The HNW Cash Dilemma: How to Balance Liquidity and Growth

Episode 11

The HNW Cash Dilemma: How to Balance Liquidity and Growth

Published on October 29th, 2025

In Episode 11 of Retirement Tax Matters we discuss cash dilemmas for high-net-worth retirees: finding the right balance between necessary liquidity and optimizing your returns. While having readily accessible cash for emergencies is important, we explore the potential drawbacks of holding excessive amounts in multiple low-yielding bank accounts, which can add unnecessary complexity. Discover how recent T+1 settlement changes allow funds in conservative brokerage investments like money markets (sometimes yielding more) to be accessed typically by the next business day, challenging the need for overly large bank balances. Furthermore, we examine the tax inefficiency of earning substantial bank interest, taxed at high ordinary income rates, compared to potentially investing a portion of that excess cash to prioritize lower long-term capital gains rates (15-20%). This conversation provides a framework for simplifying your overall cash strategy, balancing peace of mind with potential growth and tax efficiency.

Key Tax Planning Questions

Click Below To See The Answer

• How much cash should a retiree really keep in the bank?

  While the common financial planning rule of thumb suggests having 3-6 months of essential living expenses (think necessities, not luxuries) in an emergency fund, this guideline requires nuance for retirees. For someone no longer working, all savings technically function as the emergency fund. The key question becomes how to balance immediate accessibility, safety, and earning potential.

  Many retirees find comfort in keeping a specific amount of cash in easily accessible checking or savings accounts – the amount that helps them sleep better at night. This peace of mind has real value and shouldn't be dismissed. However, we often see clients holding significantly more cash than needed for this comfort, earning very little interest, simply because they aren't sure of alternatives.

  It's important to remember the primary benefit of bank accounts: FDIC insurance (up to $250,000 per depositor, per insured bank, for each account ownership category). This safety is paramount. However, funds held in a conservative money market fund within your brokerage account (where your retirement funds might be held) typically offer a higher yield than traditional bank accounts with only a minimal increase in risk and can usually be accessed within one business day (T+1 settlement). Most clients I talk to don’t have a problem with waiting 1 or 2 days.

  Ultimately, the right amount of cash is personal. But it's worth considering simplification and optimization. For example, if you hold $300,000 in bank accounts but feel comfortable with $100,000 for immediate needs, perhaps the other $200,000 could be allocated differently – maybe partly to a brokerage money market for better yield and quick access, and partly to a diversified conservative investment if you have a longer time horizon and can tolerate some volatility. The goal is to question the role of excess cash and ensure it aligns with your need for security, simplicity, and reasonable returns.

• Is earning bank interest bad for my taxes?

  While recent higher interest rates on CDs and savings accounts are appealing, it's important for HNW retirees to understand the tax impact.

  Interest income (like from your bank) reported on Form 1099-INT is taxed at your ordinary income tax rate. For example, earning 4% ($4,000) on $100,000 in savings might seem good, but if you're in the 32% federal tax bracket, you'll owe $1,280 in taxes, reducing your 4.00% return to just 2.72%.

  This tax drag can significantly erode the benefit of high interest rates. If you hold excess cash beyond your comfort level (and above what you feel needs FDIC insurance protection in the bank), and you have the capacity to tolerate market volatility, a potential strategy involves moving those funds into a taxable brokerage account (ideally held at the same custodian where your retirement accounts are located) to maintain simplicity.

  Within this brokerage account, you could invest in conservative options like money market funds (which offer potentially higher yields than banks, though without FDIC insurance) or assets aiming for appreciation like individual stocks or Exchange-Traded Funds (ETFs).

  Should these growth-oriented investments appreciate and you hold them for more than one year before selling, the profits qualify for long-term capital gains tax rates. These rates (often 15% or 20%, plus a possible 3.8% Net Investment Income Tax depending on household income) are considerably lower than ordinary income rates.

• My pension and Social Security cover all my expenses, and I've accumulated over $200,000 in my bank account earning very little. I'm also expecting an additional $150,000 in inheritance from a recently passed parent, which will just add to that pile. I value having access to these funds, but it feels inefficient. What are some smart, tax-efficient options for deploying this excess cash so it remains relatively liquid but works harder for me than just sitting in the bank?

  This is a common scenario, and while it’s tempting to offer a quick solution, the best approach likely involves understanding an individual's personal comfort level with risk and the ultimate purpose of these excess funds. Since essential expenses are covered by guaranteed income, a person in this situation likely has a higher capacity to take on investment risk than someone relying solely on their portfolio.

  The conversation usually starts by exploring risk tolerance (the psychological reaction to market fluctuations) versus risk capacity (understanding that even a significant market drop might not materially change an individual's lifestyle). Foundational questions like, "If basic expenses are covered, what is the purpose of this additional capital? Where is it intended to go?" help clarify goals.

  Once comfort level and goals are established, here are two common strategies to consider:

  1. Money Market Fund at Their Brokerage: For funds exceeding the "sleep-easy-at-night" amount kept in the bank, moving a portion to a money market fund at the same custodian holding the individual's retirement accounts offers simplicity. These funds currently offer significantly higher yields (e.g., around 4.00% 7-day yield as of late 2025) than most bank accounts with minimal added risk. While this person forgoes FDIC insurance on these funds, they remain highly liquid, typically accessible within one business day due to T+1 settlement.

  2. Investing for Long-Term Capital Gains (LTCG): If there's a longer time horizon (5-10+ years) for a portion of the cash and the individual can tolerate market volatility, investing in assets like stocks or ETFs within their brokerage account becomes attractive from a tax perspective. Instead of earning interest taxed at high ordinary income rates (22-37%), growth realized after holding the investment for more than a year is taxed at lower LTCG rates (often 15-20%, plus a potential 3.8% NIIT). This allows the investor to potentially keep more of their returns after taxes, though it requires accepting market risk.

  The key is balancing FDIC protection for necessary cash, optimizing yield and tax efficiency for excess liquid funds, and aligning any investment risk with the person's goals and capacity.

Full Episode Transcript

Adam: Good morning and welcome to Retirement Tax Matters. I'm Adam Reed. This is Garrett Crawford, our resident CFP. How are we doing this morning?

Garrett: Doing pretty good, Adam.

Adam: Yeah. Not too bad. I think we alluded to it maybe last episode, but RMD season—Required Minimum Distribution—it's upon us. I think Monday is going to be big. We've been doing some prep work.

Garrett: Yeah. I was thinking today, we don't just do podcasts every week. We're actually working with clients all the time. October is one of our busiest seasons here around the office. You can only imagine how many tax returns we're looking at, and Roth conversions. We have new people coming on board as clients, and then existing clients that have new life issues. October is pretty crazy. We're kind of running on fumes, but here we are again this week, bringing the education to the people.

Adam: We're here, we're doing it. It's always funny, I think every industry has its ebbs and flows, but it seems like for us, we hammer home intra-year tax projections. You don't want to do that too early in the year because, as we know, life changes. Financial planning is a moving target. We like to wait till later in the year. Also, I like to think our clients love us, but a lot of them, by holiday times, are like, "Hey, I don't want to see you guys. I want to have all this taken care of so I can enjoy Thanksgiving and Christmas with the family. Kind of coast off into the new year."

Garrett: I agree, and it's actually one of my favorite things about this industry is that they don't want to come in on holidays. But I will say, I have a couple years in years past where I remember thinking about Roth conversions and are we going to get it in before the December 31st deadline. So, if you're out there, try not to wait until December 31st. Before Christmas is ideal.

Adam: It's kind of like your CPA is like, "Do not show up on April 14th for tax documents. Please, please get it in there." We're in a similar boat. RMDs—maybe it's not a perfect segue, but it reminds me: I was talking to a client yesterday who was like, "Hey, I want to process my RMD. What do I do with it?" You've got options, right? You can reinvest it, you can put it in cash. And I think that kind of leads us into our topic for today: this dilemma or thought process for clients or people listening to this that are trying to decide how much cash reserve do I need? Do I need to spread these things out in a lot of different places? What about a brokerage account? I know I have my IRA and my Roth, but I've heard of these other accounts that are set up a little bit differently. It's interesting, too. I've found in my time in the industry, people think there's a million different options out there, but really when you boil it down, maybe there are different buckets inside of these, but you've got your bank, your cash, your savings, checking, an IRA, Roth IRA, and a brokerage account. Maybe there are some other places outside of this—some annuities, some insurance products—but in a lot of ways, those are kind of the places you've got. So, it's about helping people navigate where do I put my money? And also getting used to, "Hey, now the money is what I'm living off of." It's not just something I'm saving away, but now it's something I'm living off of. So, how can they feel comfortable with a good mix of cash versus investments? I think we're going to tackle that today.

Garrett: Yeah, and there's a lot to say about this subject of, "What do I do with my cash?" It's funny, I say cash, and I remember one time I asked somebody, "How much cash do you have on hand?" and they were like, "Like bills? Like coins?" I said, "No, no, no. When I say how much cash, it's really money that's sitting in your bank." Maybe it is some cash in a safe or something, but really, money that's not earning a lot of interest. The big benefit of cash is that you can go get it as soon as you need it, right? So, maybe a helpful definition as we talk about the cash dilemma: it's that money that's really not doing much for you interest-wise, but it has a great role in your finances. You need to have cash on hand so that if the air conditioner breaks, if the roof needs to be repaired, if your car needs a new engine or transmission, you don't have to worry about calling your financial planner, selling securities out of your investment account so that you can just go ahead and get that taken care of and move on with your life. But let's back up just a little bit because I always say rules of thumb are great in financial planning, but they apply to no one in particular. One of those is you've probably heard it your whole life, having like three to six months worth of expenses in a checking account. When we talk about that rule of thumb, I think maybe the first helpful clarification is that that three to six month number probably doesn't include your membership to the local luxury gym. It probably doesn't include the superfluous subscriptions, YouTube Premium 4K edition, NFL Red Zone. It doesn't cover my steak dinner every night and going out for a bottle of wine and all that. Probably not. I remember back in 2020 when COVID hit, people were asking, "How much money should I have in my checking account?" Really, that three to six months would be a number for expenses of things you've got to do to live and to get through those three to six months. So, it's probably a mortgage, groceries, insurance premiums—things like that that you can't go without. You might find that if you have a very high monthly expense level, you might not need that times six. But what you do need is some level of fixed expenses in the bank that would get you through three to six months. I think that's good and true for a lot of people. But I would challenge the retiree, the person that is listening to this podcast: I think this whole idea of an emergency account applies much better when you're working and you're earning money. I don't think it's as perfect of a fit once you retire. I still think there's a place for an emergency fund, but when you stop working or when you do not have the ability to work anymore, all your savings is your emergency fund. If you don't have the ability to earn more money, everything you have is your emergency account. I think we can sometimes get lost, especially after retirement, trying to figure out, "Okay, I need six months worth of my money in cash in an emergency account because somebody told me to do that once." I would probably argue your IRAs, your Roth IRAs, your investment accounts—all of that is one type of money, and we've got to think of it together. Now, that doesn't mean we can't keep six months in a checking account or a savings account, but I think the trap that I see a lot of our clients fall into is lots of accounts. They might have a checking account at their bank, they might have multiple checking accounts because they do different savings things for different purchases, and I get that. And then they'll have a savings account where they've got a couple more months worth of expenses, and then they opened up a credit card or another bank account at a separate bank to get some type of reward or maybe a mortgage or something. So, they've got a checking and a savings account at that second bank. I just see it very common that people have a couple different banks that they're using, and then sometimes it even hits like a third bank because maybe they're running a business and they've heard FDIC insurance and it's up to $250,000 per person. So, they've got so much cash, they're at multiple banks taking advantage of that FDIC insurance. I see where more accounts can add more complexity than is necessary.

Adam: Yeah, and I think a term in our industry is return on hassle (ROH). Maybe not the most technical term, but is it worth it to be checking all these different bank statements? I had a client in just the other day that had three different checking accounts, and he's like, "Well, that one pays these bills, and I can't remember why we set this one up." As you age, I think simplicity is a really big asset for you. I know you mentioned liquidity a couple times. I think it's interesting: when we're working, our employer pays our salary. I don't know if you ever tried going to your employer and saying, "Hey, just give me some more this month," or, "I don't need as much this month." That would probably be a weird conversation; that's just not how it works. But once you're retired, basically you're paying yourself. You save these funds, so you have some flexibility. Something that came along a year, year and a half ago, is this new T+1 settlement date. I think it used to be T+2. All of a sudden, we can get stuff traded and get cash to people quicker out of investment accounts. Maybe you can just touch on that as well: how people can view even their investments as, yes, they can fluctuate, but as far as access to them, it's really as quick as ever to get to their investments.

Garrett: Yeah. I'm sure all of our listeners out there are like, "Oh, T+1, they're about to talk about that," as probably the most exciting thing. I would say for most of our clients, this is a big thing because I just feel like there's some misunderstanding out there with clients. The world changes fast, and I have a lot of clients that keep a lot of cash in the bank because they need that money in case they have an emergency. We have industry jargon: T+3, T+2, T+1. I would bet most people listening to this, unless you work in our industry, that's not really something that you track with. But at a simple level, T+3 was the standard when I first started working, at least 10 years ago. Then it changed to T+2, then T+1. What that means is that it's getting quicker and quicker to get money from your investment custodian—like a Schwab or Fidelity—into your bank account. The 'T' stands for trade date, and the number after the plus sign, like T+1, means the federal regulatory bodies require one additional day for funds to settle before that cash can go to your bank. It used to be back when I started in 2013, if somebody needed cash from their custodial account or their brokerage account, they would have to call in on a Monday morning. If we put in that trade right away, that would be the trade date. Then we'd have to wait three more additional days before the money could leave. So, if Monday was the trade date, Tuesday, Wednesday, Thursday, the money would be allowed to leave Charles Schwab and go to the client's bank. If the bank didn't process it until late, it might not be until Friday that that money shows up. So 10, 12 years ago, T+3 meant if you called on a Thursday, the weekend would intervene. It got to be a long time where you'd almost have to say, "It could be a week before those funds get to your bank account." The world is changing; that's the reminder. Things are getting quicker, and while there probably was a good reason decades ago to have a T+3, they're improving that. And so now it's T+1. This means you can keep money in a brokerage account, in a really conservative investment. You could use a money market fund. They were hovering at like 5% last year. I think they're down to probably like 3.7%, 3.8% right now, which is probably more than most of you are getting in your checking account. There's a minimal amount of risk in a money market fund. Let's say you had $100,000 in a money market, short-term duration bond fund in a brokerage account, and you needed $25,000. You could call me on Monday morning, I could put in that trade, and the money would be on its way to you the following business day. That means we've gone from like a week sometimes to, "You call me today, that money can be on its way to you tomorrow." Almost every time I tell a client this, they go, "Oh, wow. Well, that's not too long a time." They say, "Almost anything could wait two days before I pay."

Adam: Well, and it's interesting, too, with this cashless society we're moving to. We'll have people come work on our house and I'll say, "Hey, do I need to cut you a check?" And they're like, "Oh, no, we'll send you an invoice on email and just pay it." It seems almost like things aren't as instantaneous, maybe the grocery store still, and some things like that. If you had an HVAC unit go out or something, they're not going to have you pay in cash or write a check that day.

Garrett: That's really what I'm seeing with the clients that we help. It's like even the week was manageable, but when you say, "It'd be on its way to your bank tomorrow," they say, "So, wait, I've got all this cash sitting in my bank and it's earning 0.1% interest, 0.2% interest, or I could be earning 3, 4, 4.5% interest, and I can get it by tomorrow?" Basically where we end up is we transition to the subject of, "Well, that's kind of obvious that that's a better thing for most people." But it transitions to, "So what's the point of my savings account?" Like, why do I have a checking account, a savings account, and a brokerage account? Again, checking accounts and savings accounts are great because of the FDIC insurance level, $250,000 per person. I'm not trying to talk down the benefits of that. I'm just challenging people that are listening to this podcast. Life is full of these things where you have to balance the tension of simplicity versus complexity and maximizing your ROI (Return on Investment). I grew up this way; I was an engineer in college, and you're always trying to get the most out of what you're given. When it comes to investments, you're trying to have a high ROI. If I'm averaging 9%, wouldn't it be nice to have 10%? What can I do to get me to a 10% average return? We're wired, I think most people, to maximize ROI, but at the cost of what? I think that's where this ROH (Return on Hassle) idea comes in. Maybe you don't need three checking accounts. Maybe you don't need two savings accounts. Maybe you don't need—I've seen some of them—10 savings accounts for different things. What if you kept enough in your checking account to help you sleep at night? For some people, that might be $20,000. For some people, that might be $100,000. For some people, that might be $500,000. Maybe you're running a business, and you've got rental properties and you need to be able to pay for stuff. Everybody's different on what that checking account number is, or savings account number is. I think maybe you saw this yesterday in your appointment; I've seen it too many times to count: "I got $450,000 in the bank, and it's accumulating because I'm not spending my Social Security checks and my pensions, and I just like having that cash there." Again, I'm not going to fight that if that's the number that a client needs. In fact, I would encourage it if it helps you sleep better. We have done that. But I think there's a case, just like your appointment yesterday, where maybe that $450,000 could be $250,000 or $150,000 or $50,000, and the difference could be invested in something very conservative like a money market fund. And you're going to come out ahead on that.

Adam: Yeah, and I think that was good to touch on: we can't forget asset allocation. You don't want to say, "Oh, I'll take my cash in the bank and I'll go build up a cash reserve over here, and I'm going to go pick five of the highest performing, highest growth stocks." That's not apples to apples. Let's not go crazy over here and get our asset allocation out of whack. We could look at a money market fund. I know we have some fixed income portfolios that are doing really well, especially with the dropping interest rates. So, there's definitely more juice to be had out of the squeeze at a very similar risk level. Thinking through that, I think is important for clients and listeners to say, "Hey, I do want to go get a little more juice out of the squeeze, but I also don't want to go crazy over here and take this pocket of money that's kind of a fallback for me and have it heavily invested in some really high upside equities that could also drop out tomorrow."

Garrett: I agree. And at risk of extending this conversation longer, I think this would be a really good example for high net worth retirees. Usually, there's a lot of cash at play for people that have a lot of money saved. I want to give you this kind of scenario, and just consider it. Let's say you have a lot of cash. Maybe you run a business; maybe you have money at a few different bank accounts in order to take advantage of the FDIC insurance protection, and that's a good thing for you. Especially for high net worth retirees who may be in a high tax bracket, I had this conversation about four or five months ago with somebody, and it was this situation: multiple banks, big business at play, and I was pitching them on this idea. They felt like that was too much cash, but do you know how interest is taxed? If you have a CD, or just interest that you're earning on a bank—maybe your bank has given you a good interest rate, but be careful with those, they sometimes change very quick and maybe faster than you expect—interest is taxed at your ordinary income rate. So, for a high net worth person, let's say they're in the 32%, 35%, 37% tax bracket, if you earned $50,000 in interest, you would have to pay 35% federal income tax on that interest. A third of that $50,000 that you earned is taxable at your ordinary income rate. I like to have this conversation, as I did last year: What if your risk capacity was actually a little bit higher and you could afford to invest some of that cash? In this case, it was over $700,000. What if you could afford to invest some of that, and instead of getting taxed at your ordinary income tax rate, what if you invested it—maybe not in the most speculative stocks, but big stocks that had a lower standard deviation, a lower relative risk to the market, dividend-paying stocks? What if you invested that for a year? You had the ability to not touch it for a year. You would, instead of getting taxed at ordinary income rates (32%, 35%), instead, you could get taxed at 15% or 20% instead. I think there's also a tax planning discussion here with cash: How much you need, what helps you sleep better at night, how much risk could you actually take with some of that? And would it make sense to peel off some of your cash, invest it and prioritize long-term capital gains instead of a really high marginal rate? The lower your income, maybe the less important that is. But all kinds of discussions when it comes to cash. There's a lot of different things you can do. I would argue with most people, having the conversation about how you can simplify things. If something happens to you, would your spouse know how things are set up? Are you spending a lot of time tracking individual paper bonds in your bank account or your bank safe? Trending towards simplicity, I think, resonates with a lot of retirees.

Adam: It's so funny because I think a lot of people naturally hear "cash" and think, "Oh, that's the simple one. Don't have to think about that one." But again, tax planning is these little incremental, proactive decisions we make over a lifetime that we look back and say, "Man, I won the game. I crushed it." Anyway, I appreciate you guys joining in with us today. We love to add value. I think I mentioned that last video; our goal is to add value anytime we sit down in front of the camera and turn it on. So, appreciate y'all for joining in with us today. Make sure you check us out. We're on YouTube—like and subscribe there. Spotify, Apple Music—follow and check us out. Share us with some friends. If you find yourself at a lunch and you say, "Hey, I heard this riveting podcast the other day on cash, the cash dilemma. You gotta listen to it," share with your friends, family, and have them join the conversation. Appreciate y'all joining us. I'm Adam. This is Garrett. And this is Retirement Tax Matters.