Here’s the short answer: You probably need more than you think.
As pre-retirees visit with us over the handful of working years they have left, the size of their “emergency fund” or savings account comes up a lot.
This is because we keep tabs on how much cash our clients have on hand. How much cash clients have in savings accounts or checking helps guide our “next steps” recommendations.
Many clients are used to rule-of-thumb recommendations, including the $1,000 starter emergency fund evangelized by Dave Ramsey, or the “3 to 6 months of expenses” amount advisers often suggest for employed individuals.
Retirement is different.
Your cash stash needs to reflect your income situation.
Same spending, different cash needs
Let’s review a hypothetical example of two couples with the same spending, but very different cash requirements.
Our first couple, Amy and Jack, are 67 and 65, spending $10,000 a month. They get $4,500 a month from Social Security and need their portfolio to make up the $5,500 monthly difference.
In this case, we would recommend at least two years of portfolio withdrawals, or $132,000. An analysis of other goals, such as travel or home repairs, or details like their insurance deductibles, will help us determine whether to recommend higher levels of cash.
Without cash on hand, Amy and Jack may be forced to sell investments at depressed prices to generate spending money during a market decline.
Our second couple, Julie and Jim, also spend $10,000 a month, but each has a government pension from working in the county retirement system. Julie and Jim also paid into Social Security, so they have $4,500 in pension payments to go along with their $4,500 Social Security checks.
That’s a $9,000 a month income floor! Julie and Jim’s basic budget requires just $1,000 in portfolio withdrawals.
While two years of withdrawals for this couple would be $24,000, we would probably recommend keeping at least $50,000 in cash. Financial planning, after all, requires gut checks in addition to hard numbers, and $24,000 sounds too low both to most clients and to us.
From a portfolio management standpoint, both of these households would also have lower-volatility investments in their portfolio, ready to refill their cash accounts when the time comes. The amounts would be proportionate here as well, with the first couple requiring a higher amount in low-volatility investments than our second couple, because they just have greater cash reserve needs due to their income situation.
It's hard, but you can do it!
When clients who plan to retire at a typical age of 65 to 67 visit with us several years out, they sometimes chuckle when we suggest how much cash they should be working toward. I’ve even had people laugh out loud and say they can’t do it.
Interestingly, though, clients’ conservative instincts often kick in during their final working years as they start thinking through their budgets and maybe even test-driving them.
That $10,000 to $15,000 emergency buffer you skated by on during your working career starts to feel awfully thin.
Building a more robust cash position is just one of several possible “top priorities” in your pre-retirement years. If it needs to be, I’d like to encourage you. This is a new phase, and possibly a new challenge. We’ve seen some clients with modest incomes increase their stash from $2,500 to $10,000, and others from $10,000 to $50,000. Couples who’ve always needed $50,000 in the bank when their heads hit the pillow each night start pushing for $100,000, then $200,000.
Thousands of people are retiring every day, but your situation is still unique. If you’d like to discuss retirement preparedness or other financial matters with a CERTIFIED FINANCIAL PLANNERTM professional, please book a call today!
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