2022 EP0718 How Much Cash Should I Have on Hand in Retirement

We want you to plan for success. Welcome to Planning Matters Radio. Hi, Peter.

Good to see you. A really important question today. How much cash should I have on hand in retirement? An emergency fund is always important.

We know that. Considering how volatile the markets have been recently, we're going to outline precisely how much cash you should have on hand in retirement. So what's the general rule of thumb as we're trying to figure out what our emergency fund should be? Well, having cash is important. The old saying is cash is king, but cash is convenience and cash can eliminate emergencies. If I've got an issue that comes up and I can solve it by stroking a check or just paying it off immediately, then it's not really an emergency.

It's an inconvenience. And I think that we need enough cash on hand to minimize the potential for emergencies or having to go in debt or liquidating our investment portfolio to cover unexpected surprises that come up, especially as we've seen this down market. I think people are realizing more and more that having some cash is appropriate. But the general rule of thumb, Aaron, is three to six months worth of living expenses.

And I'm in a number of different retirement discussion groups. And I hear a lot of people saying, well, I'm keeping two years in cash to weather those economic downturns. And my question always is, well, what if that downturn doesn't happen? Aren't you losing out on the potential for growth during that time? Keeping two years worth of expenses in cash is a lot of excess liquidity where you could be doing more with your money during that period where you're waiting. Right. And we're going to talk about some of those other options in a second here. But I just want to underscore the obvious here. Having cash on hand is important so that we are not dipping into our retirement savings to cover living expenses.

That's right. Now, especially during down markets, right, because that is the premise of having that retirement savings is that we get to live off of it eventually. So it's not that we don't want to dip into it at all, but we don't want to dip into it when values are down. And there is probably a whole follow up discussion to be had, Aaron, about sequence of returns, risk and dollar cost ravaging. I mean, most people are familiar with dollar cost averaging, where we're making regular contributions over time and the downtimes in the market are actually our best time to invest new dollars. Those are the dollars that are going to grow the most over time. But there's dollar cost averaging.

There's riding the market. If we've got an existing lump sum and just buy and hold and let it ride. And then there is reverse dollar cost averaging or dollar cost ravaging. And it's an equal and opposite reaction like physics and Newton's laws. Right.

If we are doing something that is the opposite behavior, we're going to get the opposite result. And if we are pulling money out when markets are down, that can really be catastrophic to our long term financial stability and certainly our projections for where we should be into the future. So should we have more cash on hand, though, in moments like these when the markets are really volatile? So let's back up and sort of define cash when you say cash. I think that we need to have three to six months worth of living expenses really at any and all times.

And depending on how confident you are in your sources and streams of income, it could be anywhere reasonably within that range. But cash is literally like storage, cold storage of your bills that you can go and get at any point in time. And you're not earning a whole heck of a lot of interest on cash, even in this rising interest rate environment. So let's say you had six months worth of living expenses sitting in cash. Well, why would you need to get more than six months worth of regular living expenses at any one point in time? And really, really think about that.

Right. What could potentially come up that would cause you to, within a 24 to 48 hour period of time, have the absolute necessity to get more than about six months worth of living expenses? Probably can't think of any fantastically awful example of when you would need to get that much money all at once. And other positions can be liquidated within a relative short period of time. Maybe it's 72 hours to a week, but it also allows you the opportunity to think about where you want to liquidate those funds from. So if you've got your growth bucket over here and that's down 20 or 25 percent, probably don't want to liquidate from that.

But there's plenty of middle ground there. Maybe it's a six month CD that by the end of the six months worth of living expenses that you have in cash, now we can get to the money that we've got in the six month CD and maybe that's earning a little bit more interest. Maybe it's in these fantastic I bonds that are available, paying 9.62 percent right now.

Maybe it's in one year structured notes or buffered notes. These things that are liquid within about a year's period of time that don't have the same type of volatility that your growth bucket might have. Maybe it's a fixed product like a fixed annuity or fixed indexed annuity that is one to three to five years out in maturity. There are middle ground type of places that you can store money that will give you a little bit more growth and upside potential than simply sitting in cash.

So it's just it's kind of splitting hairs in the vernacular. But I want a clear definition of what sitting in cash is and what cash means versus some of the other alternatives where we can reasonably have expectations for growth on our money and some accessibility to it. So are those products then the answer to the next question, which is a lot of people's concern for having a lot of cash on hand right now because inflation is so high. The CPI, as you know, recently hit nine point one percent.

So our money is just losing buying power the longer that it just stays stuffed in our mattress. Yeah. Yeah.

I mean, think about it. If you have a million dollars. Right. And it's sitting in cash or earning one percent and then inflation is nine percent. You have just lost eighty thousand dollars in purchasing power. That seems like an awful large cost for keeping money liquid and accessible.

Right. Money can do four things. It can be safe. It can provide an income.

It can grow or it can be liquid. But it's a terrible multitasker and you have to choose which ones are important to you with each and every dollar. And so, yes, Aaron, that's why having excess cash can be detrimental. You're losing money safely. You have lazy money and excess liquidity.

Therefore, you are reducing the likelihood that your total overall financial picture is keeping up with the cost of living and inflation, especially when it is, I guess, to some surprisingly high. According to the government, they're trying to get it under control. They were expecting it to come down. I think if you're out there in the real world spending money, this was no surprise that inflation continues to be a little higher than what they're advertising. No, I know. I think you called it, Peter, back in April when it dipped for a second there and you're like, no, it's going to go back up.

I said, oh, Peter. There's a lot of suppliers that are out there renegotiating the terms of their contracts, of their shipments, of their storage right now. And those contracts are being renegotiated at these now higher, much higher prices compared to two to five years ago when those prices were set initially. And so, yeah, I don't unfortunately see that going anywhere down or anytime soon. Right.

I have one more question. What if our savings exceed $250,000 because, as you know, the FDIC only insures up to $250,000? Yeah, well, that is also per individual, per institution. And so we've already had our discussion about how much cash somebody reasonably needs and should appropriately be keeping. But if for some reason you're planning on seizing on the opportunity to buy a million dollar piece of real estate sometime in the next six to 12 months and you feel like you just absolutely need that much money in cash, you can split it across various institutions because that is a limit per individual, per institution. So if I am keeping more than that for whatever reason, then if you split it across different institutions, you can still stay under those levels.

But once again, I don't think that that is a very wise utilization and deployment of capital because that million dollars is going to be worth significantly less as far as purchasing power in a year or two. Right. Right. All right. Well, this was some good, tough love talk, Peter.

I really like it. If somebody has some questions about what we've covered today, what's the best way to reach you? Yeah, get in touch. We can look over the total financial picture. We can talk about those things that money can do and try to figure out which dollars are doing what and how much is appropriate for each one so that you're really optimizing kind of your overall plan. You've got money that's accessible for emergencies. You've got midterm money for income. You've got growth money long term.

That's part of the optimized retirement plan. And to get that put together, pick up the phone. Give Rishan planning a call.

Nine one nine three zero zero five eight eight six nine one nine three zero zero five eight eight six. You can email me with any questions you have about this or any of our other conversations or any questions that are on your mind. Peter at Rishan planning dot com. Peter at Rishan planning dot com. Visit us online if you'd like to get the conversation started or learn a little bit more about us there. It looks like rich on planning dot com.

It's my last name. Rishan Rishan planning dot com. Rich on planning dot com. And it's always a pleasure. Yeah, this is great. Thank you.

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