Why cash is an important part of your retirement plan

Retirement savers are often told they’ll see a better return on their retirement assets if they invest it — and that may be true — but it’s also important to prioritize money. money in a retirement plan.

Retirement tip of the week: For those nearing retirement, consider keeping part of your retirement plan in cash, either in the wallet itself or in a separate account.

Bank and money market accounts don’t generate the same kind of return as investments, although right now, with the volatility, some investors may disagree. Investing in stocks is a big factor in the retirement income puzzle, as stocks and stock funds can create a bigger return over time, but there are times – like right now – where retirees could really use readily available cash.

Have a question about your own retirement concerns? Check out MarketWatch’s “Help Me Retire” column

As the saying goes, “cash is king”. That’s not always true when it comes to preparing for retirement, but having cash on hand helps retirees avoid dipping into their wallets during market volatility. Retirement savers may be stressed to see their balances drop week after week as major indices and sectors suffer from the current volatility.

Withdrawing money from an investment portfolio when it is falling can cause “streak risk”, which is when investors can suffer from lower possible returns over time. because they dipped into their investments during a downturn. People who have to dip into their retirement portfolios should do so cautiously, but if they can avoid it altogether, they give their investments time to rebound when volatility wanes. Cash helps with this.

Also see: My wife and I will have $250,000 in an emergency fund for retirement – ​​what’s the best way to store this money?

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

Investors may want to try the sub-fund approach, which involves dividing investments by time or objective segments. For example, three tranches could be divided into short term (say five to 10 years), long term (perhaps 25 years and more) and a middle tranche, between 10 and 25 years. The short-term portion would be invested conservatively, like cash investments, while the long-term portion would be invested more aggressively to generate returns over that time horizon.

There is no set amount of money that should be kept in cash – the answer depends on personal circumstances and individuals’ comfort level. A rule of thumb is to keep around a year or two of cash living expenses, which would be taken out as wallets ride the roller coaster of the markets.

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