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Amid high inflation and rising interest rates, there are fears that the stock market will fall for a prolonged period, and some retirees may be at risk without the protection of liquidity, financial experts say.
However, there is also the risk of a collapse in purchasing power, with annual inflation growing 8.5% in March, the US Department of Labor reported.
Meanwhile, average returns for a savings account are still under 1% as of May 4, according to DepositAccounts.com, making cash less attractive.
The correct amount of cash depends on each retiree’s status, said certified financial planner Brad Lineberger, president of the Marine Wealth Department in Carlsbad, California.
“There is no magic bullet or magic answer,” he said.
Consultants may suggest keeping three to six months of living expenses in cash during the client’s years of service.
However, the number may turn higher as they transition into retirement, said Marisa Bradbury, a CFP and wealth advisor at Sigma Investment Counsellors in Lake Mary, Florida.
Many retired advisors recommend holding a larger cash buffer to cover an economic downturn. A retiree with little cash may have to dip into their wallet and sell assets to make ends meet.
“The worst thing you want to do is sell your great investments when they are on the cheap,” Lineberger said.
Bradbury suggests retirees keep living expenses 12 to 24 months in cash. However, the amount may depend on your monthly costs and other sources of income.
For example, if their monthly expenses are $4,000, they receive $2,000 in pension and $1,000 in Social Security, they might consider keeping $12,000 to $24,000 in cash.
Another factor is the portfolio ratio of stocks and bonds.
Research shows how long some provisions may need to recover after stock market corrections, Larry Heller, of Melville, New York-based CFP and president of Heller Wealth Management, said.
For example, a portfolio containing 50% stocks and 50% bonds could take 39 months to recover in a worst-case scenario, according to research from FinaMetrica. That’s why Heller might suggest holding anywhere from 24 months to 36 months in cash.
However, some retirees are resistant to holding large amounts of cash in today’s low interest rate environment.
“It is much easier to leave that money in the bank when he earns 3%, 4% or 5%,” Bradbury said. However, advisors may remind their clients that growth is not the purpose of short-term reserves.
“Look at cash as the safety cover that allows you to invest in the most amazing machine for creating wealth, the stocks of great companies,” Lineberger said.
cash cut back
While some advisors suggest that retirees hold liquidity from 12 months to 36 months, others may recommend lower liquidity.
“The way we look at cash is that it’s a drag on long-term performance,” said Rob Greenman, CFP director and chief growth officer at Vista Capital Partners in Portland, Oregon.
“In the absence of tomorrow’s newspaper, there’s really no reason to sit on the money to wait for a better opportunity,” he said.
Greenman said retirees who need quick access to funds may consider other sources, such as a home ownership line of credit, a health savings account, pledged asset line of credit and more.
Of course, the ideal amount of cash depends on the unique situation of each retiree. Those who struggle to make a decision may benefit from weighing the consequences of too much or too little cash with a financial advisor.
“Retirement is not a cookie cutter, and it’s not just a one-stop shop,” Lineberger said. “It’s very personal, and our emotions can really influence our decision making.”