Retirees need to keep this much cash, advisors say
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Retirementists might be asking themselves how much money they really need, given the high rate of inflation and positive market returns.
Annual inflation grew by 6.8% in NovemberAccording to U.S. Department of Labor, it has been rising at an unprecedented pace since November 1982.
The savings average interest rate is still 0.06%This makes piles of cash seem less attractive, but it does not mean that they aren’t worth the effort. Federal Reserve’s planned rate hikesThe options may increase in the future.
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Financial experts say that each individual’s financial situation will determine the amount of cash they should have.
Brad Lineberger (certified financial planner), president of Seaside Wealth Management, Carlsbad, California, stated that there is no magic bullet.
Advisors might suggest that clients keep three to six months’ worth of living expenses in cash throughout their working years.
Marisa Bradbury is a CFP and Wealth Advisor at Sigma Investment Counselors, Lake Mary, Florida.
Retirees should have more cash to deal with an economic downturn, according to many advisors. If a retiree has too much cash, they may need to sell their assets or dip into their portfolio to pay for living expenses.
It is not a good idea to sell valuable investments at bargain prices.
Brad Lineberger
President of Seaside Wealth Management
Lineberger stated that selling your investment portfolio at bargain-basement price is the worst decision.
Bradbury recommends that retirees save cash for 12 to 24 months of their living expenses. This amount will vary depending on the monthly cost and income.
They might be tempted to keep $12,000 to $24,000 of cash if they have $4,000 monthly expenses.
Portfolio allocations
The percentage of stocks in a portfolio is also important.
Larry Heller (a Melville-based CFP, and President of Heller Wealth Management) said that research shows the time it may take for certain allocations to recover from stock market corrections.
According to FinaMetrica research, it could take up to 39 months for a portfolio that contains 50% stocks and 50% bond to recover from a catastrophic event. Heller might recommend that you keep cash in reserve for 24 to 36 months.
Despite this, retirees aren’t opposed to holding cash at large in the current low-interest rate environment.
Bradbury stated that it is easier to keep the cash in the bank if it is earning 3%, 4%, or even 5%. Advisors might remind clients, however, that short-term reserve growth is not the goal.
Lineberger stated, “Look at cash as a security blanket that allows you to invest the most amazing wealth-creating machine which is stocks in wonderful companies.”
Limiting cash
Some advisors advise that retirementes keep 12-18 months worth of cash. However, other advisers may advocate less liquidity.
Rob Greenman CFP, chief growth officer of Vista Capital Partners Portland, Oregon, stated that cash “is a drag” on long-term performance.
He stated, “Absent having tomorrow’s newspapers, there’s no reason for you to sit on cash and wait for a better opportunity.”
Greenman stated that retired people who require quick access to money may look into other options, including a home equity loan, a savings account, or a pledged assets line of credit.
Each retiree is unique and will determine the amount of cash they need. A financial advisor can help those who are struggling to make a decision weigh the implications of having more cash or less.
Lineberger said, “Retirement doesn’t have to look the same and it isn’t just one-stop shopping.” It’s personal and can be influenced by our emotions.
Greenman stated, “This area is where advisors play a crucial role for clients.”
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