How Much Money Should Retirees Have in Cash?

Keeping enough cash on hand is essential for retirees. It covers your expenses and helps to protect you in the event of an emergency or a market downturn.

But how much should a retiree hold in cash? Let's break it down.

How much cash should retirees have?

Some experts recommend retirees keep one to two years' worth of living expenses in cash. This means money in a checking or savings account -- not invested in stocks, bonds, or similar assets.

For example, if your annual expenses are $50,000, you should have between $50,000 and $100,000 in cash.

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Why keep that much money in cash?

That's a lot of cash, and you may think that some of it should be invested for growth. But there are several good reasons for retirees to keep at least a year's worth of expenses in cash.

• It provides predictable income: Social Security and pensions likely won't cover your expenses, and the earnings on your investments may not always cut it, either.
• It gives you quick access to money in an emergency: Big expenses like medical bills or home repairs are bound to crop up, and they can cost you five figures or more. Checking and savings accounts let you move money fast when you need to.
• It helps you avoid selling investments at a loss: You don't want to be forced to sell investments for cash during a market downturn. That turns "on paper" losses into real losses. When your portfolio is down, cash lets you wait for a recovery.
• It protects against sequence-of-returns risk: This is the risk of experiencing poor investment returns early in retirement, which can totally derail your retirement plan (imagine if you'd retired just before the Great Recession, for example). In an extended bear market, the longer your cash can sustain you, the better.

Why most money should stay invested

There is such a thing as having too much money in cash. Savings accounts earn low interest, and even high-yield savings accounts don't always keep up with inflation.

Most retirees should keep their non-cash savings in a diversified mix of stocks and bonds. Stocks can provide the growth you need to make sure your savings last for decades. Bonds offer lower but more predictable returns. And if your cash won't quite last through a bear market, you can sell bonds for income instead of selling stocks at a big loss.

Exceptions: When to keep more cash

Some retirees may need more than two years' worth of cash.

Consider keeping extra cash in savings if:

• You have high medical costs.
• You're making a big purchase within a couple of years.
• Your income and/or expenses are especially unpredictable.

Where to keep cash in retirement

Your cash doesn't need to sit idle in a low-interest checking or savings account. Consider these options.

High-yield savings accounts

These earn a high APY -- currently around 4.00% APY or more -- while giving you easy access to your money.

Want to earn over nine times the national average APY? Check out our list of the best high-yield savings accounts and open a new account today.

Money market accounts

Money market accounts offer slightly higher returns than savings accounts with similar flexibility.

Short-term certificates of deposit (CDs)

You wouldn't want to put all your cash reserves in CDs. However, 3-month and 6-month CDs currently have higher rates than long-term CDs, and they don't keep your money locked up for too long.

This guideline is only a starting point

The right amount of cash depends on your lifestyle and your overall financial situation. Keeping one to two years' worth of expenses in cash, while keeping the rest invested for growth, is a good rule of thumb.

But if you're unsure what to do, then I recommend speaking with a trusted financial advisor. They'll help you make a thorough and personalized plan so you can feel confident that you're making the most of your retirement savings.