Expert Debunks Year-of-Cash Myth: Why Most Retirees Need Balanced Reserves, Not Extremes

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Misplaced faith in financial misinformation can sink a retirement as quickly as overspending or failing to plan or budget.

The so-called year-of-cash myth is one of the most common and, according to one expert, most dangerous myths for retirees to incorporate into their strategies. 

The Danger of Early Portfolio Losses Is Real, But Cash Isn’t King

The idea is that retirees need 12 months’ worth of expenses in cash to protect against the sequence-of-returns risk, which is the threat of a substantial market decline or drop in portfolio value at the worst possible time — the start of retirement. 

Charles Schwab gives the example of two retirees with identical $1 million portfolios who withdraw $50,000 in the first year of retirement and then adjust their withdrawals by 2% for inflation in each subsequent year. One portfolio takes a 15% hit in the first two years of retirement, and the other suffers the same 15% decline in years 10 and 11. 

The first investor runs out of money after 18 years, while the second still has $400,000. 

The year-of-cash concept holds that retirees must have enough cash to avoid touching their investments for a full 12 months to mitigate the sequence-of-returns risk. 

Here’s why it might be a myth — or at least an extreme example of emotional investing. 

Inflation Can Rob You as Quickly as a Market Downturn

Kiplinger warns that large cash savings, and the FDIC insurance that safeguards it, offer peace of mind — but that comfort can come at a steep cost. 

Bryan Kuderna, CFP, founder of Kuderna Financial Team and author of “Simply Wealthy,” agreed. 

“I often tell clients that cash is a necessary evil,” he said. “It is critical as an emergency or opportunity fund to satisfy near-term goals without having to incur unnecessary debts. However, the return on cash is poor, especially in a falling interest rate environment like we’re now experiencing, usually falling short of inflation.”  

The most recent CPI data shows the current inflation rate is 2.4%, but St. Louis Fed data shows the current average savings account yield is just 0.39%. If a retiree keeps $50,000 in annual expenses in an account earning 0.39%, the current inflation rate would result in the loss of nearly $1,000 in purchasing or investing power after just one year.

Reduce Cash Savings by Half and Implement a Bucket Strategy

Instead, Kuderna counsels his clients to keep six months’ worth of cash in savings.

“Funds beyond this may be better off invested for greater growth potential,” he said. 

He suggests retirees use short-, mid- and long-term “buckets” for the various stages of retirement. 

“Generally speaking, the shorter the duration, the less risky the portfolio and the longer the more aggressive,” said Kuderna.

According to Kiplinger, most retirees should withdraw:

• From taxable accounts first
• From tax-deferred accounts, second
• From after-tax Roth accounts last

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