As you transition into retirement, having the right amount of cash on hand is crucial to ensuring that your journey is one of clarity and confidence. Your financial needs may shift, but maintaining liquidity in the right places will help you navigate the challenges ahead. In retirement, cash typically serves three key purposes, all of which contribute to a stable financial future.
- Maintain an emergency fund. Even in retirement, it’s essential to keep an emergency fund. While turning 59.5 allows you to access retirement accounts without incurring a penalty, withdrawing from pre-tax accounts means paying taxes on that money. If you find yourself dipping into these accounts for unexpected expenses, you’re not only paying more in taxes, but you’re also reacting to your financial needs rather than proactively managing them. Having a dedicated emergency fund provides confidence, just like it did during your working years. You’ll feel secure knowing unforeseen costs won’t derail your careful financial planning, and you can avoid scrambling for funds in a moment of need.
- Establish a delayed spending account. Like an emergency fund, this cash is held in a high-interest money market account, but its purpose is different. This account is set aside for planned, large expenses—things like vacations, purchasing a new car, or Christmas gifts. Having a dedicated place for these known future expenses ensures you’re financially prepared for them without having to tap into your core retirement savings.
- Hold cash within your investment portfolio. If you’re relying on your portfolio to supplement Social Security or other income sources, having readily available cash helps you avoid drawing from investments during periods of market volatility. This strategy provides stability and confidence, knowing your short-term needs are protected from market fluctuations.
As you prepare for retirement, it’s important to have the right amount of cash in place for these key purposes. If you’re uncertain, consult with your CFP® to assess your cash reserves and ensure you’re set up for success in this exciting new chapter of life.
