How Much Cash Should Retirees Have? As Little as Possible

How Much Cash Should Retirees Have? As Little as Possible

Moving from a regular paycheck to living off of your nest egg is not an easy transition. At least it hasn’t been for me. One of the many decisions retirees must make is how much cash should they have in the bank.

For some it’s a question of budgeting. They keep enough to pay the bills over the next several months, but that’s it. For others cash acts as a buffer in the even the stock market drops 10%, 20% or more. For those who see cash as a buffer, several more questions need to be considered:

--How much cash should you keep in the bank?
--How do you decide when to replenish your spending account?
--Do you factor the amount of cash you have into your overall asset allocation?

In this video, we'll explore these questions. We’ll look at some research papers that address these questions. We’ll also talk about how you can get the psychological benefits of holding lots of cash without actually holding lots of cash.

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ABOUT ME

While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I'm the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.

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DISCLAIMER: I am not a financial adviser. These videos are for educational purposes only. Investing of any kind involves risk. Your investment and other financial decisions are solely your responsibility. It is imperative that you conduct your own research and seek professional advice as necessary. I am merely sharing my opinions.

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[denniskirschbaum]

This is definitely food for thought. Thanks for breaking this down.

[twilde]

It's about how one sleeps at night. I don't sleep well under most circumstances. I also have a few more years before retirement. I plan to have about 3-5 years in a savings account as a "sleeping aid". At 68-70 - which I will be -- I'm not too concerned with having too much money in a savings account that doesn't yield much interest. I'm concerned about rest and relaxation.

[BenRook]

Thanks for showing what you do as well as what others may do.

[rayanderson]

Excellent content. Thanks for the insights. We're looking at a similar plan starting at 55 in a few years. You got a new subscriber!

[mitch-lifestyle]

For people who retired early, cash reserves is directly proportional to how much they disliked the job they retired from. If a person really really hated their job, they won’t sleep very well unless they have multiple years+ living expenses set aside in cash 💰 !

[michaelgreskamp]

Rob - new suscriber (69 yr old/retired 60 yr) and enjoyed your video. You nailed it at the end with a "3% withdrawl rate option" vs more than what I believe is a year in cash. You run more of a risk with excess cash due to higher than planned inflation as we are currently experiencing. I am fortunate that my fixed income covers my base expenses between SS and pension. I will review some of your other videos and assume you cover the what I believe is the #1 retirement plan risk - sequence of returns.

[mihandsplitters]

I just found you and started watching your videos. Thank you! I was wondering if you have done a video about attempting to move as much money from pre-tax accounts to Roths before RMD’s kick in to try to avoid them. Thanks again looking forward to going back through your library of helpful information.

[ultramegasuper]

I appreciate this video, it’s making me question some dogma thrown out by radio financial experts for years.

[Harry_]

Just found your channel, Rob - good presentation/arguments. Subscribed.👍🏼

[Rugrats]

When I retire at 61 or 62 Im putting my money into Vanguard Wellington fund, grabbing the dividends and average return in retirement. Plenty of cash on hand and keep a 60/40
Asset allocation. Most importantly is I am completely debt free which is key

[mbaker]

Just have the "cash" buffer (in something safe, like t-bills, bonds, CDs, whatever) outside of the funds used to calculate your 4%. It won't drag down the performance, and yet it's there for your peace of mind. You could start with 1-2 years, and even add to it over time (in years you don't spend a full 4%, or by using some extra income from whatever source: YouTube channel, mowing neighbors' yards, selling veggies from a garden, etc.). Best of both worlds.

[NuclearAlex]

Why do you not take into account taxes? The cash "buffer" is already after-tax money that is ready to be spent. Both rebalancing and selling stocks or bonds for living expenses is a taxable event.

[oldcountryman]

Don’t risk what you have and need for what you don’t need. If you’re 70 and you lose half your life savings in a market crash, there is no do-over. Looking at market averages over a hundred years is a foolish way to plan your retirement strategy. You don’t have a hundred years. I know people that retired in 1999 and had all their savings in tech stocks. They thought they had a brilliant strategy. They went back to work in 2001 and worked into their late 70s.

[rwa]

Thanks for your channel, Rob. You explain things very well. I'd like to offer up a counterargument to your idea that it's best to keep a minimal amount of cash in retirement. I have about 3 years worth of expenses in cash, and my expenses are fairly high since I still have school-age kids at home. While this cash is basically losing value due to inflation, it's enabled me to invest my other assets more aggressively than I would have otherwise. There's no way to know what might have happened if I had kept a smaller amount of cash. But I'm pretty sure the overall value of my portfolio is greater now because I have this cash "buffer." In some ways I think a large buffer is the flip-side of what you mentioned at the end of your video: that in a worst case scenario you would reduce your expenditures to deal with a market downturn. What I'm suggesting, and what I don't think academic studies take into consideration, is that having a financial and psychological buffer makes it possible to do better with your other investments. A pile of cash goes a long way toward making the downs of the stock market, etc., easier to stomach. And I think a strong stomach is 90% of the key to investing success.

[Jfhelwig]

3 years cash in these weird times. Every other penny invested. The investments are split between conservative value funds and aggressive growth.
I'm under 59.5 and can't touch IRA quite yet. I can always grab some Roth contribution out at any time.
Should there be a drop in the market, I can buy a lot towards the bottom if I don't need it all as a buffer.

[feelnrite]

This way of thinking is working for now. How will it do if crap hits the fan? It will not be about return then but hanging on to what you have.

[SuperYova]

Great video, as always. I find it helpful to simply think of cash simply as "insurance" and not focus on it not generating anything beyond peace of mind.

[zekeboz]

Nice piece Rob. So in a pre 59 1/2 scenario where the person has lets say 5-7+ years prior to "retirement" dollars available to cover expenses how would you apply the cash buffer portion given the breakdown of tax vs. tax sheltered dollars? Structure your taxable and tax sheltered with the same ratios, ex. 70/30 so you don't end up to cash heavy?

[auricgoldfinger]

I’ve been catching up on your older videos. Good presentations and common sense. We are a bit of mirror-images (background & investing), I’m just an older version

[ranger]

Thanks for doing this video. It seems perfectly reasonable. I have two retirement/pensions, plus social security for myself and my wife. That covers all of our expenses. I have about a year's worth of cash in a saving and checking account for the inevitable unexpected expenses. I watch my 401K and skim some off when it reaches a certain threshold and never go below a certain base threshold. We use that for projects, new cars, and mutually agreed fun things. I'm not particularly interested in growing wealth, but having safe assets I can tap into if I need them. I don't disagree with your thinking.