Why Many Retirees Prefer Cash — and the Trade-Off It Brings

Keeping cash in the bank that you can access whenever you need it can feel reassuring. Unlike the S&P 500, which may fall sharply during a market correction, cash generally keeps its nominal value. But that comfort has a downside: inflation gradually erodes what that money can buy.

A $100 bill went much further in 1980 than it does now, and the same is true when comparing today’s prices with those of the 2010s. Having some readily available savings is important, but so is investing money so it has the chance to grow.

Must Read

Why retirees are drawn to cash

Many retirees are attracted to cash because it does not fluctuate in value. It can feel more predictable than putting money into stocks and wondering what the account will be worth several years later. That desire for certainty is often stronger among retirees than among younger investors, since retirees are usually withdrawing from their savings rather than building them with regular paychecks. They also have less time to recover if markets decline.

Older investors have also lived through major downturns, including the dot-com bubble and the Great Recession, which can make them more cautious. By contrast, many younger investors have not faced those same conditions. While holding some cash for expenses is a sensible part of retirement planning, that advantage turns into a drawback when too much money is kept idle.

The downside of holding excessive cash

A $100,000 balance will stay at $100,000 if you do not add to it or withdraw from it. You may also earn interest without taking much risk. Even so, the annual percentage yields on standard savings accounts usually do not keep up with inflation, especially once taxes are considered, since interest is taxed as ordinary income.

Over the next five to 10 years, that $100,000 may not purchase as much as it does now. Cash not only loses purchasing power over time, but money left on the sidelines may also miss out on the long-term gains that investments can provide.

Retirees still need some exposure to investments over the long haul because retirement can last for decades. Some people stop working at 60 and live well into their 90s. Investing remains one of the few ways to outpace inflation and preserve financial flexibility later in life.

Finding the right mix of safety and growth

Protecting wealth matters more in retirement, but focusing only on safety can leave your money shrinking in real terms because of inflation. One common way to balance those goals is the bucket strategy, which separates money into short-term spending needs, medium-term conservative investments and long-term growth investments.

How much should go into each bucket depends on your goals, comfort with risk and time horizon. A general framework is to keep enough cash to cover one to two years of living expenses. The next bucket can be placed in conservative assets such as bonds for years three through 10 of retirement. The final bucket can be invested in stocks so the money has room to grow beyond that period.