What’s the role of cash in a retirement strategy and portfolio?
While the wording changes from person to person, this is one of the questions I often get. Sometimes that question comes because there is a worry about needing to be invested more. Sometimes that question comes because they worry about an upcoming expense.
Either way, there is a thin line between having too much cash and needing more. The answer as to where that line lies will be unique to each. That’s something we can evaluate together.
According to the Financial Planning Association (FPA), maintaining some of your retirement savings in cash has at least three benefits.
First, you will have cash readily available when there might be a reluctance to sell due to current market prices, taxes, or transaction costs. This will help with the quality of your retirement by ensuring you have the money when that washer needs to be replaced, or the car needs repairs. You don’t put those things off because of how the market is behaving.
Second, there is a greater chance you will stick with your investment strategy, even when things get volatile. We all know that stock market prices can vary. Sometimes that variance can be significant. The emotional reaction is to sell when the market makes wild declines. Investment rules, not emotions, should dictate whether you buy or sell. It becomes much easier to stick to those rules if you have a cash reserve to pull from for needs.
Third, there is a greater statistical possibility of success in your retirement strategy when you have proper cash reserves. In fact, it can be as much as 6% higher, according to the FPA study. You get that statistical bump in the success of your plan because you don’t sell at inopportune times in market cycles, and you don’t avoid investing enough, either.
So, if you have some cash set aside, but are unsure if it’s too much or too little, let’s run an analysis. I believe everyone should reap the rewards of having the right cash reserves.
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