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Why Is it Important to Have Cash Available?
Though you may have plenty of money invested, its still important to keep enough cash on hand.
Cash is the oxygen in your financial life, said Weerden.
You might take it for granted and not truly appreciate it until youre underwater.
Cash creates flexibility and options.
Having a cash cushion can help your investments better weather a down market.
Jane has five years worth of spending in cash to ride out market volatility.
By March 2009, Johns portfolio is down to $629,000,roughly a 37% loss.
Janes portfolio is worth $693,000, roughly a 30% loss.
By October 2010, the 60/40 portfolio is no longer underwater and has recovered from the financial crisis.
But, since John made continued withdrawals, his October 31, 2010 balance is $875,782.
Janes balance is $1,014,766.
Janes cash cushion resulted in a portfolio balance that is $138,984 greater than Johns portfolio balance.
How Much Cash Should Retirees Have on Hand?
In this scenario, a retiree might be more comfortable owning more stocks and having less cash set aside.
Is There a Formula to Calculate a Cash Cushion?
Kates uses a formula to create a general guideline for emergency funds at the start of retirement.
How Does a Cash Cushion Vary Throughout Retirement?
Kates explained that you may want to adjust your cash cushion as you progress through retirement.
When you first retire, you wont completely know how your expenses might change.
After a few years, you might find that you need more or less cash.
This is where the variability of your expenses and your tolerance for risk come into play, said Kates.
Should You Adjust Your Cash Cushion Based on Investments?
Weerden highlighted the importance of proper asset allocation.
If you dont need to take additional risk, why take it?
Weerden encourages retirees to consider havingenough inflation-fighting assetsto sustain their portfolio while also minimizing downside risk.
Kates encouraged retirees to work with a trusted advisor, like a professional financial planner.
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