The Cash Cushion Number That Lets Retirees Ignore Bad Market Days
You don’t want to spend your retirement stressing about market downturns — and if you have a cash cushion large enough to cover most of your expenses, you don’t have to.
This fund allows you to stay invested in the financial markets so your money grows while giving you the safety net of knowing surprise costs won’t require you to sell investments at a loss.
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How much cash to have saved
The typical rule of thumb is to have enough cash on hand to cover expenses for three to six months in case of an emergency, but that number should likely be higher for retirees. Many financial advisors recommend that retirees bump up the amount of cash they have easily accessible to enough to cover a year to two of expenses. You should also factor in how much you’re receiving from Social Security and other income sources.
You can still withdraw from your nest egg to replenish this supply, but ideally, you won’t be forced to sell assets during market corrections.
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Why cash helps retirees stay invested
Investing money is one of the best ways to beat inflation and give yourself more financial flexibility deep into retirement. However, if you invest every dollar you have, you risk having to sell at a market low — and losing money — to pay your bills. In retirement, you also don’t have as much time for your balance to rebound as you did when you were earlier in your career.
Not only does cash provide a buffer, but it can also allow retirees to sleep easier at night and avoid stressing about stock prices and headlines. Knowing you can weather the storms makes it easier to approach investing logically and not let emotions dictate your investing.
How much is enough — and when too much cash can backfire
Keeping too much cash on the sidelines also comes with risk. The money in a traditional savings account likely won’t keep up with inflation, and you are missing out on potentially high returns in the stock market by keeping it there.
The cash you keep on the sidelines can still grow if you search for high-yield vehicles. Putting idle cash to work in short-term certificates of deposit (CDs) and high-yield savings accounts (HYSA) offers a risk-free return on your investment. HYSAs are liquid, meaning you can access your cash whenever you need it quickly, and short-term CDs ensure you won’t have to wait long before you can access your money penalty-free. Just be sure not to lock up your money in a CD that has a term length longer than when you’ll need the money, and keep in mind that the stock market offers much higher potential returns.