Rule 1 of How Much Money You Should Save for Retirement
Cash is an important asset for retirees as it provides security for when you most likely need to start tapping into your savings, and you can earn interest on it through a high-yield savings account and other cash equivalents.
But if you keep too much cash, you risk falling behind inflation and missing out on potentially higher returns in the stock market. That’s why many financial advisors recommend keeping cash for one to two years in retirement, along with some money in bonds, certificates of deposit (CDs) and other low-risk investments.
Why too much money is dangerous
Your money usually doesn’t earn high interest in a regular savings account, and it usually doesn’t earn anything in a checking account. A high-yield savings account can help, but the actual return after accounting for inflation and taxes is much lower than the advertised rate. That’s why it’s important to keep your money working for you.
Although retirees are likely not looking for many new investment opportunities, they should still keep enough cash to meet their needs. This database can help you prepare for emergencies, and allow you to not worry about sharp market fluctuations as the performance of the stock market does not affect your ability to pay for living expenses. It’s even easier to stay invested if you receive Social Security, dividends and other income streams that make the need to sell assets less likely.
How much money should you save?
Many financial advisors recommend that retirees save at least enough money to cover a year of essential expenses, but that amount will look different for each person. Some retirees have enough money to cover up to three years of expenses in liquid accounts. If you are risk averse or want to travel a lot in retirement, you may want to save more. If you have a pension or other forms of income, you may not need to save as much.
The experts at T. Rowe Price recommends holding enough cash to cover one to two years of living expenses beyond Social Security and a predictable retirement income in addition to what you save to cover daily necessities like gas and groceries.
What can you do with all your money
Having enough cash to cover up to 12 months of living expenses is a good start, but that doesn’t mean you should invest all of your savings in the stock market. A tiered bucket approach can ensure your savings grow at a healthy pace while giving your stock portfolio more time to compound.
Short-term cash includes funds that can cover expenses for up to one year, but there are medium-term assets such as bonds that provide cash flow that you can turn to. You can choose maturity dates ranging from one to three years, so you’re never locked out of those funds for too long. Money for long-term goals can still be invested in stocks, depending on your strategy.
While stocks are a popular choice, it may also make sense to invest in inflation hedges such as gold and other assets that may hold or gain value when stocks decline. Many experts suggest allocating 5% to 10% of your portfolio to gold.
