Our Asset Liquidity Ratio

There are benefits to having a hobby in personal finance. In a world where money moves products and services, understanding how it works is a powerful thing. When you enjoy learning about it, that makes things even easier. From complex tax law to convoluted retirement accounts, it is worth spending some time figuring all this stuff out.

But there are also some basic things we should keep an eye on.

One of the metrics that got away from me over the years is how much of our net worth is easy to access. These days I call this our asset liquidity ratio.

$100 under lock and key

Earlier this year, I started wondering if I put too much away for retirement in my 20s. I even mentioned it in a personal finance round-up I participated in back in December. Was my laser focus on maximizing tax advantage accounts to get to financial independence an error? Was I robbing young Max to pay the old and decrepit Max? What if I didn’t make it to my golden years?

Did I have balance?

Retirement Accounts

Retirement accounts are great. They can save us some serious money. From the 401(k) deferring taxes to the Roth IRA providing tax-free growth, there is no question they will accelerate our way to becoming financially independent.

The problem is they also lock your money up for years. Complicated rules are in place that aim to keep us from accessing our money before the traditional retirement age of about 60. There are plenty of workarounds and exceptions, but understanding those take time.

The bottom line is these accounts are not meant to be liquid in the near term. We usually need to jump through more than a few hoops to access the money before the traditional retirement age.

And let me tell you, 60 is a long way off.

Taxable Accounts

Taxable accounts, on the other hand, are extremely liquid. Checking and brokerage accounts grant us almost instant access to our money. The drawback? Interest, dividends, and capital gains on investments are all taxed the year the income is realized. In other words, there is a “tax drag” on this piece of our portfolio. A larger balance equates to a larger tax drag. I consider this just part of the cost of liquidity.

But outside of the tax drag, money in these accounts is generally easy to access.


Asset Liquidity Ratio

So how do we balance capitalizing on tax-advantaged accounts while also keeping liquidity in check? Well, one place to start is knowing how much of our net worth is in liquid accounts.

Liquid Net Worth / Total Net Worth = Asset Liquidity Ratio

I’m sure this doesn’t meet the technical accounting definition, and I don’t really care. That’s another good thing about having a hobby in personal finance, you can make up ratios out of thin air. Even if they are probably technically percentages.

For the Max Out of Pocket crew, we have been running an average of 28.68% in liquid net worth since early 2018. As of August 2020, we are up to 31.16%.

In other words, 31.16% of our assets are easy to access. This includes things like our taxable brokerage accounts, checking accounts, Fidelity cash management account, government I-bonds, and even the cash in our pockets.

It does not include things like our 403(b), Traditional IRA, Roth IRA, H.S.A., or state pensions. I also do not include other non-liquid assets such as our cars or a house (if we owned one). The majority of our net worth currently sits in tax-deferred IRAs.

That Seems Low, Max

There are two sides to this.

The fact that we only have easy access to 30% of our assets does seem low to me. I was noticing the folks over at TicTocLife are at a much healthier 47% in their checking and brokerage. I think that is a good spot to be considering their total assets.

Ultimately, it is a percentage I would like to increase a bit. It is one of the reasons I decided not to front-load my 403(b) account in 2020. I needed some time to think through this. Now I am not even planning on maxing it out.

On the flip side, this shows that despite not having an explosive income out of college, I have been doing a great job prioritizing retirement savings. Even when I had a much lower income, I always made it a priority to dump truckloads of money into my retirement accounts. That money grew exponentially over the last decade. In fact, with our reasonable standard of living, we probably do not need to save another dime for retirement because we still have a super long time horizon for these assets to grow through the stock market.

Did Max Overutilize Retirement Accounts?

I do not think I necessarily made a mistake here. Our tax-deferred accounts have been able to take advantage of the roaring stock market over the last 12 years. Additionally, our federal effective tax rate was extremely low for most of those years. For several of them, I was able to capitalize on a 0% capital gain rate in my taxable accounts by deflating our adjusted gross income with tax-deferred accounts. One year shortly after Mrs. Max OOP came on the scene, I got it so low I even accessed the saver’s tax credit. One of the few benefits of her meager teacher salary.

Through all of that, never once did I feel I was depriving ourselves for the sake of saving. I certainly kept an eye on things, but we definitely weren’t slumming it. We regularly traveled internationally and lived in nice places.

That said, there is a chance the future me might wish we had easier access to our assets. I can think of two things that might trigger that reaction: buying a house or starting a business.

Although I enjoy renting, we will likely eventually buy a house again. Depending on the market, we could definitely absorb a purchase, but our liquidity ratio would suffer. Unfortunately, I don’t think we could pay cash for a house in some of the markets we are looking at. We could easily put 50% or more down, though, which isn’t a bad place to be.

Opening a business is a wildcard. Mrs. Max OOP is currently in training out in Alberta, and we have no idea what the next steps to that project are, but it could turn into a significant investment. I suppose a small business loan would always be an option.

Early Withdrawal Options

All that said, we do have options for early withdrawal, and I understand them. The Roth IRA gives us some liquidity after contributions sit for five years and our 401(k) offers loan options. There are also those fancy Roth IRA conversion ladders that might make sense in an early retirement scenario.

But for the average Joe-Max learning about personal finance, we should put early withdrawal strategy aside. A liquidity ratio is a good metric to keep in check and can make sure you are balancing the goals of both your future self and your current self.

Do I sound like Dr. Emmet Brown yet? 

” You’re just not thinking fourth dimensionally!”

Fixing This Ratio

Ultimately, so far in 2020 I have been attempting to correct our liquidity ratio. There are challenges, though.

One thing I am finding is the money in our retirement accounts is working harder than we can. Capital gains and dividend distributions keep those retirement balances growing and it is a hard thing to offset with regular income. While that’s certainly not a bad thing, it could make correcting our liquidity ratio a challenge.

Most of our liquid assets are invested in the stock market. But I also hold most of our “cash equivalent” allocation in our liquid accounts as well. So we do not benefit from market returns on that money. This comes to $51,436 (representing a full year of expenses) and is a number I am considering increasing, which will further slow us down. This money barely keeps up with inflation.

I am also still making small contributions to my Roth 403(b) to capture my employer’s contribution match. This doesn’t help the ratio.

Final Thoughts

I am always looking at financial ratios of health systems. Cost to charge ratios, net to gross revenue ratios, and cash on hand can give me a good pulse on the organization. The same goes for personal finance.

But this is just one metric. There are plenty of other indicators to check when looking at the big picture. But I think it is a good one to monitor early on in personal finance to make sure you are not locking too much up in retirement accounts.

Overall, I don’t think I made a mistake here. Theoretically, assuming we stay the course, our net worth will grow to a point where this doesn’t even matter. Our reasonable standard of living just does not take much to sustain. When you think about it, 30% of a lot of money, is still a lot of money. The ratio is probably something we only need to look at early on in personal finance.

For us, we still need to keep an eye on this for a few more years.

Frankly, 2020 will likely be the first year in a long time that I don’t max out my retirement account. With Mrs. Max OOP on sabbatical, we will be on the cusp of a lower tax bracket, and I want to pay the tax now and take advantage of it. Additionally, early retirement is seeming more and more unlikely for me these days. It turns out I like working. and the odds are I will fill up my $572,570 standard deduction bucket anyway.

As a result, we have been able to move our ratio from 28.83% to 31.16% over the last 8 months. I expect that number to continue to improve, especially if the overall stock market dips again.

What is your asset liquidity ratio? I’m almost sure it is better than ours.


13 Responses

  1. You can think of Roth IRA principal (not interest) as pure liquidity as well (so long as it was a normal Roth contribution and not a conversion which indeed requires a 5-year holding period). We tapped into our Roths post-grad school to cover a 6-month stretch without income during which we also bought a $400k home. To purchase the home, one could also tap into $10k of Roth interest per person without taxes/penalties.

    • Max OOP says:

      Absolutely. My Roth won’t move the percentage materially, but certainly a consideration once those funds age out the full 5 years.

      I believe the 5-year holding period for my Roth 403(b) at work wouldn’t start until I actually roll it over into a regular Roth IRA. Nice use of those funds to fund life during post-grad school, certainly a good strategy there.


  2. Medimentary says:


    I enjoyed this post and it’s a good metric to think about if one is considering early retirement. About 60% of our net worth is liquid and Frugal Professor makes a good point regarding Roth principal contributions. Given the size of our liquid portion, I consider all my prior Roth contributions as deferred (and currently illiquid).

    My wife currently does not have a retirement plan with her employer so this limits our tax-deferred space. I would love a tax deferral option for her given our marginal tax rate, but we just accept it. This does, however, create the opportunity to put more in taxable accounts. We also don’t currently own a home, so no down payment or principal tied up in a house. This will probably change in the future.

    I realize the grass could always be greener from a tax-deferral standpoint, but I just try to make the best decisions with the options currently in front of me. So far, staying disciplined has worked out well.

    • Max OOP says:

      Thanks, Medimentary – I also consider my Roth contributions as illiquid for this exercise for the sake of simplicity.

      We are also currently renting, a bit under market rate, which is a nice place to be. That will eventually change.

      Take care,


  3. 50andFREE says:

    My number is lower! :). I’m at 24.6%. I’m about to turn 50 and plan to retire before 51. Let’s just call it a 10 year time frame that I can draw down this liquid net worth bucket. No debt whatsoever. I also have a $254K Roth IRA where I can withdraw the principal if I run out of liquid funds. What do folks think of this ratio from where I am at right now?

    • Max OOP says:

      Finally, someone in my range! Sounds like you have a nice glide path ahead of you and a solid nest egg. That 254k is definitely going to come in handy. How much of that balance is (liquid) contributions vs. market gains? You planning on using that during the 10-year drawdown or fund that from a taxable account or a mix?

      What do you plan to do with your time for the next 10 years? Any trips planned post-COVID?

      All the best,


      • 50andFREE says:

        I would have to manually go through the Roth IRA account to see how much is liquid unless there is an easy click on Fidelity that I don’t know of. My guess is less that 100K is principal. I’ve been contributing max allowable Roth IRA since it started with the exception of the last 2 years where I made too much money. However, I don’t really need to withdraw my principal from Roth IRA unless it is an emergency. My liquid bucket is $544K for next 10 years (most invested in no-cost Fidelity Index Funds) with a very padded budget of $50K/year. This $50K budget is pre-Covid with includes $10K of international travel. My post-Covid budget has been running around $2K/month or $24K/year because I cannot eat out, shop, socialize, nor travel. I don’t plan on traveling until 2022 and only if it is safe and convenient to do so. I haven’t completely calculated the most efficient strategy for 10 year drawdown yet because I don’t know when I will pull the plug next year. It depends on a possible layoff, severance payment, 2020 bonus paid in 2021, unemployment insurance, continuing medical group coverage terms then COBRA, and a number of other factors. In 2022, when my employment income will be 0 is when I can better estimate if a mix from taxable and Roth IRA principal is more advantageous. Am also planning to the longest yearly conversion of traditional IRA to Roth IRA to reduce my RMD down the road. My investable total bucket is $2.21M and paid off house valued at $462K. Net Worth is $2.67M. My plans for next 10 years is a long list of activities which I’m already doing now but in limited amounts. Skiing, mountain biking, reading, hiking, gardening, learning on various academic channels, resuming my Spanish lessons, volunteering, and hiking the Camino de Santiago in 2022. I won’t be bored as I’ve already been trying this out since mid-March. I might even try my hands at creating a cool blog like yours. :). You have any recommendations or good reads on how to ideally do a draw down for next 10 years for tax efficiency, maximizing the subsidies for medical insurance, and reducing impact of RMD? How old are you by the way so that gives me a better feel of how safe your asset liquidity ratio is? It didn’t say on “Start Here” page and I was too lazy to scroll through your previous articles. Soooorrrrrryyyyyyy

  4. My number is around 23.9%. I’m not including the Roth IRA contribution amounts in that even though they would probably bump it up to the mid thirties. I don’t really consider them very liquid. I continue to sock away money in my retirement accounts and like you, I enjoy my job and will continue doing it as long as want. I see the value of savings not so much as “I can stop working soon” but more “I can work on whatever I want to and don’t have to put up with bad management/conditions/etc.”

    • Max OOP says:

      Well, you officially have the lowest.

      The Roth thing keeps coming up in the comments, but like you, I don’t really consider that liquid either. It wouldn’t move us much anyway.

      Thanks for stopping by Ocho Sin Coche.


  5. Chris@TTL says:

    Haha, it’s the first time I’ve been able to find some positive spin on our generally high account balances for non-tax advantaged accounts! Thanks for the mention.

    We’ve been generally fortunate but I had a couple of very good business years specifically where come January 1st I would go to the brokerage account and transfer $100K straight from checking into VTSAX or similar index funds within a brokerage account. That drove a lot of the higher “liquidity ratio” as you referred to it (I like this simple idea!).

    Even if we were in a situation closer to your level of 30% in more accessible accounts like brokerages, I really wouldn’t personally worry about it too much. This, as you and other commenters suggested, is largely relevant when looking at retiring early (which we are).

    There are enough ways to get money out of 401(k), IRA, and similar accounts that I never gave our ratio more than a minor passing concern. Between the 72(t) rule and Roth IRA conversion ladder (I recently did a summary if you search “Retire Early With Real Estate Reader Case Study” on our site), I was sure we could get money out without too many pains. As long as you have a decent cunk in a brokerage account to tide you over for 5 years while Roth conversions mature, you can make it work.

    As an aside, I think we may have actually overvalued some of our tax-advantaged accounts–especially anything Roth-like. With the changes to the Standard Deduction (24K for married couples!) in the US and exceptionally high-income level before capital gains applies, it seems quite unlikely we’ll end up even paying taxes at all on our early retirement income level.

    Then again, that can all change with congress and leadership changes. I suppose it’s nice to have a backup plan!

    • Max OOP says:

      Hi Chris,

      Thanks, I enjoy the transparency of your updates. It is a simple idea, and something worth looking at particular for those who catch the early retirement “bug” but might not balance the now with the later.

      You are absolutely right on the tax situation and the possibility of not paying taxes on those distributions. In the current state, the tax structure is practically set up for it. But like you mentioned, things can always change!

      Take care,


  6. Dragon Guy says:

    Our ratio is over 55% (and does not include principal on Roth IRA). In 2002 I started investing a set amount of money into the stock market every month in our taxable account. We contributed to our retirement accounts as well, but always made sure to make this monthly contribution, regardless of the direction of the stock market. This continued until 2017 at which point we discovered financial independence and then we spent some excess cash we had paying off our mortgage and simplifying our investments.

    I think it is good that you are working at building up your ratio. Sure there are ways to extract money out of retirement accounts, but in my mind there is no guarantee that those rules will stay in place.

    • Max OOP says:

      Sounds like your path of “consistent and often” worked well. It almost always does no matter what the underlying investments are. That ratio is pretty impressive considering the house is paid off!

      I agree – rules and tax law can always change, so having easy access to liquid assets needs to be part of the strategy. Shoring this up a bit could put me in a better position to be even more aggressive with my tax-advantaged accounts in the future. It will also give me access to an “opportunity fund” outside of my emergency fund.

      Thanks for stopping by, Sir.


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