Retirement savers are often told that they’ll see a greater return on their retirement savings if they invest them — and that may be true — but it’s important to also prioritize some cash in a retirement plan.
Retirement Savings Tip of the Week: For those nearing retirement, consider holding some of your retirement savings in cash — whether in the portfolio itself or in a separate account.
Bank and money market accounts don’t generate the same type of returns as investments, although given the volatility at the moment, some investors might disagree. Investing in stocks is an important piece in the retirement income jigsaw puzzle because stocks and mutual funds can produce better returns over time, but there are cases — like now — where retirees could use really easy-to-reach cash.
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As the saying goes, “cash is king”. That’s not always true when it comes to preparing for retirement, but having cash on hand gives retirees the opportunity to avoid tapping into their portfolio during market volatility. Retirement savers could be stressed as their balances decline week-on-week as key indices and sectors across the board suffer from current volatility.
Taking money out of an investment portfolio when it’s declining can create “return-following risk,” where investors may suffer lower returns over time because they have used their investments during a downturn. People who need to downsize from their retirement portfolios should do so conservatively, but if they can avoid it altogether, give their investments time to recover when volatility subsides. Cash helps with this.
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Cash can also be built into an investment portfolio, a strategy some advisors employ for their clients, particularly later in life. Investors not yet immersed in their retirement planning, such as 401(k) or IRAs may be forced to retire a portion of their portfolio due to required minimum distributions beginning at age 72. Advisors can reserve a number of years’ worth of minimum distributions required so that in market volatility, as is currently the case, the investments themselves remain unaffected.
Investors should try the bucket approach, which splits investments by time or target segments. For example, three buckets could be divided into short-term (let’s say five to 10 years), long-term (maybe 25 years and beyond), and a medium bucket between 10 and 25 years. The short-term part would be invested conservatively, such as B. Cash investments, while the long-term portion would be invested more aggressively to generate returns over that time horizon.
There is no set amount of money that should be kept in cash – the answer depends on the individual’s personal circumstances and comfort level. However, a rule of thumb is to keep living expenses in cash for about a year or two, which would be called upon as portfolios roller-coaster the markets.
https://www.marketwatch.com/story/why-cash-is-an-important-part-of-your-retirement-plan-11653598208?rss=1&siteid=rss Why cash is an important part of your retirement savings