One of the most common questions I hear from retirees is: “How much cash should I keep available once I’m retired?”
It’s an important question. While market returns, portfolio value, and net worth all matter, the real concern for most retirees boils down to this: Can I maintain my lifestyle with the resources I have? At Van Leeuwen & Company, we have developed a simple, practical rule for answering that question.
Our One-Year “Cash Bucket” Rule
We suggest retirees keep approximately one year’s worth of retirement cash needs readily available. Here’s how we get there:
- First, account for predictable income. We start by adding up any sources that are more predictable:
- Social Security payments
- RA distributions (including required minimum distributions)
- Pensions
- Any other steady income streams
- Then, determine the shortfall. Once we subtract your predictable income from your annual living expenses, we know the “gap” that needs to be filled.
- Set that cash aside. That gap amount becomes your “cash bucket.” This money is invested at no fee in short-term instruments like Treasury bills. The goal is to keep it safeguarded while generating a little extra income.
Why This Works
The cash bucket acts as a financial cushion, especially during market downturns. What we want to avoid ultimately is being forced to sell positions at lower prices to cover short-term cash needs. If anything, we’d rather have excess cash available to buy when the stock market is “on sale”, so to speak.
For example, earlier this year, tariffs triggered a sharp market decline. Retirees with a full cash bucket didn’t have to sell investments at a loss just to cover living expenses. They had financial margin, knowing their spending needs for the next year were already covered.
This approach helps you ride out volatility without sacrificing your long-term investment strategy.
It’s Not Just About Numbers
Retirement planning is about pursuing portfolio growth and also about making sure your
resources align with your life.
Yes, portfolio value matters, but our priority is preserving your ability to maintain your lifestyle through all market conditions. That’s why the cash bucket is such an important part of our planning process.
The Bottom Line
Keeping a year’s worth of retirement cash needs on hand is a simple but powerful way to help:
- Avoid selling investments at the wrong time
- Aid in building confidence during market turbulence
- Stay focused on long-term goals instead of short-term swings
If you’re retired or nearing retirement, it’s worth taking a fresh look at your income sources, expenses, and shortfall. Building your own cash bucket can make all the difference in preserving both your financial health and your clarity.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC. Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. Stock investing includes risks, including fluctuating prices and loss of principal. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.