How much cash do you need in retirement?

Are you nearing or in retirement? If so, then you need to be aware of the importance of maintaining a cash stash at all times for a variety of reasons. And for those who are younger, you need to maintain a strong cash position as well. So why is cash king you may be asking? Well, it is the lifeblood of you being able to provide for your needs in retirement or the case of an emergency. In this post, we will examine how to go about maintaining a strong cash position at all times.

How much cash do I need?

For those who have not retired yet, I recommend an emergency cash stash of at a minimum of three months of cash, but preferably six months is better. Some people will even recommend having a year’s worth of expenses in your emergency cash stash. But some things need to be considered when saving up for your emergency fund.

If you are like me and work for the government, your job and paycheck are relatively safe and can be considered reliable. We can get away with having three or six months’ worth of expenses in cash. If you are like so many your job and paycheck are far from being considered reliable, and in your case, six months’ plus worth of expenses in your emergency cash stash would make more sense. For someone creating an emergency cash position, look at what your critical expenses are and how stable your job and paycheck are when deciding how many months’ worth of expenses you need to save.

If you are retired and living on Social Security and your retirement accounts, I recommend you maintain at least one but preferably two years’ worth of expenses in a safe and liquid cash account. These are funds that are not meant to generate a significant return but rather provide a level of security for your cash expenses.  If you are like many, you may even consider maintaining three years of cash in your liquid accounts to be on the conservative side of things.

How to maintain your cash stash?

If you are working and need to tap into your emergency cash stash that is fine provided, it truly is an emergency. General car maintenance is not an emergency, such as new tires. That expense you should be budgeting for and have an account with enough cash to cover routine maintenance type issues. But what if you need a new engine? That would be considered an emergency and a justified expense from your emergency fund. But as soon as you withdrawal, the funds start to replenish them and do so until you get back to the starting balance. Pay the fund back from your salary as you did when you created the fund in the first place.

For those who are retired, your cash will be replenished from your retirement investments. Here it will take some planning and insight on your part or that of a trusted fee-only Registered Financial Consultant. If you are maintaining at least two years’ worth of expenses, that means you will be selling stocks and bonds to generate your cash. The key here is to sell when the markets are high or when you are in the process of rebalancing your portfolio. What you do not want to do is sell when the markets are low, and you may be selling at a loss.

If the markets are up, it is the perfect time not to be greedy and sell some of your appreciated assets to generate the cash you will need in the next year or two. But if you wait until the year you need the money you may be selling at a loss of say 10%, and you need 5% to live, you just created a 15% loss for yourself by not planning appropriately. Do not be afraid to sell when the markets are on the way up and never worry that if you wait another week, you might get more. As COVID-19 showed us recently, that extra week can mean a significant drop in the value of your investments in rapid fashion.

I know many of you handle your finances, and that is a good thing. But it is a wise idea to have a fee-only Registered Financial Consultant that you trust to assist you in some of these issues such as where is the best place to maintain my cash stash? A professional can assist you in finding the best place to park your cash and earn a small return on it. They can also help take the emotion out of selling assets when the time is right to replenish a depleted cash stash.

Is your cash stash adequate for your needs? Do you feel that you are prepared to maintain that cash position or how you will replenish it? If you need help with these or any other financial questions, reach out to me directly or by leaving a comment at the bottom of the page. And to join my email newsletter and obtain a free PDF book sign up on the form below.

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