Retirement can be an uncertain time, particularly when it comes managing finances. Cash reserves are an important part of a retirement portfolio. These reserves act as a cushion against market volatility, helping retirees to weather downturns. When should retirees begin to tap into their reserves?
This depends on a number of factors including the size of your cash reserve, the investment portfolio you have, and how well-off the investor is. It is generally a good idea for a retirement portfolio to include some cash or conservative investments that are stable and can be used as a cushion to cover living costs during market turmoil. It can be difficult to know when to begin drawing from these reserves.
Step 1
To answer this question, it is important to first define “cash reserve”. This will vary depending on an individual’s portfolio. If a retiree’s portfolio is all stocks, but he has only set aside one year in cash, then that year represents his entire cash reserve. If someone has a portfolio of 60% stocks, 40% bonds and 40% cash, the cash and stable investments that make up 40% should be included in their cash reserve.
Step 2
Second, a retirement portfolio should be used to live off. Retirement investors may hesitate to withdraw from their portfolios during a downturn in the market, but diversification is crucial. Stocks, bonds and stable investments can all be included in a well-diversified portfolio.
Step 3
Allocation strategy is the third step to determining when you should start using your cash reserves. A retiree who has a carefully planned allocation strategy shouldn’t worry about when to start tapping into their cash reserves. Rebalancing a portfolio that is designed to meet an investor’s needs for income and is well-diversified will generate enough cash automatically to cover their living expenses. If stocks rise and the portfolio is unbalanced then some stocks can be sold, and the money can be reinvested into bonds or cash in order to bring it back in line.
Retirement investors should consider not only these three factors but also their own financial situation. Someone who has an emergency fund, or cash from other sources, may be able delay using their retirement portfolio. If someone has unexpected expenses or is experiencing a substantial reduction in income, it may be necessary to begin using their cash reserves earlier than expected.
It is important to note that retirees need a plan for how and when they will tap their cash reserves. This plan should be built on a well diversified and balanced portfolio. It should also include a clear understanding of “cash reserves” and an allocation strategy aligned to the investor’s financial goals and income needs. These principles will help retirees to ensure they have the cash necessary to weather any market volatility, and live a comfortable life in retirement.
