How much cash should you hold in retirement?

Retirement columnist Glenn Ruffenach offers his take on holding cash reserves in retirement.

  • By Glenn Ruffenach,
  • The Wall Street Journal
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Q: Should I hold a cash reserve in retirement? If so, how much? And, if you’re willing to share, do you have a cash reserve as part of your retirement savings?

A: Sure. Happy to share. But let’s start with some background.

Most people are familiar with the idea of having an “emergency fund” during one’s working years—a pot of money (typically, equal to three to six months of living expenses) that can help with unexpected bills or, perhaps most important, tide you over if you lose your job. Unemployment, of course, isn’t a risk for most retirees—but a prolonged bear market is. As such, many financial advisers recommend holding a cash reserve in later life as an insurance policy, a way to pay your bills without having to sell investments when markets are tumbling.

Being financially prepared to retire

A few simple calculations can help you determine if your money will last throughout retirement.

All that might sound simple, but cash reserves generate a surprising amount of debate and disagreement in financial-planning circles. Some experts, for instance, question whether retirees need a cash reserve at all. The thinking: The low returns on, say, a certificate of deposit or money-market fund (popular havens for cash) are a drag on your nest egg’s overall performance. If you need money for an emergency, the thinking continues, tap your retirement savings.

Even those advisers who do favor holding a cash reserve can’t seem to agree on just how much money to set aside. One year of living expenses? Two years? More? (Which is another way of saying: No one knows how long the next bear market will last.)

So to return to your original question…there is no single, correct answer. I think most people (and again, many financial advisers) like the idea of a cash reserve simply because of the “comfort” factor, knowing you have cash on hand if the sky falls. In that sense, it’s as much psychology as it is science.

“Cash reserves are often more emotional—more personal—decisions,” says Laurie Burkhardt, a certified financial planner with Modera Wealth Management in Boston. “It’s like asking someone how much risk they want to take with their portfolio. The answer is different for everyone.”

Ms. Burkhardt likes to see retired clients keep a cash reserve that amounts to at least a year of living expenses. If markets tank, that amount of time, she explains, allows for thoughtful planning—the opportunity, for instance, to realize losses on some investments, offset gains on others and rebalance one’s portfolio. But again, the “right” number, more often than not, is a “personal preference,” she says. Given that, she suggests: “Ask yourself: What’s going to help you sleep at night?”

As for my nest egg, my wife and I have two years of living expenses in a money-market fund. The primary reason, as well as my primary concern: “sequence of returns” risk. That’s the risk of getting hit with negative returns early in retirement. If the value of your savings is falling and if, at the same time, you’re withdrawing funds from those savings, that double whammy can deplete your nest egg in a hurry.

Given that my wife and I are still relatively new to retirement, I see our two-year cash reserve as (some) protection against sequence risk. I’m also prepared to re-evaluate the size of, and need for, our cash reserve as we get deeper into retirement.

Where to keep your cash? There’s no excuse today for failing to take advantage of websites—Bankrate, BestCashCow and DepositAccounts, among others—that can help steer you toward high-paying accounts.

In particular, more retirees seem to be getting over their aversion to online savings accounts—and that’s a good thing, Ms. Burkhardt says. Players like Ally Bank and Marcus, the online bank operated by Goldman Sachs Group Inc., she notes, can help you earn considerably more on your cash holdings than savings deposits at commercial banks or brokerage firms.

Finally, if you wish to hold a large sum in cash but are worried about safety—remember, the Federal Deposit Insurance Corp. covers up to $250,000 per depositor, per insured bank—check out MaxMyInterest.com. This online service, Ms. Burkhardt says, “facilitates spreading your cash across multiple banks with the highest available rates.”

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