How Much Cash Should You Hold in Retirement? (2026 Update)
Hey friends, and welcome back to another episode of Retirement Answers. My name is Jacob Duke. I'm your host as always. Hey, if you are either in retirement or thinking about it, kind of getting really close to that stage of life, one of the big questions on your mind is probably how much money should I have in cash or in savings or in that emergency fund as I'm in the early stages of retirement? So that's the question I want to address with you today.
Jacob:I kind wanna give you a framework to think about this in, we like to use the bucket strategy here with our clients at RiverTree. So I'm gonna explain what that strategy is. But one of the questions that comes up every time I talk about this topic is, so I understand the idea and the methodology and the formula, but how do you actually use it? How do I deploy the strategy in real life? So I wanna talk about that towards the end and how you can actually apply it.
Jacob:But why is this such a critical question? How much cash you should have in retirement? Well, in my opinion, it's one of the most critical parts of your retirement plan, because if you don't have enough liquid savings or enough money set aside on the sidelines to weather storms and help you sleep at night, then you are going to run into trouble, either you're to run out of money in the future, or you're going to have so much anxiety and worry that you're not going to enjoy your retirement. So either of those are bad places to be, those are failures, right? You don't want to run the money, but you also don't want to be worried every single day as you live the rest of your life.
Jacob:So that's what that cash is for. Now, how do we like to think about this? How do we actually build this out? What I'm gonna do here is explain the bucket strategy and kind of the the rules of thumb that we like to use so that we have a formula to follow and I'll explain some nuances as we go as well. But in general, what I wanna have with any client who is retired, is I want to have two years worth of living expense needs that you need to pull from your portfolio, I want to have that in a money market in cash.
Jacob:Now, that doesn't mean it has to be all cash at the bank, it can be cash in your IRA, it can be cash in a brokerage account, it could be cash in a bank account, either way, the underlying asset is cash. It's a money market, it's getting some sort of interest rate, but it's not exposed to volatility within the broader markets. Now, a key point to make here on this is that it is not how much money you spend every single year that you need to have in terms of the two year requirement, it's how much you need to pull from your portfolio, okay? So if you think about this and let's say that you are, let's say you're 60 years old and you've not started social security yet and you need a $100,000 per year to live on. Well, you've got to pull all $100,000 out of your portfolio.
Jacob:So in that scenario, if you need two years worth of a $100,000, that equals $200,000 that you need to have set aside in cash on the sidelines, in a bank account, in your IRA, in a money market, it needs to be there $200,000 in that scenario. Now let's fast forward to let's say '65 and now you're taking your social security. So instead of a $100,000 of need from the portfolio, let's say you need $70,000 because the other 30 is made up by your social security benefits. So you need a $100,000 for spending, but of that 130 is coming from benefits, therefore you only need 70,000 from your portfolio in this new scenario. Well, that means that you don't need $200,000 in cash anymore, you would only need a $140,000 based on the rule of two years of living expense needs that you need to pull from your portfolio.
Jacob:So that's how that would actually work. It's not how much you actually spend every year, it's how much you really need to take from your portfolio, when you subtract out all the other fixed income sources you might have, like a social security or a pension. So that's bucket number one, that's your cash bucket, two years of cash. Bucket number two is your bond or your fixed income bucket, and this is where I wanna have three years worth of expenses that you need to pull from your portfolio in this one. So bucket number one is two years, bucket number two being the fixed income portion is going to be three years.
Jacob:So what you've got here is you've got a five year runway that you're building. Now this is a minimum requirement, okay? You can have more than this, I'm gonna talk about this in just a second, but this is a minimum requirement that you should have as you enter into retirement, a five year runway so that you can weather a storm for five plus years without having to dip into your stock bucket, which is bucket number three at a loss. So you don't want to ever have to sell your equity positions after they've lost a lot of money, because that will start the sequence of return risk that much worse and make it that much harder for you to claw back out of over time. So that's why I want to have those first two buckets, five year runway and again, those are minimums.
Jacob:Now, specifically here on bucket number two, whenever it comes to fixed income and bonds, what I personally, I'm not saying this how you should invest your bond bucket, but what I personally like to do is keep these on the shorter term end, right? So I want a shorter duration within the bond bucket. I don't want a fifteen, twenty, thirty year bond duration in this bucket because if I'm going to own something for longer than five or ten years, I want that to be in bucket number three, want own a stock, right? So what I want to do here is I want to actually target a duration in the bond bucket, bucket two, I want to have anywhere from two to five years is like the duration of that overall holding within that bucket. Now, that means cash is today money.
Jacob:So money market, that's technically a zero duration, it's available today, there's no time horizon on it. But if you've got a bond bucket, that two to five year duration is a good spot to be. You eliminate a lot of interest rate risk if you do that. So the idea there is yes, you're taking less risk, but you're going to get some sort of yield or return that's a little bit higher than cash otherwise would produce. So typically I fill this up with something like US Treasuries and corporate bonds that are on the shorter term time horizon there.
Jacob:Now, again, these are just the minimum. So I want two years in cash, three years in fixed income, you can have more than that, but here's what I will caution you with. I will caution you by saying do not get overly ambitious on this bucket one and bucket two, because one of the things that a lot of retirees face is they have this anxiety and this fear around, oh my goodness, I finally have a million dollars, I finally have 3,000,000, whatever the amount of money that you have saved, you finally have that amount of money and you're like, I can't afford to lose it, this is all I have, right? So I need to go really conservative in my portfolio. I need to be 50% stock, 50% bond, or I need to have all cash because I can't afford for the market to go down at the wrong time.
Jacob:That is a mistake as well, because if you sit in that position for too long, you're going to run into the issue of purchasing power risk, meaning your your value of your money is actually going to be declining relative to inflation. So you're you're devaluing the purchasing power of your overall asset portfolio. So that is why you cannot go all cash or it wouldn't be wise to do so because you're going to have the issue not now, but it's going to be in twenty years, thirty years down the road, whenever you're 80 or 90, that's whenever you're gonna start feeling that issue, whenever your money does not go as far. So the point of building out this bucket style portfolio and thinking of it in these three tranches is to actually cover all the different levels of risk throughout retirement. The short term risk of having to not hopefully not sell equities whenever they've gone down in value, but also the long term risk of inflation and purchasing power risk where you could see your money get devalued over time if you aren't investing enough money in stock.
Jacob:So what is kind of my top line in terms of how conservative I will get with a client or, you know, typically want someone to be? And really what it is, is two times the minimum amount. So if you think about it, that means I would have four years of cash and then six years of fixed income or bonds, right? So that's two times two and that's two times three. So whatever that amount is, that is kind of like my high watermark.
Jacob:That's my high end of how much I would have in those first two buckets. I wouldn't want to go more than that because that means I'm getting too conservative in my overall allocation. Now, what you'll notice here is I'm talking about this is I've not mentioned anything about, hey, if you're retired or if you're 60 or if you're 70 years old, you need to have a sixtyforty portfolio or an eightytwenty portfolio or some sort of predetermined asset allocation mix. I don't want to do it in that fashion. What I want to do is I want to always base your portfolio allocation on your specific income and spending needs.
Jacob:And then whatever your allocation ends up being based on that is whatever it ends up being. So if you've got a million dollars and you just spend $50,000 out of your portfolio per year, that'd be a 100,000 you need to have in cash, right? Two years worth in bucket 1 and 150,000 in fixed income in bucket number two, so that equals when you add those two together, a 100,000 plus $1.50, that equals 250,000 and if we have a million dollars total in our portfolio, that means our stock to bond allocation, stock to bond to cash, that would be about a $75.25 mix. Now, that has nothing to do with your age, that has nothing to do with where you are in retirement, has everything to do with how much money you're gonna need over the next few years from your portfolio and that we backed into your allocation. We use a method, a formula, something that we can go back to and say, hey, here's why we're allocated this way, because if you just say, hey, I'm gonna be 75 to 25 because that feels right.
Jacob:The problem is, is that's not gonna feel right at some point in the near future, whether you have a big market increase or decline, or some other sort of event that's happening around the world, and it's like, oh my goodness, this is really scary. That's going to change how you feel about how aggressive or conservative you should be, rather than following some sort of formula. That's why I like to have this bucket formula and standard process where we have two years cash, three years of fixed income, we can go up to two times that amount total, that's on the high end. I don't want to go more than that, but that gives you a framework, something to actually peg your portfolio allocation to and say, this is why I'm invested in this way, rather than some rule of thumb or just how you feel that particular day, right? It gives you something concrete to go back to.
Jacob:Now, how does this actually work in practice? That's the big question because you're like Jacob, okay, that makes sense. I really like the buckets. It's simple enough for me to understand it. It makes sense in theory, but how does this actually work?
Jacob:How do I apply this? Because does this mean that I just automatically when I retire, start pulling from my cash bucket and then drain that down for the first two years and then go to my bond bucket second there in year three and four and five. What does this actually mean? How do we do this? Well, it's a great question because it's going to be nuanced and it's going to change over time.
Jacob:The default answer that you need to understand is that whenever you start to take money out of your portfolio, you always want to, not always, but 99% of the time you likely want to pull money from the thing that has gone up the most or down the least. So, for example, if your stock portfolio has gone up 10% and then you've made 3% on your cash, it would make the most sense to take any sort of gains you've gotten on the stock portfolio and shave that off and actually send that out into your bank account for spending rather than just pull from cash. Right? Because that's free money, you made that 10% in your stock portfolio over the last however long, wherever the period has been, therefore that's free money that you did not have before that period of time started, and now you can use that as gains. So the idea is to always take from the thing that has gone up the most or down the least.
Jacob:Now, in recent years, we've had a really good market climate and really good market run. So that means we've just simply had our cash buckets and our bond buckets for our clients sitting there almost as an emergency fund for when the time comes that things are not going well in the stock market. Now, I'll talk more in a second just about how we maybe replenish back and forth between the two, because that situation will arise at some point. But that's where I start. What has gone up the most?
Jacob:And I'm going to take my money from there for my spending or what's simply gone down the least. Now, if we look at the opposite side of this, let's say we've had a market decline rather than a market gain, right? So let's say that the market's down 10% and the bond portfolio, your bond buckets down 3% because the value of that's down, your cash is obviously sitting there at zero. What you're gonna do is you're likely at some point going to switch from taking money out of the equity portion, because that's now losing money, and you're gonna start taking money from that cash and then secondary, that'd be that bond bucket. That's where you'd switch to based on again, what's gone either up the most or down the least, That's the idea.
Jacob:Now, I'm going to get to the part where we refill buckets if we have to use a lot of them here in just a moment, but one thing I do want you to kind of remember here is that you're also getting dividends and interest on your equity positions, you're getting interest on your cash. And so what you're having here is you've got income coming in to this portfolio, no matter what, whether it be 1% or 4%, that's obviously dependent on what you're invested in, but you're getting some sort of income from your holdings, right? So you're not having to sell all of your principal every single time to create income and expense money for yourself. You're actually getting interest and dividends no matter what along the way. Obviously, it's in a different amount for different people.
Jacob:But the idea there is if that's happening, you're likely gonna have 25 to even upwards of 50% of your distribution amount for the year or for the every single month that is likely gonna be coming from those interests and dividends. So even when you're thinking about this, you've got to remember that you're gonna have some sort of income being produced from your portfolio itself. Now, the big question is, Jacob, what happens if we get a four year market decline and we go back to something like an 'eight, where we've got this big drawdown and it's this big long recovery. What happens if we use all of our cash bucket or our bond bucket or, and we only have stock bucket left over? How do we replenish those first two?
Jacob:And it's a wonderful question, and I think this is a critical question to especially at this point in time right now today. Okay, because again, there's always nuance to this. We want to have rules and methods and formulas to follow, but there's also nuance to it. So how do we get ahead of that? I think the question is, how do you get ahead of it, not how do you react to it?
Jacob:That's the first thing I want to mention here. And so, for example, with a lot of our clients right now, we've had this amazing run the stock market, right? It could continue going. I have no idea what's going happen. Don't try to pin me on anything and say, Jacob said the market's going to drop.
Jacob:But we are doing with our clients, we're being very thoughtful and saying, hey, we have grown this portion of your portfolio over time. Does it make sense to start peeling off some of those gains beyond what you're spending every month and actually set that aside and beef up your cash bucket, beef up your bond bucket, so that if and when that big market decline and that bear market actually sustains itself and it's kind of with us for a while, if that event happens, what if we got ahead of that right now and start filling up extra in those buckets one and two for the time being. Now that's how we're being thoughtful with our clients, but that's how you can maybe get ahead of some of these big declines in the future and say, I'm gonna go ahead and add a little bit more going again, going back to that two times, how much we can have in each bucket, the four years perhaps of cash and six years of fixed income, that would give you a ten year runway in that example. Now we're not going that far, I don't think at this point, but what we're doing is we're saying let's just slowly add a little bit more every month, a little bit more we're going to start throwing into those buckets so that if we do get a big market decline, we're well prepared for it.
Jacob:Now, if you are not prepared for it and you get to that situation again, you've got dividends and interest coming in where you're living off of those income pieces and you're also having to pull from your bucket one and bucket two. The idea there is at a minimum, you've got a five year runway to outlast any market decline. And again, the biggest and most recent decline we've seen has been back in 2008 from 'eight until 2013. It was just under five years that the market took from where it was pre collapse and how much time it took to get back to that same level is just under five years. That's why I've kind of arbitrarily chosen five years as the minimum.
Jacob:So the idea is if you have to get in that situation and you have to spend all that cash in that bond bucket down, hopefully you've got enough runway there to get to the stock side of things. And hopefully that's recovered and back to at least the same level, at which point you'll slowly start taking money from the stock bucket and rebuilding your cash and your bond bucket, because at that point, you're going to be accelerating past where you were in bucket three, in terms of the total balance, and now anything above where you started that five year period or whatever period of time it was that the market's been declined, take that money above that amount and start shifting that back to bucket one and bucket two to replenish it right now. Here's the deal. The reality is you very well could have to slow down your spending throughout that period of time as well to make that bucket one and bucket two last longer. Or if you come out of that period, maybe you have to slow down your spending after so that you can replenish bucket one and bucket two, right?
Jacob:There's no perfect formula for it, but the idea here is you've got to know your situation and the nuances around it so that you know when and how to prepare for it on the front end, but also react to it in correct course once you're in it. So my suggestion is, is get ahead of it. That's the first thing. So if you're sitting on, you know, minimum cash and minimum fixed income and you're not prepared for a big market decline, I would think about getting there. I would think about adding that to the portfolio and getting ahead of it.
Jacob:So you're not having to figure out and scramble all of those things together in the midst of a bear market. That's the last thing you want to be doing, because typically when you're in those moments, you've got a fear based approach. You're making decisions based on fear and worry rather than making those decisions with a clear mind. So that's how I want to structure my portfolio in retirement. That's how I think about cash management in retirement, how much we should have as a minimum starting place for retirees.
Jacob:So I'm curious if this is something that was maybe helpful for you to hear or something that you're maybe already doing. If you got thoughts for me, maybe something I left out here in this episode, feel free to shoot me an email and say, hey, Jacob, here's an idea I've had for my stuff. Curious if it would actually apply for what you're doing there with your clients. Or maybe it was helpful and you think that someone that you know, whether it be a friend or family member, could benefit from this episode. Feel free to share it with them, and that way they can gain some knowledge from this as well.
Jacob:Thank you so much for tuning into this week's episode of Retirement Answers. I I look forward to talking with you again very soon. Hey, it's Jacob again, and I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal or tax advice. Retirement Answers is for educational purposes only. For tuning in to this week's episode.
Jacob:I look forward to talking with you again next week.
