How Much Cash Should Retirees Have? As Little as Possible
Retirement marks a new chapter in life, often accompanied by dreams of travel, leisure, and time spent with loved ones. However, a crucial part of this phase involves careful financial planning. One fundamental question that arises is, “How much cash should retirees have on hand?” Surprisingly, the answer may lie in having as little cash as possible. Here’s why.
The Importance of Cash in Retirement
In retirement, having liquidity is essential for managing day-to-day expenses and unforeseen emergencies. However, retirees should not focus solely on cash for their financial security. Cash accounts, such as savings or checking accounts, typically offer low interest rates, struggling to keep up with inflation, which means that cash can quickly lose value over time.
1. The Inflation Risk
Inflation can erode purchasing power, and money sitting idle in cash accounts is particularly vulnerable to this threat. The average inflation rate over the past few decades has hovered around 3-3.5%, while cash accounts often yield less than 1%. This discrepancy means that the longer money sits in cash, the less it can buy in the future. Therefore, retirees should aim to minimize their cash holdings and invest more in inflation-hedged assets.
2. Investment Opportunities
Retirees should consider investing their surplus cash into assets that provide better returns, such as stocks, bonds, or mutual funds. Historically, equities tend to outperform cash accounts over long periods. By strategically reallocating cash into diversified investment portfolios, retirees can secure stable income streams, such as dividends and interest, as well as potential capital appreciation.
3. Building an Emergency Fund
While minimizing cash savings is advisable, retirees still need to maintain an emergency fund. A well-structured emergency fund should ideally cover three to six months’ worth of living expenses. This fund should consist of easily accessible cash to address unexpected expenses like medical emergencies, home repairs, or sudden travels. However, beyond this safety net, excess cash may not serve the purpose of wealth preservation or growth.
4. Understanding Cash Flow Needs
Each retiree’s financial needs and lifestyle differ. It’s essential to evaluate expected cash flow requirements thoughtfully. Factors like monthly expenses, lifestyle preferences, and health care costs will impact how much cash is necessary. Creating a detailed budget and spending plan can help retirees determine the most suitable amount of cash while positioning the majority of assets for growth.
5. Taxes and Withdrawals
Retirees should also consider the tax implications of keeping large sums in certain accounts. Funds withdrawn from tax-advantaged retirement accounts like IRAs or 401(k)s can incur taxes, which may affect withdrawal strategies and cash needs. A more balanced approach that involves adjusting the asset allocation accordingly can help mitigate some of these taxes over time.
6. The Role of Annuities
For those looking for guaranteed income to supplement pension benefits or Social Security, annuities can provide a consistent cash flow without requiring large cash reserves. This option could replace the need for excessive cash savings, allowing retirees to invest more in higher-yielding assets.
Conclusion
Ultimately, retirees should approach cash holdings with caution and strategy. While having a sufficient emergency fund is vital, holding large amounts of cash can lead to missed opportunities for growth and security. A diversified investment strategy that balances cash needs with growth potential is essential. By minimizing cash holdings and focusing on smarter, inflation-resistant investments, retirees can enjoy their golden years with greater financial confidence and a higher quality of life.
LEARN MORE ABOUT: Retirement Pension Plans
REVEALED: Best Investment During Inflation
HOW TO INVEST IN GOLD: Gold IRA Investing
HOW TO INVEST IN SILVER: Silver IRA Investing
Article: https://robberger.com/how-much-cash-should-retirees-keep-on-hand/
Excellent content Rob. Please keep up the hard work you obviously put into these.
How about holding more cash in the first 7 years of retirement and then reduce it later to reduce initial risk of return
I like having dry powder
Even with CDs at 5%?
If a person has enough there is no need to take significant risks.
Peace of mind is invaluable.
Money markets, bonds, and dividend stocks to fund expenses is my approach.
What if you want to retire a few years before Medicare kicks in. Isn’t it smart to build a cash reserve large enough to pay for healthcare out of pocket?
When I retire at 61 or 62 Im putting my money into Vanguard Wellington fund, grabbing the dividends and average return in retirement. Plenty of cash on hand and keep a 60/40
Asset allocation. Most importantly is I am completely debt free which is key
Ha! Cash will return 3.5%. Unbelievable! I guess your wish was more than granted. I'm very happy with my 1-2 year buffer. I sleep well at night. Of course, more in other fixed income for longer term downturns.
I keep part of my investment in a money market account and then I sell cash-covered puts on SPY or something similar. I use a strike price as low as possible to get 1% a month. If I need cash, I can easily reverse back to cash from the put.
Great video, as always. I find it helpful to simply think of cash simply as "insurance" and not focus on it not generating anything beyond peace of mind.
in the 4 years from 1929 to 1932 the total loss was approx. 90% so if one had 5 years of cash & had to start selling stocks from the portfolio even after the almost 50% increase in the next year the portfolio would still be about 85% in the red so the portfolio could be just about completely depleted the first year once the person sells enough to meet expenses for that one year
I use quicken , real simple and easy for a decade. I just reinvest dividends in all accounts. No need to ever rebalance just buy more then another if percentages are you game. I’m 56 and I have at least 5 years cash which is a small percentage of overall investments
I retired 21 years ago at 45 and only had cash. Checking and savings account. My house is my only other investment. For me there's 2 problems with investing. #1 I hate it. #2 I suck at it. I loved my career as a software engineer, love greater freedom more though. For me I'd rather go back to earning by writing code than have to learn and do investing in financial instruments. Not my idea of retirement.
I appreciate this video, it’s making me question some dogma thrown out by radio financial experts for years.
I noted that you rebalance once a year. How often do you think retirees should rebalance?
Brevity Rob, brevity..
My plan is to have 7 years of cash funded from sell of some property in a high yield savings account , and live off of that. Let my IRA account grow until I start taking SS at 67. I will be poor on paper and qualify for obama care for health care. Possibly not even pay any premiums.
When you mention "keeping 10% of cash in bonds", does this include Bond ETFs?
Rob,
I have been watching your videos and enjoy them. Good work.
On the cash topic, seems like there is no doubt that cash underperforms over a long period compared to market or market and bond returns, as in the Bengen example. But we are in a negative market now with others sure to come randomly in the future. I understand and agree no one can time the market.
But suppose I was lucky and converted 50% of my 401(k) to cash in mid-2021. I want to hold some amount in cash as an emergency fund. For us, I want to be very conservative, say 3-5 years, to survive the next bear market. I will still have substantial cash left and am planning to dollar cost average back into index funds over the next year or so. And/or I may do some substantial Roth conversions with the cash–which will then be invested in a S&P 500 index fund, probably VOO, to grow tax free in the Roth.
Seems like a sensible strategy, but open to your comments and the comments of your followers.
As background, I am 66.5 years old, married to my wife of 36 years who is 63, and 2023 will be my first fully retired year from an income standpoint.
Keep the content coming.
Rob, thought you were not fond of dividends. Surprised they’re used in your Budget Dividend Strategy.
Why do you not take into account taxes? The cash "buffer" is already after-tax money that is ready to be spent. Both rebalancing and selling stocks or bonds for living expenses is a taxable event.
Follow up time! How does this strategy feel in Oct 2022? Thanks,
Ha! Cash is the top performer of my portfolio this year.
Hi Rob, can you tell me what funds in your taxable account are giving you the dividends which you transfer into your checking account?
Rob – new suscriber (69 yr old/retired 60 yr) and enjoyed your video. You nailed it at the end with a "3% withdrawl rate option" vs more than what I believe is a year in cash. You run more of a risk with excess cash due to higher than planned inflation as we are currently experiencing. I am fortunate that my fixed income covers my base expenses between SS and pension. I will review some of your other videos and assume you cover the what I believe is the #1 retirement plan risk – sequence of returns.
not retired yet, but i'd keep 1 year of minimum expenses in anything that wouldn't lose value in a black swam type event. I wouldn't go under 3 months in the bank account. I don't want to have to pull out any of my money if the market is down 50%
also interesting the idea in this video is living off dividends, and other videos talk about how living off the dividends could be a bad idea.
I still like the idea of not worrying about selling the principle living off dividends, and reinvesting some portion to continue to grow the principle
Another consideration is that during the Great Depression there was a lot of deflation, even if you wanted 5 years of spending money – you'd only need 3 years of spending money at most.
100% in cash!
Cash reserves is a very difficult question…. in this conversation I would hold only 6 months of essential costs in cash. I thought the reason for bonds was to cover a withdrawal during a bear market. Then when the market recovers you rebalance to replenish your bonds. Am I missing something?
Thank you
my concept of keeping 12 months cash in an emergency fund (retiring in 3 months at 60 years old) is to have cash to buffer spending in the eventual stock drop that will come. I moved to 46 percent treasuries (and 10 % bonds) with rest in s&p fund. i plan on moving back to 60% stocks after next 20 – 30 stock pull back and then running with that long term. Is that a bad plan?
Question: If you perform an in kind RMD to a taxable brokerage account, is that RMD calculated in the combined income formula for social security benefits? Since no income was actually realized (but taxes were paid on the RMD), is that RMD no longer calculated in the combined income definition?
This subject isn't or shouldn't be about historical performance over how various portfolios performed, but rather risk mitigation. Our world is much more volatile to the financial markets than ever before. You need to have a plan that has multiple layers ("tranches") that will give you acceptable performance, but also be able to absorb and handle adverse conditions that you cannot control the severity nor the timing.
Thanks for showing what you do as well as what others may do.
I absolutely agree with everything Rob says here, assuming we are going to live in the same capitalistic system that the country had for the last 150 years or so. But it is a bold assumption to make. There is always a small chance of a black swan event, for example a large scale nationalization.
I have lived through the fall of the Soviet union and a dizzily fast spin from socialism to capitalism. Even a few years before it happened, nobody , neither those who loved the system nor those who hated it, could imagine this turn of events. The general feeling was, this system was around for 80 years, we were born in it and we'll die in it.
In black swan events, depending on their nature, other assets may become profitable, like cash, gold, salt, tobacco and alcohol, clean water and so on…
So having a small cash bumper maybe prudent, since it works both for good and bad times.
Don't be fearful. Hold only 45-60 days cash tops and the next few months thereafter in (fast) negotiable assets like gold, vintage watches, etc…etc…pure cash is wasteful.
I actually keep approx 20 yrs worth of basic survival funds, in a combination of laddered standard, and inflation-protected treasuries. In these frothy times in the stock market..it's easy to forget, that bear markets, have lasted for up to 25 yrs!! (1929-1953). The remainder of my money, is in a total market index fund.
hmm I have an issue with those studies, they assume that bonds are very different than cash. With current low yields I tend to try bonds and cash like if they were the same.
Rob, I could swear you mentioned in one of your previous videos that you recommended that we don’t invest money we’ll need within the next 5 years. Consequently, that leads me to think that you advocated a 5-year buffer in cash. Now, in this video, you mention something else…
Excellent content. Thanks for the insights. We're looking at a similar plan starting at 55 in a few years. You got a new subscriber!
I am a lump sum recipient and I am not likely to earn much money in salary in the future, so I will not be continuing to dollar cost average salary into the market. I just need the cash cushion to feel safe. I think you are wrong. I think a downturn in the stock market of 20% would be devastating. Your faith in the stock and bond market always going up, I don't believe that. You only go back to 1928 and I don't think society is going into super productivity like it has for the last 93 years. I have 7 years of expenses in cash. I still have 17 years of expenses in stock/bonds. But I will review this info in the video more carefully and maybe I will change my mind.
I suspect the argument against a cash buffer depends on the overall returns of stocks and bonds. Now it's hard to argue against historical data but will we see %8+ CAGR for stocks over the next 20-30 years, ditto for bonds? I am highly doubtful. I would like to see studies which assume far less stock and bond returns and compare them with the buffer approach.