How Much Cash Retirees With Strong Finances Usually Keep Available

If you are nearing retirement with solid finances, or you are already retired, you may have a healthy portfolio and dependable income. Even so, you might still ask how much cash it makes sense to keep readily available.

Cash is important for paying everyday bills, but surprise costs like home repairs or medical expenses can strain even a well-planned budget. Keeping a reserve can help you avoid selling investments at an inconvenient time, though holding too much cash can also hold back portfolio growth.

To protect both your near-term needs and your long-term goals, it is important to strike the right balance between cash and investments. Here is what financially stable retirees may want to set aside.

Hold Three to 12 Months of Expenses in Cash

Retirees often maintain larger cash balances than households that are still working, with many keeping about three months of expenses available, according to Vanguard Research. That cushion can make it easier to shift money from investments into cash for added peace of mind.

Schwab, however, has recommended keeping one year of expenses in cash reserves, plus another two to four years in liquid investments, such as short-term bonds that are easier to tap during a market downturn.

The Trade-Off: Do Not Keep Excess Cash

Cash can provide valuable stability in an emergency, but too much of it can weaken long-term returns and lose purchasing power to inflation. Cornerstone Wealth Management notes that holding large cash balances can work against financially secure retirees because of the hidden costs involved.

For instance, a $1 million portfolio with $75,000 parked in cash reduces the amount working for growth over time. And if you withdraw money from a retirement account such as an IRA or 401(k), your tax bill could rise.

That is why it is smart to match cash reserves with long-term investments. A checking account, high-yield savings account, or money market fund can provide easy access, while the remaining money stays invested in a diversified portfolio.

Assign a Job to Every Dollar

Financially secure retirees usually keep cash for three main purposes: routine spending, emergencies, and unexpected costs such as a $10,000 roof replacement, travel, medical bills, or other unplanned purchases. Retirees who receive the maximum Social Security benefit, have a substantial pension, and collect annuity income that covers most expenses may need only a relatively small cash cushion compared with someone still working who could suddenly lose income.