Most people don’t need one. And it’s important to realize that financial advisors don’t exist only to tell you how to invest your money.

If you do need a financial advisor, it’s important to find and hire a fee-only fiduciary.

Typically, those who need full-service financial advisors are high-net-worth individuals, particularly those with blended families, those who own a business and those with complex tax situations.

John and his family need more than investing advice. Although a financial advisor could help on that front as well.

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“Your situation calls for a fiduciary relationship with a fee-only financial planner who does a full plan for you,” Clark says in response to John.

“Where [are you] planning to go in your life? How long [do] you want to operate your business? What [is] your exit strategy down the road for your business? What are you doing to plan for your estate?

“That stuff is more important than actually saying you should be in this fund or that fund or the other fund. But also because you’re in a higher tax bracket, even for money that you’re putting aside in conservative savings, there are strategies that you can use that will allow you to avoid taxation that you have right now at the highest possible tax rates on the money you have.”

It’s not enough to hire any financial advisor. Learn how to interview and hire a fee-only fiduciary financial planner, Clark says.

“If all they’re talking about is how they’re going to take your money and make it grow to the sky? Wrong person. You want somebody who’s asking you the right questions about your life goals and life plans.”

Consider a Tax-Advantaged Retirement Account

John and his wife presumably make more than the IRS income limits on Roth IRA contributions. Therefore any money they contribute to a traditional IRA wouldn’t be tax-deductible.

Since they operate a business and are not employees, they can’t simply contribute to a company 401(k) account as workers.

However, currently, all $2 million in their portfolio that they have invested in the stock market sits in taxable accounts. That doesn’t have to be the case.

“It doesn’t sound like you’re doing anything in retirement-based accounts that would reduce your taxes,” Clark says. “So that’s one of the things that meeting with a fee-only fiduciary would be a big help to you.”

Final Thoughts

Many business owners balance the risk of operating their business with a conservative approach to their investments.

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It’s hard to know how risky John’s business is. But with more than 75% of his assets in high-yield savings accounts and CDs, after taxes, he probably will beat inflation by only 2-3% as long as interest rates don’t fall.

Hiring a fiduciary financial advisor is a great idea for John. That way, he and his wife can get some advice on tax-saving strategies, determining their eventual goal for retirement and exiting their business — and getting advice on how to be a little less conservative in terms of their investments.

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