Retirees need to keep so much money, advisers say

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Pascal Brozé | ONOKY | Getty Images

As retirees enter the New Year, high inflation and strong market returns can leave many people wondering how much cash they need to have on hand.

Annual inflation rose 6.8% in November, increasing at the fastest rate since November 1982, according to the US Department of Labor.

The average interest rate on savings is always 0.06%, making the cash piles less attractive, but the rate hikes planned by the Federal Reserve could improve options in the coming months.

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Yet the right level of liquidity depends on the circumstances of each retiree, according to financial experts.

“There is no silver bullet or magic bullet,” said certified financial planner Brad Lineberger, president of Seaside Wealth Management in Carlsbad, California.

Advisors may suggest keeping three to six months of living expenses in cash during a client’s working years.

However, the number may increase as they transition into retirement, said Marisa Bradbury, CFP and wealth advisor at Sigma Investment Counselors in Lake Mary, Florida.

Many advisers recommend that retirees keep a larger cash reserve to deal with an economic downturn. A retiree with too little cash may need to dip into their wallet and sell assets to cover living expenses.

The worst thing you want to do is sell your wonderful investments when they are at rock bottom prices.

Brad Lineberger

President of Seaside Wealth Management

“The worst thing you want to do is sell your wonderful investments when they are at rock bottom prices,” Lineberger said.

Bradbury suggests retirees keep 12 to 24 months of living expenses in cash. However, the amount may depend on the monthly costs and other sources of income.

For example, if their monthly expenses are $ 4,000, they receive $ 2,000 from a pension and $ 1,000 from Social Security, they may consider keeping $ 12,000 to $ 24,000 in cash.

Portfolio allocations

Another factor is the percentage of stocks and bonds in a portfolio.

Research shows how long some allocations may need to recover after market corrections, said Larry Heller, Melville, New York-based CFP and president of Heller Wealth Management.

For example, a portfolio made up of 50% stocks and 50% bonds can take 39 months to recover in a worst-case scenario, according to research from FinaMetrica. This is why Heller may suggest holding 24 months to 36 months in cash.

Yet some retirees refuse to hold large sums of money in today’s low interest rate environment.

“It’s much easier to leave that money in the bank when it’s earning 3%, 4%, or 5%,” Bradbury said. However, advisers can remind their clients that growth is not the goal of short-term reserves.

“Think of money as the security blanket that allows you to invest in the most incredible wealth building machine – the stocks of wonderful companies,” Lineberger said.

Limit cash flow

While some advisers suggest retirees have 12-36 months of cash, others may recommend less cash.

“The way we think about cash is that it’s a drag on long-term performance,” said Rob Greenman, CFP and director of growth at Vista Capital Partners in Portland, Oregon.

“Absent having tomorrow’s newspaper, there really is no reason to be sitting on money and waiting for a better opportunity,” he said.

Retirees who need quick access to funds can consider other sources, such as a home equity line of credit, health savings account, pledged line of credit and more, said Greenman.

Of course, the ideal amount of cash depends on the particular circumstances of each retiree. Those who are struggling to make up their minds may benefit from weighing the consequences of more or less liquidity with a financial advisor.

“Retirement is not a cookie cutter, and it is not just a one stop shop,” Lineberger said. “It’s very personalized, and our emotions can really affect our decision making.”

“This is where an advisor can play a vital role for clients,” added Greenman.


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