While working, it’s good to have three to six months of expenses on hand to cover a big unexpected financial event like a large repair or a job loss. In retirement, cash should be looked at differently. After all, you already lost the job, right?!?
I recommend that retirees keep two years of expenses, minus their guaranteed income, in savings or a cash-like vehicle such as a brokerage account. The idea is no longer to keep replacement income on hand in case of a job loss, but to help cushion stock market volatility. You would also want this cushion in anticipation of life’s surprises. I like to see at least 50K in a savings account for retirees in addition to their portfolio reserves.
Let’s say that you need $100,000 annually to live on. You and your spouse receive $45,000 in social security benefits leaving $55,000 to be withdrawn from your own investments. Your investments total $1,500,000. Your reserves should be $110,000 (55K x 2). You would take a monthly income from your investments of $4,583 ($55,000/12). Each calendar quarter, you should look at your investments and also at the market and decide to either 1) sell and take gains to build cash back to the $110,000 or 2) keep drawing down cash because the market is lower (or perhaps falling)? This process helps you sell high, provides emotional stability in times of market volatility and allows you to outlast any market crisis without taking realized losses.
The downside to this strategy is that the cash withdrawal will slightly lower the overall return on your investments. But many investors end up selling out of fear when facing a market crisis. And unfortunately, fear-driven selling causes big realized losses that are never recovered. Having a cash program in place will ultimately protect you from you!
If you are withdrawing from an IRA, you would keep the cash management program within the IRA while also keeping 50k+ cash in your bank savings accounts. Here at Wiser, we manage this cash program for clients. Since cash pays basically you nothing, we will keep three to six months of expenses in the cash account; and the balance in a cash like ETF to help boost the yield on the client’s reserve.
You worked hard to be retired and you don’t want to spend your retirement constantly stressed out about market volatility and life’s emergencies. Create some distance between you and market anxiety so you can focus on what is most important to you.