In the face of high inflation fears and the lowest interest rates, retirees can struggle with how much money they need in their golden years.
The consumer price index, a key measure of inflation, was up 5.4% yoy in July, and average savings rates are still 0.06%, making the cash reserve less attractive.
While some retirees like easy access to their funds, others worry about their crumbling purchasing power. However, it can be difficult for retirees to know how much cash they will need, say financial experts.
“There is no silver bullet or a magic answer,” said certified financial planner Brad Lineberger, president of Seaside Wealth Management in Carlsbad, California.
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Consultants may suggest keeping three to six months of living expenses in cash during a client’s working years.
However, the number could move up on the transition into retirement, said Marisa Bradbury, CFP and investment advisor with Sigma Investment Counselors in Lake Mary, Florida.
Many advisors recommend retirees hold a larger liquidity buffer to cover an economic downturn. A cash retiree may need to dig into their portfolio and sell assets to cover their living expenses.
The worst thing you want to do is sell your wonderful investments at bargain prices.
President of Seaside Wealth Management
“The worst thing you want to do is sell your wonderful investments at bargain prices,” Lineberger said.
Bradbury suggests retirees keep their living expenses in cash for 12 to 24 months. However, the amount may depend on the monthly costs and other sources of income.
For example, if their monthly expenses are $ 4,000, they are receiving $ 2,000 from a pension and $ 1,000 from Social Security, they may consider keeping $ 12,000 to $ 24,000 in cash.
Another factor is the proportion of stocks and bonds in a portfolio.
Research shows how long certain allocations may have to recover after stock market corrections, said Larry Heller, a CFP based in Melville, New York and president of Heller Wealth Management.
For example, according to research by FinaMetrica, a portfolio with 50% stocks and 50% bonds can, in the worst case, take 39 months to recover. So Heller might suggest holding cash for 24 to 36 months.
Still, in today’s low interest rate environment, some retirees are reluctant to hold large amounts of cash.
“It’s a lot easier to keep that money in the bank when it’s making 3% or 4 or 5%,” Bradbury said. However, advisors can remind their clients that growth is not the purpose of short-term reserves.
“Think of cash as the security blanket that enables you to invest in the most incredible wealth creation machine that stocks of wonderful companies are,” Lineberger said.
When should cash be limited?
While some advisors suggest retirees hold cash for 12 to 36 months, others may recommend less liquidity.
“We look at cash in terms of slowing long-term performance,” said Rob Greenman, CFP and chief growth officer at Vista Capital Partners in Portland, Oregon.
“Without tomorrow’s newspaper, there’s really no need to sit on the cash and wait for a better opportunity,” he said.
Retirees who need quick access to funds can consider other sources, such as: B. A home equity line of credit, a health savings account, a pledged line of credit, and more, Greenman said.
The ideal amount of cash naturally depends on the individual situation of each retiree. Those who cannot make up their minds can benefit from weighing the consequences of more or less cash with a financial advisor.
“Retirement is not a cookie cutter and not just a one-stop shop,” Lineberger said. “It’s very personal and our emotions can really influence our decision-making.”
“This is where a consultant can play a critical role for clients,” added Greenman.