I’m a Financial Planner: Here’s How Much Cash Retirees Should Have on Hand in 2024
Written by
Jake Safane
Edited by
Sean Fisher
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Amidst factors like high interest rates boosting the return on cash sitting in a savings account, along with issues like economic uncertainty, many individuals are increasing their cash holdings. In fact, cash was the top asset class where retail investors increased holdings, according to an international study by eToro that took place in late 2023.
However, the study found that younger investors were more likely to increase their cash holdings than those ages 55+. Yet some retirees might be underestimating the amount of cash to keep on hand in 2024 and beyond.
Stu Sneen, founder and financial planner at TwoTen Planning, thinks that retirees should approach the issue of how much cash to hold as more of a math problem than one that relies on what’s happening in the current moment.
How Much Cash To Hold Onto
“I personally do not think world events should dictate cash levels. Essentially it then becomes a game of predictions on when to raise or lower cash levels. Nobody can reliably predict the future, whether it be markets, economics, politics, or inflation. Adjusting cash levels based on world events would only lead to greater levels of stress and anxiety, which could be harmful,” he said.
Instead, it’s important to consider your personal situation — particularly your expenses — and build a cash buffer accordingly, according to Sneen.
“One common approach is to hold 2-3 years’ worth of expenses in cash,” he said. “A simple calculation can be run to determine the inflation-adjusted amount over that period.”
“That may be a good starting point for the initial cash allocation. If a retiree is concerned about surprise expenses soon, they may consider adding an additional buffer of cash. The whole point is to reduce the possibility of not having ample cash to cover their expenses,” he added.
Reducing Anxiety
This amount of cash is far more than a typical emergency fund — even conservative planning generally involves building an emergency fund equal to around 9-12 months’ worth of expenses, while a more common approach is 3-6 months’ worth of expenses.
“In short, the reason the retiree needs 2-3 years of expenses in cash is for anxiety management,” said Sneen. “The cash buffer prevents the client from making the big mistake — panicking and selling, which leaves little chance for recovery.”
Instead, having a big cash cushion can prevent you from selling low.
“Let’s say a typical equity/fixed breakdown for the retiree is 60%/40%, or perhaps even 50%/50%. It’s a relatively conservative allocation,” said Sneen. “If the retiree is taking a systematic withdrawal from the portfolio each year, and the portfolio drops 20-25%, they will likely hit the panic button. This happened in 2008.”
“However, if the retiree knows they have 2-3 years of expenses sitting in cash, the financial planner can point to this as the reason to stay put and let the equity/fixed portfolio recover in time. The retiree could even turn the withdrawal ‘off’ for a few years — and live off the cash — so they are not withdrawing from a depleted portfolio value. It gives the investments time to recover, and then the retiree can turn the spigot back on,” he explained.
In other words, because retirees often rely on their retirement portfolio for much of their income, they may want to be more careful about how they handle a market downturn.
“A non-retiree doesn’t have this concern because they still have income from their job. They don’t have to worry as much as the retiree as to where the money will come from to pay the bills,” said Sneen. “Once the income from work ceases, then it’s all about wisely managing withdrawals from the portfolio — excluding Social Security or pension income — to provide the highest likelihood of not outliving the nest egg.”
Final Thoughts
While Sneen doesn’t think that world events should drive cash considerations, interest rates might make a difference, such as with the current rates pushing more people toward cash.
“One other consideration for current times is that savings and money market rates are significantly higher now as compared to the last 20+ years. Higher rates on these short-term instruments are attractive to cash holders,” he said.And if you potentially want to earn a little extra return on your cash, while perhaps giving up some liquidity, you might consider putting cash in certificates of deposit (CDs).
“Some retirees may also consider taking a portion of their short-term needs and purchasing laddered CDs, which come due over a period of one to three years. This may provide an additional level of confidence and security that the money will be available when needed,” said Sneen.
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