The Key Guideline for How Much Cash to Hold in Retirement

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Cash remains an important part of a retiree’s portfolio because it provides stability when you begin drawing from savings, and it can also generate interest through a high-yield savings account or other cash-like holdings.

Still, holding too much cash can leave you exposed to inflation and cause you to miss out on the stronger potential returns available in the stock market. For that reason, many financial advisors suggest keeping one to two years’ worth of cash in retirement, along with some funds in bonds, certificates of deposit (CDs) and other lower-risk investments.

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Why holding too much cash can be a problem

Money kept in a standard savings account usually earns little interest, while a checking account often earns none at all. A high-yield savings account can improve that, but after inflation and taxes, the real return is much smaller than the advertised rate. That is why it is important to keep your money productive.

Even though retirees may not be seeking many new investments, they still need a healthy cash reserve to cover regular spending and unexpected costs. This cushion can help you handle emergencies and feel less exposed to stock market swings, since your day-to-day living expenses do not depend on market performance. The need to sell investments also becomes less pressing if you have Social Security, dividends or other income streams coming in.

How much cash is enough

Many advisors advise retirees to keep at least enough liquid money to cover a year of essential expenses, though the right amount varies by household. Some retirees keep enough in accessible accounts to cover as much as three years of spending. Those who are more cautious or plan to travel extensively may want a larger reserve, while people with pensions or other steady income may need less.

Specialists at T. Rowe Price recommend holding cash equal to one to two years of living expenses beyond expected Social Security and pension income, in addition to the money needed for daily costs such as gas and groceries.

What to do with the rest of your money

Keeping enough cash for up to 12 months of expenses is a solid starting point, but that does not mean the rest should all go into stocks. Using a tiered bucket strategy can help your cash reserves keep pace while giving your stock investments more time to recover and grow.

Short-term cash should cover up to a year of expenses, while medium-term assets such as bonds can provide income you can access later. You can choose maturity dates from one to three years so your money is not tied up for too long. Funds earmarked for long-term goals can still remain invested in stocks, depending on your overall plan.

Although stocks are a common option, it may also be wise to add inflation hedges such as gold and other commodities, which can hold their value or rise when stocks weaken. Many experts recommend putting 5% to 10% of a portfolio into gold.