Should I hold a cash reserve in retirement? If so, how much? And, if youâre willing to share, do you have a cash reserve as part of your retirement savings?
Sure. Happy to share. But letâs start with some background.
Most people are familiar with the idea of having an âemergency fundâ during oneâs working yearsâa 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, isnât a risk for most retireesâbut 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.
Ask a Question
Have a question about planning for and living in retirement? Email [email protected].
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 eggâs 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 canât 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 questionâŠthere 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 âcomfortâ factor, knowing you have cash on hand if the sky falls. In that sense, itâs as much psychology as it is science.
âCash reserves are often more emotionalâmore personalâdecisions,â says Laurie Burkhardt, a certified financial planner with Modera Wealth Management in Boston. âItâs like asking someone how much risk they want to take with their portfolio. The answer is different for everyone.â
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 planningâthe opportunity, for instance, to realize losses on some investments, offset gains on others and rebalance oneâs portfolio. But again, the ârightâ number, more often than not, is a âpersonal preference,â she says. Given that, she suggests: âAsk yourself: Whatâs going to help you sleep at night?â
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: âsequence of returnsâ risk. Thatâs 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, youâre withdrawing funds from those savings, that double whammy can deplete your nest egg in a hurry.
Asked how much money, if any, they had set aside for a financial emergency, surveyed baby boomers in these percentages said they could cover living expenses for:
Less than 3 months
3 to 5 months