Why cash is an important part of your retirement plan

Retirement savers are often told that they will see a higher return on their retirement assets if they invest them, and this may be true, but it is also important to prioritize some cash in a retirement plan.

Retirement Week Tip: For those who are close to retirement, consider keeping a portion of your retirement plan in cash, either in your own portfolio or in a separate account.

Bank and money market accounts do not generate the same kind of returns as investments, although right now some investors may differ with volatility. Investing in stocks is an important factor in the retirement income puzzle, as stocks and equity funds can generate higher returns over time, but there are cases, such as, where retirees could use cash. easily accessible.

Do you have any questions about your own retirement issues? Take a look at the MarketWatch column “Help me retire”

As the saying goes, “the king is the cash.” This is not always true when it comes to preparing for retirement, but having cash on hand gives retirees the opportunity to avoid taking advantage of their portfolio during market volatility. Retirement savers may be stressed to see their balances fall week after week as major indices and sectors suffer from current volatility.

Withdrawing money from an investment portfolio when it is declining can lead to the “risk-return sequence”, which is when investors may suffer the lowest possible return over time because they took advantage of their investments during a recession. . People who have to withdraw from their retirement portfolios should do so conservatively, but if they can avoid it altogether, they give their investments time to recover when volatility declines. Cash helps with that.

See also: My wife and I will have $ 250,000 in a retirement emergency fund – what is the best way to store that cash?

Cash can also be incorporated into an investment portfolio, which is a strategy that some advisors use for their clients, especially later in life. Investors who have not yet immersed themselves in their retirement plans, such as a 401 (k) or an IRA, may be forced to withdraw a portion of their portfolio due to the required minimum distributions, which begin at 72 years. Advisors can book for a few years. ‘of minimum distributions required because if there is market volatility, as is currently the case, investments themselves remain intact.

Investors may want to test the cube approach, which is when investments are broken down by time or target segments. For example, three buckets could be divided into short-term (for example, five to 10 years), long-term (perhaps 25 years or more) and one bucket in the middle, between 10 and 25 years. The short-term cube would be invested conservatively, such as cash investments, while the long-term would be invested more aggressively to generate returns during this time horizon.

There is no set amount of money to be kept in cash: the answer depends on the personal circumstances and the level of comfort of the people. A general rule of thumb is to keep the cost of living in cash for about a year or two, which would be reduced when wallets pass through the roller coaster of markets.

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