How much cash should you keep on hand once you retire? Here’s how to figure out the right number for your needs

How much cash retirees should keep on hand

During your working years, it’s important to have cash savings for unplanned expenses. These could run the gamut from home repairs to medical emergencies to a period of unemployment.

The general guidance is to have enough money in an emergency fund to cover three to six months of essential bills. That amount of savings may, for example, make it so you don’t have to resort to credit card debt while you’re looking for work after losing a job.

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But what if you’re retired and are therefore permanently unemployed on purpose? In that case, the guidelines for keeping cash on hand change quite a bit. Here’s what you need to know.

Why do retirees need cash?

In the context of retirement, cash can take several forms. It could be a combination of money in a checking or savings account, and certificates of deposit (CDs). Regardless of the account type, when we refer to cash, we mean money that can’t lose value based on market conditions.

Here are some reasons you’ll need cash as a retiree.

1. You're living off of savings now

It’s true that the typical retiree can collect Social Security. But with the average retiree receiving just $1,918 per month, you may need income beyond your monthly benefit to cover your expenses.

Once you’ve spent your Social Security check, you need the ability to cover a car repair or pay the handyman who fixes your leaky roof. Even if you have a large investment portfolio, you don’t want to have to sell stocks to cover an unplanned expense.

2. You might face unplanned expenses

For workers, an emergency fund doesn’t just safeguard against a job loss. It can also be the ticket to covering surprise expenses without going into debt. And being retired doesn’t make you immune from surprises.

Many retirees face home repairs as their properties age alonside them. Your monthly Social Security check may not be enough to replace a water heater. What if you encounter a medical emergency? Even with Medicare, you might be responsible for a significant expense.

In 2024, Medicare Part A enrollees pay a minimum of $1,632 each time they're admitted to a hospital, and your costs could extend beyond that for a lengthy stay. Medigap insurance could offer some protection in that scenario, but it's still a good idea to have cash available for your out-of-pocket health care costs.

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3. You want to protect yourself from investment losses

You may have the majority of your retirement savings in a portfolio of investments that include stocks, bonds, and mutual funds. The upside of holding these investments in retirement is that they can continue to generate growth, giving you access to more money. The downside is that their value can change based on market conditions.

Keeping cash on hand protects you from having to sell off investments at a loss during periods of market declines. That, in turn, helps preserve your nest egg and could lead to it lasting longer.

How much cash should you aim for in retirement?

Just as there are different opinions when it comes to building an emergency fund for your working years, the guidance varies over how much cash you might need in retirement.

Generally speaking, financial experts suggest keeping enough cash on hand to cover one to two years of expenses. The additional cash resources could prevent you from having to pull money from your investments during an extended market slump.

By answering the following questions, you can estimate how much cash you should have on hand.

What does my investment mix look like?

If you have a riskier portfolio more concentrated in stocks, then you may want more cash on hand to balance that out. If your portfolio is largely bonds, you might get away with less cash, since bonds are less volatile than stocks and can provide predictable interest payments that you can use as income.

How fixed are my expenses?

If your bills are fairly predictable, you may be able to get away with having less cash. But if you tend to travel a lot, you might want to have extra cash available to cover variable expenses. Similarly, if you rent a home, the bulk of your monthly housing expenses are fixed. If you’re a homeowner, you never know what repairs might come your way.

How's my health?

If your health is excellent, you may be able to cover your health care expenses with relative ease. If you have multiple health issues, it's a good idea to stockpile extra cash in case your bills start to mount at a time when it's not advantageous to tap your investments.

How much peace of mind do I need?

Some people want to know that they can cover their bills for a couple of years or longer. There's nothing wrong with catering to your emotional needs by erring on the side of having more cash.

Remember that it’s never a bad idea to speak with a qualified financial adviser. Based on your expenses, needs, and investment portfolio, they may help you strike the ideal balance so you have enough cash on hand without going overboard.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.