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However, there’s also the risk of crumbling purchasing power, with annual inflation growing by 8.5% in March, the U.S. Department of Labor reported.
Meanwhile, average savings account yields are still below 1% as of May 4, according to DepositAccounts.com, making cash less attractive.
The right amount of cash depends on each retiree’s situation, said certified financial planner Brad Lineberger, president of Seaside Wealth Management in Carlsbad, California.
“There’s not a silver bullet or a magic answer,” he said.
Advisors may suggest keeping three months to six months of living expenses in cash during a client’s working years.
However, the number may shift higher as they transition to retirement, said Marisa Bradbury, a CFP and wealth advisor at Sigma Investment Counselors in Lake Mary, Florida.
Many advisors recommend retirees keep a larger cash buffer to cover an economic downturn. A retiree with too little cash may have to dip into their portfolio and sell assets to cover living expenses.
“The worst thing you want to do is sell your wonderful investments while they are at bargain-basement prices,” said Lineberger.
Bradbury suggests retirees keep 12 months to 24 months of living expenses in cash. However, the amount may depend on monthly costs and other sources of income.
For example, if their monthly expenses are $4,000, they receive $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 a portfolio’s percentage of stocks and bonds.
Research shows how long certain allocations may need to recover after stock market corrections, said Larry Heller, a Melville, New York-based CFP and president of Heller Wealth Management.
For example, a portfolio with 50% stocks and 50% bonds may take 39 months to recover in a worst-case scenario, according to research from FinaMetrica. That’s why Heller may suggest holding 24 months to 36 months in cash.
Still, some retirees push back on holding large amounts of cash in today’s low interest rate environment.
“It’s a lot easier to leave that cash in the bank when it’s earning 3%, or 4% or 5%,” Bradbury said. However, advisors may remind their clients that growth isn’t the purpose of short-term reserves.
“Look at the cash as the security blanket that’s allowing you to invest in the most incredible wealth-creating machine, which is stocks of wonderful companies,” Lineberger said.
While some advisors suggest retirees hold 12 months to 36 months of cash, others may recommend less liquidity.
“The way we look at cash is that it’s a drag on long-term performance,” said Rob Greenman, a CFP and chief growth officer at Vista Capital Partners in Portland, Oregon.
“Absent from having tomorrow’s newspaper, there’s really no reason to be sitting on cash to be waiting for a better opportunity,” he said.
Retirees who need quick access to funds may consider other sources, such as a home equity line of credit, a health savings account, a pledged asset line of credit and more, Greenman said.
Of course, the ideal cash amount depends on each retiree’s unique situation. Those struggling to decide may benefit from weighing the consequences of more or less cash with a financial advisor.
“Retirement is not cookie-cutter, and it’s not just a one-stop shop,” said Lineberger. “It’s very personalized, and our emotions can really affect our decision-making.”
Image and article originally from www.cnbc.com. Read the original article here.