How much cash should I keep on hand once I retire?

Ralph
00:00:00

Are you approaching retirement and watching your savings grow in investments, but are you secretly worried about whether you'll have enough cash available when those unexpected expenses hit? If you're wondering how much cash to keep on hand in retirement, you're not alone. Today, I'm going to share a powerful story about a client who thought they were making all the right moves, until life threw them a curve ball they weren't prepared for.

So that's what we're going to talk about on today's show. Just how much cash. And I'm not talking about cash that you keep in the mattress. I'm talking about how much cash and cash equivalents do you have ready for those emergency expenses.

Podcast Announcer
00:00:37

Welcome to the Ask Ralph podcast where listening to an experienced financial professional with over 30 years of experience can help you make sense of confusing questions, current headlines and industry trends about taxes, small business, financial decision making, investment strategies, and even the art of proper budgeting. Ask Ralph makes complex simple by sharing his real world knowledge from a Christian perspective with all things financial.

Now here's your Host, Ralph Estep Jr.

Ralph
00:01:07

Thank you for joining me today. I hope you're going to get on board this journey to financial freedom and spiritual growth. I've got a great show for you today. Now, if you missed yesterday's show, we discussed Jesus' unconditional love and sacrifice for all people. We were talking about communion or what they call the Lord's supper and I really tied that into our overall financial and spiritual health. So if you missed that, I'm going to encourage you to go back and listen. I really think it was a transformative discussion and the best part of it was it reminds us of God's boundless grace.

Now today's question is another one from Tennessee. This one comes from a lady named Margaret, and this is what she wrote. She said, "Dear Ralph, I've been blessed with a good career and have managed to build up a decent nest egg for retirement. I'm going to be retiring in two years. My financial advisor has me fully invested in a mix of stocks and bonds, but I'm losing sleep wondering if I should have more cash available. Last month, my friend Linda had to sell investments at a loss to pay for an emergency home repair. I don't want to end up in that situation. Some experts say to keep a year's worth of expenses in cash, others suggest three years. I'm confused and worried. What's the right amount of cash to keep on hand in retirement?" Well Margaret, let me thank you for your question. And it is a great question. It's one that a lot of people commonly neglect, and I hate to say this, but a lot of financial brokers also neglect this.

So today's show is going to give you some important insight on how to prepare for that type of situation and how much everybody, especially those who are retired should have in cash and cash equivalents. Now listen, this show thrives on your questions. But today, I want to ask you some questions. I've built a listener survey and I would love to have your honest opinion about the show and listen, it's only going to take about five minutes and here's the best part. Everyone who completes the survey will be automatically entered into a $250 Amazon gift card drawing.

That's right. Just go to askralphpodcast.com/survey and listen. You're doing this for a purpose. Your answers are going to shape the show and how we do the show moving forward. Now in order to enter the contest, I need your survey completed by December the 10th at midnight, because on December the 11th, some lucky person who does the survey is going to be awarded that $250 gift card and listen. I'm doing this for a purpose. I want to hear from you. Share your honest opinion about the show. Again, that's at askralphpodcast.com/survey. One more time. That's askralphpodcast.com/survey.

Well, let's ground ourselves in scriptures today, Margaret. I found a perfect verse that kind of addresses your situation. And it comes to us from the book of Ecclesiastes it's chapter 11 verse 2, and it tells us this. "Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land." And think about that for a second. This wisdom, it reminds us to diversify our resources and be prepared for uncertainties. And that's the whole point of today's show.

Now I'm going to tell you a story about a client that I met and I'll call him, Tom. I met him about three years ago. And it completely changed my approach to retirement planning for every, just did. Now picture Tom. Here's this guy, he's a successful engineer. This guy did everything by the book. If you know engineers, they have a manual and they do it by the manual. So Tom lived his life according to these principles, he maxed out his 401k at work. He diversified his investments. He was actively working with his broker and Tom was proud of his money. He had his money invested working for him. He would say to me, he comes sometimes Ralph, I got it all working for me. And he looked great on paper.

He had saved for 35 years and that was disciplined savings. He made wise investments. I remember him saying to me one time he said, Ralph, I don't believe in letting money sit idle. And he would smile confidently during our meetings. And he would show me his aggressive investment strategy, and this dude knew what he was doing. He was getting strong returns. And like many professionals and people who understand the market, he had a clear understanding of that term compound interest and time in the market. He understood that the more he put in, the more he invested, the longer he kept them in and these high performing what he called aggressive investments would lead to gains. Sounds like a great story, right?

You might be saying, Ralph, what is the story here? Well, here's the problem. Life has a way of testing even the best laid plans. So picture this. Six months into retirement. Him and his wife are enjoying a quiet Sunday afternoon, they had gotten home from church. Had a nice, what we call in the south a supper. And all of a sudden his wife came to him and she said, Tom, I feel, I feel pain in my chest. And so of course, you know, they reacted right away.

They called the ambulance. The ambulance took them to the emergency room. And it seemed like a routine. Well, maybe it was some, maybe it was this, but all of a sudden when the doctors got involved, his wife ended up meeting a complex cardiac procedure. I don't remember what it was called, but it was complex. And it was one of those things that his insurance didn't even cover a hundred percent of.

Maybe there was some elective miss to this. So it was only partially covered. And you would think that's bad enough, but the story gets worse. So while he's dealing with this medical crisis, all of a sudden their 15 year old HVAC system failed. Like I said, they're from Tennessee. So right in the middle of this heat wave, it's like 95 degrees out, their HVAC system is only 15 years old, which I guess is getting to its useful life.

I've got a few clients that do that type of work. Completely died. So you probably know what's coming next. I suddenly found themselves needing and listen to this. They needed $45,000 in cash to pay for the new HVAC system, to cover this medical coverage that they needed to pay for, for part of this thing. And he said to me, Ralph, he said, listen, looking back at it now, I thought at first, I had no problem. I've got over a million dollars in investments. And he did. That was correct. But here's where his perfect plan showed its cracks. And here's the thing. That's the whole point of today's show. So when they needed that $45,000 in cash, they didn't have it.

They had it tied up in the market. And at this particular time, it was this time in the market where there was this called a periodic downturn. Sometimes these happen. Just the ebbs and flows of the market. And he talked to his broker and his broker said, listen Tom, if I sell these things, you're going to have a big loss. Because Tom had an emergency fund, like I said, this was a guy that did all the right things. As I recall, he told me he had about six months’ worth of emergency funds, but that was nowhere near $45,000. And think about it. Tom had planned, but he just hadn't planned for this particular scenario. And I'll never forget the stress in Tom's voice when he called me. He said, Ralph, I feel like I failed Sandra. Now Sandra was his wife. He said to me, we have all this money, but I can't access it without taking a huge hit. And I felt so bad for him. I could tell his pride was shaken. I could hear the worry in his voice, and I could sense the frustration. He was truly frustrated.

He thought to himself, I did all the right things. For 35 years, I diligently put into the retirement plan. I didn't let my money sit on the sideline idle. I'm working this aggressive investment strategy. But now I've got this situation, and I don't have the tools to fix it. So you're probably wondering, Ralph, what did you do?

Well, unfortunately, we got in touch with each other. Tom said, what do I do, Ralph? So here's what we were able to do. We work with this broker. We arranged for some loans that he could use against his investments. And I got to be honest with you. They weren't favorable terms. And they cost him thousands in interest and fees, but it was a better option.

It was our only option at the time. Because the only other option we had was to sell some investments, to take an even bigger, bigger loss. And that wasn't what Tom, or I thought were the best things to do.

And it really taught Tom, and it taught me, like I said, at the beginning of this, it taught me a valuable lesson about retirement. And see, here's the thing. You've got to listen to this. Retirement planning isn't just about maximizing returns. That's a good portion of it. Listen, I had a client in the other day. It's an older lady.

She's a widower. And we were going over her tax planning for the end of 2024 and the beginning of 2025. And we had a real frank discussion. And I said to her, I said, you've got enough money in your investments that you don't really need to worry about maximizing those returns anymore. I think now, you're in a position where you could put things in very low risk things to just maintain that income. And think about it.

It's sort of an oxymoron. It's a hard discussion. Because you work so hard to maximize those returns. Hey, the broker wants to maximize those returns as well. And that's what Tom was doing. And just like my client the other day, I had to say to her, hey, when is enough enough? When do we start looking at this maintenance strategy instead of that maximization strategy?

So that's one of the valuable lessons I learned. And the other side of this it's about ensuring you have the right resources available at the right time. See, that's the key to this. Tom had well over a million dollars in investments. My other client got great investments. But what happens if there's a downturn in the market?

What if you need that money because something happened. Your HVAC goes out. Your wife or your husband or somebody needs that emergency medical procedure. Who knows? There's a whole list of things that just happened. I just found out a couple of days ago, my wife and I got to replace the whole electric panel in our house. It's not a cheap fix, but guess what? You got to have electric.

And so here's the thing. I'm going to tell you about the best side of it then I'm going to tell you about how you can avoid getting in this situation. So Tom and Sandra, I'm happy to report they're doing well. Sandra got past that medical situation. She tells me she's feeling better than ever.

And the other thing they did was they restructured their portfolio and now they have what they call a, now I'm going to use this term a robust cash position. And recently, Tom and I talked, he said, Ralph, I sleep better at night. And I said, well, why is that? He says, I know we have enough cash to handle life surprises without touching our investments. And see that's the key for Tom.

He had done all the right things, and you could be doing all the right things. But if you don't have that allocation set up or that way to do that position, to have that cash position, you're going to struggle. So you might be asking, what does this situation really teach us? And I think there are some key takeaways. And like I said a few minutes ago, proper cash planning isn't just about numbers. Having that amount of cash is about peace of mind. It's about being prepared because listen, life has unexpected challenges. There's one constant in life and that is change. And as I think about it, as I get older, I see this all too clearly.

I see things that I just assumed, well, I'll do this, this and this, and that'll work out perfectly and that, but you get the idea. But challenges happen all of a sudden. They're unexpected. So I dug in a little deeper and I said, well, let me look at some statistics. So here I'll throw a couple of statistics out at you that kind of address the situation.

Now in 2023, Vanguard did a study. And they found retirees who maintain and listen to me very clearly. Retirees who maintain 12 to 24 months of living expenses in cash. So basically what I'm saying is they've got 12 to 24 months’ worth of their investments that are sitting in cash or cash equivalents is simply pick up the phone, talk to your broker and you have the money. They report a higher satisfaction with their retirement planning.

And listen to what I'm saying. I'm not saying they're getting the best returns because being truthful, parking money and cash and cash equivalents generally will not give you the best returns. But what did this survey found? It found that they reported higher satisfaction with their retirement planning.

Why? Because they've got peace of mind. They know if that scenario happens, that unexpected thing happens, they'll be able to meet that obligation. Now here's another survey. This one was from the Federal Reserve Survey of Consumer Finances. And it shows this, it shows that successful retirees typically keep about 20% of their portfolio in cash and cash equivalents during the first five years of their retirement. And they gradually reduce this to 10 to 15% in later years. And I kind of like that.

That's a very good idea of the way to do it. So again, 20% of their portfolio is in cash and cash equivalents. That's during the first five years of retirement. And then they gradually reduce this as they get older to about 10 to 15%. And here's one more survey and this is a 2023 Fidelity retirement analysis revealed that retirees who maintain a cash buffer, now listen to these numbers, of 75 to 125,000 per million dollars of portfolio value were better positioned to weather market downturns without being forced to sell investments at inopportune times. So what is Ralph saying here? What is he saying is for every million dollars, a lot of us don't have a million dollars, but let's just say you did. For every million dollars you have in portfolio value, the argument here, the 2023 fidelity retirement survey says that having 75,000 to 125,000 put people in a better position to weather market downturns and not be forced to sell those investments in an inopportune time.

So basically what this is saying is having that cash hedge or those cash equivalents if something happens, you don't have to sell your holdings and end up losing money. And statistics show that the average retiree, so this is overall. Average retiree keeps between 5 and 10% of their portfolio and cash and cash equivalents. So that's sort of a big pie in the sky thing, but this is the thing you do want to have a discussion with your broker and have this discussion about keeping that 5 to 10% in the cash equivalents.

Now listen, I recommend a more nuanced approach. And so here's what I'm going to talk. And I think it depends on your specific situation. Let me start by saying that. So here's what most financial experts typically suggest. And I'm going to concur with this. Number one thing, your emergency fund. You should have between 6 and 12 months of living expenses in easily accessible cash.

That means cash, money market accounts. If you want to do short term CDs, that ladder, then that's fine, but 6 to 12 months of living expenses in easily accessible cash. Now for Tom, the guy we talked about earlier, that $45,000 probably wasn't enough or he wouldn't have been able to get to that with those 6 to 12 months. So that's what we're going to move on to number two.

And that's what we call near term expenses. So this is where you have 2 to 3 years of planned withdrawals in cash or cash equivalents. Well, what am I talking about here? What I'm saying here is look at your near-term expenses. For example, let's say that you know in three years you're going to have to repair or replace the roof on your house. Well, that's something you want to discuss with your broker and start planning those withdrawals out. Make sure that cash is going to be available.

If it's the opportunity time, you have a stock when, and you want to cash that out, and take advantage of that gain and park that in money market cause you know this is coming up. That's where you've got to have that near-term expense. 2 to 3 years of planned withdrawals. And number three, investment cash.

That's 3 to 5% of your portfolio for opportunities and rebalancing. What I mean there is you've got this money parked on the sideline. It's not tied up into something. So if something happens, like maybe there's a market segment that takes off and your broker calls you and says, hey, Ralph, I've got this great idea. I've got this great tip.

First of all, study that. But let's just say it is a good idea. Well, if you've got this 3 to 5% of your portfolio parked in cash or cash equivalents, then you can take advantage of the market. And listen, I'm going to share some action items in a few moments, but first let me ask you this. Are you losing sleep wondering how you'll afford everything on your holiday list this year? Listen, Christmas and the holidays can be stressful. I talked to a lot of people every day and you can see the stress on their face. Maybe you're tired of starting every new year, buried under a mountain of holiday debt.

You know, there are so many people, they drive themselves into debt. And they don't have to because here's the thing. Maybe you want to create a magical Christmas memory. But you don't want that financial stress that usually comes with it. Listen, I've seen it firsthand. My wife and I have done this. When our kids were younger, we would stress ourselves out.

We want to make sure that tree was robust with all these gifts. I'm going to give you a gift today. I'm going to help you. And I want you to use this gift. I want you to discover peace of mind. I wrote a what I'll call a handout or a guide it's called surviving the holidays without going broke. I think it's pretty apropos.

It's straight to the point. And in that guide, you're going to learn a proven budget system that actually works and will help you get through the holidays without going broke. I talk about some smart shopping strategies to slash your costs. I talk about ways to create magical memories without maxing out those credit cards.

Who wants that? Who wants to have this magical Christmas where everybody got what they want and then come January, February, March, April, you figure it up, you're paying that credit card every month. Maybe you're only making minimum payments and near to suck any would interest. Also in the guide, I'm going to share some tips for teaching kids gratitude in what I called is gimme more world. We've all seen those kids at the store. Gimme, gimme, gimme more and more and more. And I round out this guide with the central component of this, and that's how to keep faith and family at the center of your celebration. This is a Christian podcast. And my view, and I'm going to say something it might get a little dramatic for people, but Christ is the reason for Christmas.

It's nothing more than that. So in my guide, I talk about how to keep your faith and family center your celebration. And listen. Don't let January's credit card bill steal your holiday joy cause they will, if you let that happen. Download my free guide. It's really easy to get. You go to askralphpodcast.com/christmas, and I'm going to encourage you, go download this and make this your most meaningful and dare I say, affordable holiday season yet. Listen. Listen to me, your stress-free holiday season starts here.

Go to askralphpodcast.com/christmas. One more time. That's askralphpodcast.com/christmas. Now, before the break, I told you I would share some actionable steps. I always want to leave you with things that you can do. So here are some specific steps you can take to determine and maintain, that's the key, determine it first, and then maintain your cash reserves.

Number one thing. Calculate your monthly expenses and multiply by 12 for your emergency fund. That's how we're going to build that emergency fund. So take your monthly expenses. If you're keeping track of these, if you listen to me, you're keeping that budget. You're managing what you're doing. You're measuring it.

Look at that and multiply by 12. That's your pie in the sky emergency fund. Now listen, if you're not there, you can grow to that. But that's your goal. Then I want you to do for the next one. Number two step here is list any major planned expenses for the next 24 to 36 months. Maybe you're going on a vacation.

Maybe you've got to replace the car. Maybe, like I said, you've got some repairs or maintenance to do around the house. Then I want you to take that number and add 10% of it for unexpected costs, because as we learned, things happen. Number four. Consider keeping this money. So I'm talking about the emergency fund and the planned expenses for 24 to 36 months.

Consider keeping this money and what I call a high yield savings account or a money market account or some short-term ladder CDs. What I mean by laddering, I'm not going to talk about that on the show today, but you're going to have different values of CDs that mature maybe every 6 months or every 3 months, or even every 12 months. And then the last thing on the list, number five. You kind of do the can't just set and forget it because life changes.

So review and adjust these numbers annually. Remember. It's not just about having cash. It's about having the right amount in the right places. So this is where I'm going to give you a one more little, what I call a pro tip. Consider spreading your cash reserves across number one, a regular checking account.

I would put one to two months of monthly expenses. Keep that in your checking account. A lot of people ask me, Ralph, how much should I keep in my just regular, everyday checking account. Here's Ralph's opinion. Keep one to two months of expenses. Whatever you normally spend a month, keep one to two months of that in your checking account. Then maybe you have a high yield savings account.

A lot of people call that a money market account. There I would keep three to four months of expenses. So if you think, if you get what I'm saying, Between one and four months, you're going to have in your regular checking and your high yield savings account. And then I would put the rest of your meaning emergency fund and money market funds, and short-term CDs, and those are the things that you're planning and beyond six months. So if you know, listen, I can, we talked about a little while ago. Let's say, for example, you know, you're doing that roof repair. You've already got your estimates. You know what it's going to cost, but you're planning on doing in the spring. Put that into a short-term CD that's going to mature in enough time that you can pay for that. That's my goal today. Well, thank you for joining me today and tomorrow, I'm going to have a great show. We're going to discuss an exciting topic about the best apps to help your kids and your grandkids for that measure and work with their finances.

We do a terrible job in this country about showing our kids how to manage their money. So I'm going to do a show tomorrow all about some apps that you can use for your kids, and maybe you're working with your grandkids. And that's a show you don't want to miss because we're going to swore how technology. Yes.

You know, I'm kind of a tech nerd, but it can help the next generation develop strong financial habits. And listen, they're already on the technology. They're already using the technology and here's a little spoiler. I'm going to tell you about one of my clients whose daughter wanted that thousand-dollar iPhone.

I'm going to tell you about how we managed to make that happen. So as I close today, remember, my passion is to help you achieve financial success. That's what our goal is here today on this show and every show I do, I want to see you live out your dreams, and I want to see you grow in your faith because I know together, we can master your finances from that Christian perspective.

And I'm here to guide you every step of the way. You're not alone in this journey. As I said at the beginning, I'm here to be your journey keeper and your journey helper. So as I always end the show, stay financially savvy out there, and God bless you.

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