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How Much Cash Should I Hold in Retirement? · Retirement Answers

• 0:02
  Jacob: This bucketing strategy will give you a framework to give you a little bit of emotional relief and know that you've got enough money on the sidelines, that way you can sleep at night knowing, hey, I'm good to go, that bucket is for the long term, these buckets are for the short term, I can sleep tonight knowing that I'm taken care of because I have a plan. Welcome to Retirement Answers, a podcast built to answer your most pressing retirement questions. If you're someone who's either thinking about retirement or already in retirement, well, you're in the right place. Hey there, my name is Jacob Duke, and each week I'll be walking through different tips and strategies to help you succeed in retirement. So let's go ahead and get started with today's show.
• 0:45
  Hey friends, and welcome back to another episode of Retirement Answers. My name is Jacob Duke. I am your host as always. This week on the show, I wanted to talk about cash and specifically how much cash you should have or think about having throughout retirement. One of the big questions that many people have as they approach this thing called retirement is they have questions around how aggressive they should be invested or what their portfolio allocation should be for their retirement accounts.
• 1:12
  Whenever we think about how much income you need on an annual basis, where that income is gonna come from, whether it's pulling from, you know, your IRAs, your Roth IRAs, your brokerage account, but then also your different income sources, perhaps around social security or maybe you have a pension. So what we've gotta do is we gotta establish an investment allocation to meet your specific needs, and there's plenty of different rules of thumb out there around, you know, what your investment allocation should be in retirement. The most common one that many people fall back on is the 60% stock and 40% bond portfolio. But one of the questions that a lot of people have is how much cash should I have on hand? Where should that be?
• 1:46
  Should I be at the bank? Can that be in my IRA? How much should I have? What's too conservative? What's too aggressive?
• 1:51
  And so I wanted to talk through that today. I wanted to hopefully clear some things up for you, maybe give you a framework to build out your cash reserves based on and kind of give you some ideas on how to do that. So before we jump into that, I wanted to kind of revisit or rephrase some different things around investing and then also cash. And so why do we invest in the first place? Well, the primary reason is so that your hard earned money, what you've earned, what you've saved, you want that to grow.
• 2:17
  You want that to appreciate in value over time. And one of the big reasons for that is inflation or cost of living or basically everything just costs more as time goes on. And so what you've got to do is you wanna put your money to work for you and that's what you've done throughout your career or maybe you're still doing is you invest in your four zero one ks, your brokerage accounts, your Roth IRAs, you're investing that money in different investment options, maybe real estate, maybe just normal traditional stocks that you're buying really small percentage of a company, you're an owner of that in hopes that that company or group of companies, will grow over time in value. So the purpose of investing your money is so that it will grow, but what that does is that gives you longevity. Right?
• 2:58
  So, by growing your assets over time, you create stability in the future, meaning your money's not sitting on the sidelines today, which would provide stability right now today, but in the future, you're giving up stability because you're not growing your assets over that investment time period. So that's the primary reason that we invest, is so that our money is worth more in the future than it is worth today. And I'm not gonna get into investing or kind of how that works or even what you should be investing in. It's really just a general principle of investing is we wanna make sure that our money is growing over time. Now, the flip side of this, why would we have cash or what's the purpose of having cash on hand?
• 3:31
  Well, the most obvious reason might be to simply just have an emergency fund, right? You wanna have some cash available if the AC unit breaks, if you need to buy a new refrigerator or the car breaks down, you wanna get that fixed at the shop, whatever it might be for you, you need to have some cash available on hand to meet those random things that kinda pop up, we call that an emergency fund. Also, we might wanna have some different cash options available for some short term goals that are coming up here in the near future. Maybe you know that you need to buy a new car in two years or one year, and you need to have some cash set aside to go purchase that, or you're going on a family vacation here in six months and you're trying to build up some cash reserves to help cover that. Or maybe you're paying for your child's education or college or something like that.
• 4:10
  So you need to have cash available to help pay for those things. And so really the big thing there is that you've got a short term goal, meaning in the immediate future, than three years from now, I'm gonna need to spend this money on something that I know I would need to spend it on. So those are some different reasons that you'd have cash on hand. And really the big thing here is time. So, the time horizon in which you would need the money to purchase a new car or have an emergency fund ready for an unexpected expense, that time horizon dictates whether or not you need to have cash.
• 4:39
  If you know that you're not buying a new car for another ten years, that means you don't need that cash today. Therefore, you could probably invest that money, make more money on your savings, and then go buy a car with some money that has grown or appreciated over time. So, just know that really what we're looking at here is we decide this investment versus cash kind of decision, how aggressive or how conservative we should be, it's really a time question. What's your time horizon for the need of the money that we're talking about? So that's really what I want to get into today.
• 5:08
  As we think about retirees and just kind of retirement in general, there's a lot of rules of thumb out there. There's a lot of different things that kind of point us in certain directions. And what I often encourage people to do is kind of use the rules of thumb to your advantage, take note of them, don't ignore them completely because there is some truth in them, but we need to take them and then apply them to our situation. We need to actually mold them and shape them into our specific needs. So what I mean by this is, for an example, you know, the general retirement portfolio might be 60% stock, 40% bond, as I alluded to earlier.
• 5:40
  So that's a sixtyforty portfolio. The idea here is to have some growth, but not too much growth because we kinda need a stability of income throughout our retirement. So this is a good starting place, I would say, but at the same time, I would say that it's not the right situation for every person. And here's an example. Let's say that we've got Jack and Jill, they retired last year.
• 6:00
  They've got social security already started. They've got a pension and they've got a disability income coming in as well. And that particular disability income is tax free. So what this all adds up to be, this fixed income on a monthly basis that they've got coming in adds up to around $10,000 a month. But the key here is they only spend 9.
• 6:18
  They don't have any real estate debt. They own everything outright. They just spend $9,000 on their different various insurances perhaps, also just fund spending and living and enjoying life as they want to in retirement. So their monthly needs in general are met based on these fixed income sources that I just described to you, but here's the other catch. They've got around $1,200,000 saved for retirement.
• 6:38
  So the question is, is Jacob, should they invest that $1,200,000 a 60% stock and a 40% bond portfolio? And the answer is as well, maybe, but here's maybe a thought for you, is because they have all of their monthly fixed income needs met, meaning their normal month after month needs are being met based on those fixed incomes, they don't actually need to have any quote conservative assets on the sidelines because they have all their needs met. Meaning they can continue to grow their assets over time at a faster rate by investing in quote a more aggressive approach with that $1,200,000 because they don't need any of that money today. Now, another flip side of that is Jacob, since they don't need to have that money in the future, they actually don't need to invest it very aggressive at all because they, again, like you said, they don't need it. So there's an argument here on both sides of that, but maybe a thought here for them would be this, you know, since they don't need any of that $1,200,000 here today, perhaps they can invest that in a more aggressive approach than a $60.40 portfolio.
• 7:36
  Maybe they can take an eighty twenty style approach and they still have plenty of money left over that could be held in cash to meet those emergency type things that come up, or maybe they do wanna go on a vacation or they have a car they're gonna purchase here in the near future. We can plan those things out specifically, and then the rest of that money could be invested in a higher growth style investment approach. Therefore, they can have more money in the future. They can leave a larger legacy to their kids or grandkids or church or charity or whatever's important to them. They can actually use the opportunity to invest in a more aggressive way to benefit someone else in the future beyond just them.
• 8:10
  So that's just one example of how the standard rules of thumb of a retirement investing or the portfolio for retirees, it might be a good place to start, but we've got to go deeper than that. We've got to figure out why should you be investing the way that you are. And this all hinges again on the amount of time between right now and when you need the funds. So how do I like to do this? What I like to do is build out a bucketed strategy.
• 8:35
  And if you listen to my podcast at all, maybe you've heard this in the past, but what I like to do is build out a three bucket investment approach. And the way this is constructed is we have a cash bucket, we've got a bond bucket or a fixed income bucket, and then also we've got a stock bucket. So we've got three different types of investments within your overall portfolio. And so what I like to do is this, I like to say that we wanna have at least, so this is at a minimum, two years of living expense needs in cash. So what does that look like?
• 9:04
  Let's say we need to spend $50,000 per year out of our portfolio to meet our normal living expense needs. What we would do there is we take 50,000, multiply it by two, and that's $100,000 that we would want to have in cash. Now, I mean by cash, that can be partially at your checking account or your bank, but also probably more likely a lot of that is going to be in your money market fund, whether in your brokerage account or at a bank or something like that. So you want that growing, at least getting some interest, the highest interest rate possible for cash. But again, the key there is it's not in bonds or fixed income and it's not in stock.
• 9:35
  So that's the first bucket. At a minimum, we wanna have two years of living expenses in cash. Now the second bucket is your bond or your fixed income bucket. Now this consists of things that have some sort of fixed time horizon in terms of a maturity. So it could be a CD, it could be a treasury, it could be corporate bonds, but regardless is most likely gonna have a higher interest rate than your money market or your cash funds, which means there is slightly more risk, but the time horizon is slightly longer as well.
• 10:01
  So maybe you have a CD that's a twelve month CD or a treasury that's a two year treasury. And so what you've got there is you're gonna have whatever interest rates you purchased on those fixed income investments, you're gonna have that for a longer period of time compared to cash that goes up and down every seven days or so in terms of the interest rate that you would get on that. So what you've got here is you've got a little bit longer time horizon, therefore it means there's a slightly higher risk profile because there are interest rate shifts that do affect those fixed income holdings. Now, how much money do you wanna have in this fixed income bucket? The thought there is I wanna have at least three years of living expenses in fixed income or your bond bucket.
• 10:39
  So going back to our $50,000 a year expense example that we started with, that means you wanna have $150,000 in that bond or fixed income bucket, and that's at a minimum in order to meet your bucketing kind of goals that we're establishing here. So what this does is if you look at that, you've got bucket number one is cash, bucket number two is fixed income, and the first bucket is two years, the second bucket is three years, so that equals five years total of your living expenses. For the next five years, they are covered in that cash bucket and that fixed income bucket combined. And all the while, you're earning some interest or something like that on those different holdings. So at a minimum, if the stock market is down for five years straight, you can use those first two buckets to live on.
• 11:21
  Meaning you don't have to sell stocks at a loss, which is one of the biggest risks for retirees. Now the third bucket here is that stock bucket. And so whatever is not included in bucket number one being the cash bucket and bucket number two, the fixed income bucket, that is allowed to be in the stock bucket. So everything else kind of overflows into that. So what that does is you kind of broken out your money into three different buckets for three different purposes.
• 11:46
  The first one is immediate cash flow if I need it. It's kind of like your emergency fund. I wanna have two years living expenses in cash so I can touch it for two years and grab it and use that money if I had to. The second bucket is three years at a minimum of your living expenses in the bond bucket. And finally, third one is I want that money to be invested in stock so that it grows.
• 12:06
  And now that we've broken out your money in different purposes for different reasons, whenever that stock bucket goes down in value for a short period of time, which it often does as we've seen, and you know in the back of your mind that you've got these other two buckets to meet your specific income needs if you had to pull on those assets during that particular period of time. So how this works in practice, I'm not going to dig into, you know, which bucket you pull from when because it kind of changes over time. If things are going really well, you might want to pull from the stock bucket. Things are going poorly in terms of stock market returns, you might want to pull from the cash or the bond bucket. So that's maybe a little bit more complicated, but in general, want to structure it this way so that you know that your short term needs that you could need something for today or six months from now or a year from now, they're covered by that first bucket and that second bucket, But then also your long term needs of beating inflation and having money when you're 85, 90, 95 to cover health expense costs or maybe long term care stays, whatever it might be.
• 13:01
  That third bucket, the stock bucket, is meant to have long term growth so that you don't run out of money too soon. So it's kinda like this balancing act. We've gotta have money in the short term, midterm, and then also the long term. And so the big concern that I see often for retirees is they think once they reach retirement age and they actually stop working, they think that their investing stops too, right? They made it.
• 13:22
  They finally reached the end zone, the goal line. They finally reached their point in which they no longer work, they go enjoy life and invest in a more conservative way. And so, what this does is it actually presents a longevity risk, meaning the longer that you live, the risk of running out becomes greater and greater. And so, what happens there is most people end up getting more conservative than they otherwise need to be or can be as they get started in retirement because they, in their minds, are thinking the investing stops because my time horizon is now zero. I reach retirement, I'm not investing anymore.
• 13:55
  But I would like to flip that on its head and say, let's say you retire at 60, you live to 95, that's thirty five years. That's a long time that you're gonna need money for. And so you have to invest over your new time horizon. So most people wanna invest until they reach retirement. That's, the retirement is kind of the end of their time horizon, but really we've gotta focus on the time horizon being to the end of your life.
• 14:15
  And so that means that we need to invest perhaps in a more aggressive manner than you otherwise thought. So if we go back to that standard sixtyforty portfolio or a fiftyfifty portfolio, that might end up being too conservative depending on your specific spending needs. So I feel like this bucketing strategy is a better way to kind of tailor and customize your investment portfolio to your specific needs. So hopefully this gives you some ideas around how to structure your investment portfolio as you enter retirement based on your specific spending or income needs that you have. And really what this will do is this will help balance out the emotional side of retirement, right?
• 14:48
  That's a big piece to all this. It's not just about making a ton of money based on your investments. Yes, we need to make some money in our investments, which I just described earlier, but we've also got to manage the emotional part of this, right? What happens if we have another o eight type event come up and you know, the stock market's down 40% plus. How are you how is that gonna sit with you?
• 15:06
  It's probably not gonna be very fun. So are we prepared for that? Are we prepared in the short term to meet your spending needs to keep living the life as you desire to live, doesn't have to change your standard of living at all? Right, are we covered on that end, but also are we covered in the long term by not having too much cash on hand? Are we covered to make sure that we're growing our investments, our assets over time, that so we don't run out of money too fast because we were too conservative, meaning we outlived our money.
• 15:29
  So it's kind of like this balancing act and I think over time things are gonna shift and change based on the environment and the current market cycles we find ourselves in. So that's why being proactive and having a plan again is just so crucial to knowing what you're gonna do and when you're gonna do it and how you're gonna structure your portfolio overall. And so the final thing I'll kind of leave you with is, is more cash does not mean safer. Again, whenever we talk about investing, you have to grow your money over time in order to beat inflation and keep up with the cost of living that will continue to rise. You've got to invest your money as painfully as it might be, but hopefully this bucketing strategy will give you a framework to give you a little bit of emotional relief and know that you've got enough money on the sidelines that's not in the stock market that isn't fluctuating up and down all the time.
• 16:12
  That way you can sleep at night knowing, hey, I'm good to go, that bucket is for the long term, these buckets are for the short term, and I can sleep tonight knowing that I'm taken care of because I have a plan. Hopefully this helps you with that. If you've got questions around this, feel free to shoot me an email, it should be listed down below. And if you're someone who's trying to figure out how to build your retirement plan or maybe looking for help with that, feel free to schedule an intro call with me completely free. Happy to have a conversation with you and see if there's anything I can do to help you on your retirement journey.
• 16:37
  So with that, I hope you have a wonderful week and we will talk to you again next week. Hey, it's Jacob again, and I wanted to extend a quick offer to you. If you have a question and you would like to have it answered here on the show, please email me at jacobretirementanswers dot net. And I'd love to answer that question for you right here on the show. Also, wanted to remind you that nothing discussed in today's episode is meant to be financial, legal or tax advice.
• 17:03
  Retirement Answers is for educational purposes only. Thanks for tuning into this week's episode. I look forward to talking with you again next week.