Too Much Cash In Retirement? Why Playing It Safe Could Cost You More Than You Think
- Personal Finance
ThePostMaster- 0
- 9 minutes read
Several retirees transfer much of their savings to cash. This is because when there are bills payable, cash is easy, stable, and accessible. The possession of cash ensures that you have money immediately, but its value plummets when prices increase at a faster rate than the interest received.
This brings a practical question for people planning to retire or living in retirement: how much cash is helpful? And at what point does the cash start to hurt long-term earnings? This article examines why retirees have high cash levels, the cost, and how bonds and other assets might work better.
Why Retirees Hold More Cash
Cash is often treated as a safety buffer by retirees. Many bring into retirement the same emergency savings mindset they had during their working years, keeping a reserve to cover unexpected expenses.
Fidelity Investments suggests most people approaching or in retirement could benefit from liquid cash that covers essential needs and provides peace of mind. This is often described as six months to a year of living expenses in a liquid account.
Avoiding market volatility also plays a role. After the sharp drops in both stocks and bonds in 2022, several retirees and people about to retire became uncomfortable with the price fluctuations.
Keeping cash meant not bearing the risk of selling investments when their prices were low during retirement. This is associated with the sequence-of-returns risk that financial experts observe may impact portfolios most intensively during the first few years of withdrawal.
Holding one to two years of spending in cash or equivalents appears in multiple planning discussions as a common baseline to cover short-term expenses and avoid forced selling at unfavorable times.
The Hidden Cost of Excess Cash
The short-term savings accounts and money market have been offering relatively higher interest rates than the long-term accounts, which are offering nearly zero yields before 2022. However, these are still lower than the rate of inflation in the long term.
In the past few years, bonds have also been offering relatively higher yields than cash, especially the intermediate-term bonds, as these offer relatively higher interest rates that can help offset the impact of inflation.
There is also the opportunity cost of holding too much in cash, as the money deposited in savings accounts is not being utilized to earn money, which might be required in the future, especially in the coming decades during retirement.
In addition to this, the interest earned on the cash deposited in savings accounts is subject to taxation as ordinary income, and if the interest rate is lower, then the overall return is extremely low, which reduces the overall purchasing power of the savings in the future.
Where Bonds Fit Into the Equation
A retirement plan would normally have bonds between cash and stocks since they tend to generate more income than cash and less volatility than stocks. Intermediate term bonds are usually more interest rate sensitive than short-term ones and therefore offer a cushion against inflation, without the volatility of a stock price.
One way retirees use bonds is through a bond ladder. This plan involves holding bonds that mature with different timelines, providing a scheduled cash flow to meet spending needs without forcing sales of other assets.
It is important to know that bonds are never safe. Prices are subject to change due to changes in interest rates and the rate of reinvestment. But because bonds combine income and relative stability, they often serve better than large cash balances for intermediate spending needs.
How Much Liquidity Is Too Much?
No universal rule applies to all retirees, but a framework can help them understand when cash hoarding is a good idea. Most planners recommend maintaining sufficient cash to meet the immediate necessities, excluding non-essentials, and usually one to two years of cash needs, while using bonds and other income-producing assets for medium to longer horizons.
A simple way to think about allocations includes:
- Bucket 1: Cash for immediate spending (0–2 years)
- Bucket 2: Bonds covering intermediate expenses (3–7 years)
- Bucket 3: Stocks or other growth-oriented assets for long-term needs
These categories help separate money needed soon from assets that have investment potential for higher returns. Allocations will vary according to specific situations, including rate of spending, other guaranteed incomes, including Social Security or pensions, and individual risk aversion.
It is not the absence of risk through holding of cash that is important, but the trade-off between the near term safety and the purchasing power in the long term.
What This Means for Retirees in 2026
Retirees in 2026 will be operating in a different world than the low-yield world of the late 2010s. The better nominal returns on high-yield savings accounts and short-term instruments are improving compared to before, but inflation is still a factor that reduces purchasing power over the years.
Excessive cash allocations may feel secure, but over 10–20 years, real returns matter. Small differences between cash and income-producing assets can add up, affecting how long a portfolio can provide income. Comparing the timing of outflow requirements with the right kind of assets would assist in ensuring the liquidity as well as growth potential.
Liquidity in retirement is about matching resources with spending timing. Cash is useful in meeting short-term requirements; however, holding much more than is necessary may decrease the capacity to earn income and keep up with rising prices.
Bottom line
Cash plays a significant part in retirement planning as a source of easily accessible money and rest. However, holding excess cash over a long period could decrease its long-term purchasing power.
Allocating between cash, bonds and growth assets is important for balancing accessibility with the possibilities of covering inflation in retirement. Regular review of allocations, particularly where there have been major changes in interest rates or cost-of-living, assists in keeping abreast with anticipated future expenditure.
Images Credit: Author
Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.
