When the bull market is going strong, it’s hard to be in cash when it is earning 1-2%. Until that bull market turns into a bear market, then cash looks good.
Cash is a retired persons best friend when the stock market takes a downward turn. Very few people have a pension that replaces their paycheck. Most are living from retirement accounts – retirement accounts invested in the stock market. Some may be receiving social security benefits or have rental income.
The Case for Cash. If your living expenses are $3,000 a month and your investment is $100 a share, you need to sell 30 shares a month to meet your expenses. The stock market takes a downturn and now your investment is worth $50 a share. You need to sell 60 shares to generate the same $3,000.
Logic says – Don’t sell now – wait until the value of the shares returns. But how long will that take?
How can you delay drawing from your investments account? Squeeze your budget-tighten your belt. Delay expenses. Staycation vs. vacation.
Or fill a retirement bucket or two with cash. Your first bucket is your living expenses depending on your unique circumstances: 1-3 years.
To determine that amount, take your monthly budget and subtract social security, pension, rental income and other income. For example, if your monthly expenses are $5,000 and your social security is $2,000, the gap you need to cover is $3,000 a month. That amount is $36,000 for one year, $72,000 for two years or $108,000 for three years. You would fill your bucket with $36,000 to $108,000 in cash. Choose the amount that allows you to rest easy.
Often this bucket for living expenses resides in your retirement account. A second bucket is for an emergency reserve. When you need to replace an appliance or a car. Or you have a major dental expense or need to replace the roof on your house. This bucket might be in a Roth IRA or a non-retirement account where accessing it doesn’t increase your taxable income.
Where do you put the cash in your two buckets? Money market accounts, CD’s with banks or credit unions. You may need to do some ‘shopping’ for the best rates.
Occasionally you will need to refill the cash buckets. Generally, that can be done when you are rebalancing your portfolio. Dividend paying stocks/mutual funds and interest bearing bonds can also help refill the bucket.
Having cash buckets allows you to wait for better days in the stock market to replenish the cash.
There may not be much return on a money market account. Until there is a bear market – and then the return is priceless.