Why Retirees Prefer Cash — and the Trade-Offs That Come With It

Keeping cash in the bank that can be accessed at any moment can feel reassuring. Unlike the S&P 500, which may fall sharply during a market correction, cash does not lose its nominal value. But that comfort has a downside: inflation steadily erodes the money’s real purchasing power.

A $100 bill bought much more in 1980 than it does now, and the same comparison holds between today’s prices and those from the 2010s. Having liquid savings is important, but so is investing so your money has a chance to grow.

Why retirees often choose cash

Many retirees are drawn to cash because it carries no volatility. It is easier to predict than stocks, where account balances can swing widely over time. That predictability matters more to many retirees than to younger investors, since retirees are usually drawing money from their savings rather than building it with a paycheck. They also have less time for portfolios to recover after a downturn.

Older investors are often more familiar with major market declines, including the dot-com bust and the Great Recession. Younger investors may not have experienced those events in the same way, which can make them more willing to take risks. While holding enough cash to cover expenses is a smart part of retirement planning, keeping too much of it can create problems.

The downsides of keeping too much in cash

A $100,000 cash balance will still be $100,000 if you neither add to it nor withdraw from it. You may even earn some interest without taking on market risk. However, savings account annual percentage yields, or APYs, usually do not keep up with inflation, especially once taxes are taken into account because interest is taxed as ordinary income.

The $100,000 you set aside today may buy less in five to 10 years than it does now. Cash not only loses purchasing power over time, but money kept on the sidelines also misses the chance to benefit from long-term investment growth.

Retirees still need to invest for the long haul because retirement can last for decades. Some people leave the workforce at 60 and live into their 90s. Investing remains one of the few ways to outpace inflation and preserve financial flexibility later in retirement.

Finding a balance between security and growth

Protecting wealth becomes more important after retirement, but focusing only on defense allows inflation to slowly weaken your buying power. A bucket strategy can help strike a balance by dividing money into short-term spending, medium-term conservative investments and long-term growth assets.

How much belongs in each bucket depends on your goals, risk tolerance and time horizon, but a general approach can be useful. One guideline is to keep enough cash on hand to cover one to two years of living expenses. The second bucket can go into conservative investments, such as bonds, for years three through 10 of retirement. The final bucket can be placed in stocks so your money has room to grow beyond that period.