Help Me Retire Podcast - Episode 38

Emergency cash in retirement

Show notes:

We all know an emergency cash reserve is essential when you’re working and building wealth...

But do you still need cash in the bank after you retire?

You’re darn right you do... and I’ll explain why in this episode of the Help Me Retire Podcast...

This is the Help Me Retire Podcast… with your host… Mike Brown… Senior Wealth Advisor with Raymond James Financial Services… and head of Brown Family Wealth Advisors…

Mike is the best-selling author of Your Way to True Wealth: How to Make It Happen, Make It Last, and Make It Matter…

He and his team have been helping clients pursue their dreams of financial independence for the past 30 years… and in the Help Me Retire Podcast… he’ll share his best ideas with you…

And now… here’s Mike…

Building and maintaining a cash reserve is absolutely crucial during your working years...

It helps you avoid credit card debt... it keeps you from raiding your 401(k)... it gives you a cushion when the car breaks down... the furnace quits... or heaven forbid... you lose your job...

Most people understand the importance of a financial cushion while they’re working and building wealth...

But once you retire... is an emergency cash reserve still necessary?

I mean, think about it...

Once you stop working... you can’t lose your paycheck...

You’ll have Social Security... maybe a pension... and your investments will be generating regular income you can spend...

The kids are grown... your debt should be lower... maybe even paid off...

In other words... if you do it right... your lifestyle in retirement should be pretty predictable...

But even with all that predictability... with all those risks pretty much behind you... I believe you should still maintain a healthy chunk of cash somewhere...

In retirement, though... you’ve got to think about reserves in two ways... cash you can get your hands on today... to cover unexpected expenses that... yes... still seem to come up in retirement...

And beyond that... as we’ve discussed in other episodes... you’ve got to have money that’s invested very conservatively... to cover your spending needs over at least the next five years...

You see the difference? Cash for emergencies... and conservative investments you can withdraw from to cover your retirement expenses... over and above what you’re getting each month from pensions and Social Security...

If you read my book... Your Way to True Wealth... you’ll know that I typically recommend an emergency cash reserve of about 30% of your gross annual income while you’re working... for all the reasons I mentioned a few minutes ago...

The same advice holds for retirees... but instead of 30% of your gross income from a job... let’s think in terms of 30% of your annual spending needs...

For example... if you’re spending 100-thousand dollars a year in retirement... in addition to what you’re getting from Social Security and pensions... I recommend you keep about 30-thousand dollars in the bank...

If you’re spending 150-thousand... 30% would be around 45-thousand in an emergency reserve...

Now... you don’t necessarily need a separate account for this... it could be the bank account you pay bills out of... the account where your Social Security check gets automatically deposited every month...

And this could be the account that you refill systematically... with money you’re withdrawing from your investment portfolio...

You just want to MAINTAIN an account balance that’s at least 30% of what you spend every year... doesn’t have to be any more complicated than that...

If you haven’t transitioned into retirement yet... I want to let you in on a little secret that our retired clients can tell you about...

No matter how well you plan... how well you budget... you’re still going to run into unexpected expenses after you retire...

That’s how life works...

For example... your home...

Your roof doesn’t care that you’re retired... your furnace doesn’t know how well your investments are doing... the air conditioner DOES seem to know that it needs to wait until the hottest day of the year to stop working...

Appliances go out... sewer lines need work... trees fall over in a storm...

And ALL of these things cost a lot of money... money you’ll have if you accept the fact that they keep happening... and you plan for them...

A well-maintained emergency cash reserve... can turn a crisis... into a temporary inconvenience...

Another example... your car... which is still going to need tires... brakes... repairs and insurance... and then one day... sooner than you’d like... you’ll need to replace it...

A cash reserve gives you options... like a larger down payment... better financing... or simply more time to make a smarter decision...

How about other surprises... like health care... medical and dental expenses?

You know, Medicare is a wonderful resource... but you’ve still got deductibles... co-pays... other out-of-pocket expenses... and there’s always the risk of unexpected illness or injury that could throw you into debt overnight if you’re not prepared for it...

And what if your family needs financial help in an emergency? A health issue... job loss... a major life transition...

Cash in the bank allows you to ask yourself... “Do we want to help... and can we help responsibly without jeopardizing our own retirement?”

I don’t want to scare you... but the list goes on...

When you travel... a canceled flight... a stolen wallet... a change of travel plans involving an overnight hotel stay...

When you’ve got insurance... but it won’t pay for everything... and what it will pay... you have to wait to get reimbursed...

An emergency cash reserve can help you bridge the gap...

And sometimes... it’s not even emergencies that require a lot of cash up front... sometimes it’s just flexibility you need...

The big property tax bill that comes due once a year... a big insurance premium every six months... a home project requires a sizable up-front deposit...

Social Security... pensions... interest... dividends... portfolio withdrawals... they are all pretty predictable ways to cover predictable expenses... but as we’ve seen... some expenses AREN’T predictable... and sometimes you need to spend more money than what’s coming in...

An emergency cash reserve acts like a financial shock absorber... money that’s there for unexpected expenses... that you can replenish later when things calm down...

Do you need that in retirement? Absolutely.

Now, I don’t want you to make the mistake, though... of overdoing it... of holding too MUCH in cash... because you think retirement is all about safety... and the more cash you hold, the more secure you’re going to feel...

You’ve got a long drive ahead of you in retirement... maybe 20... 30 years or more... and if you’ve got too much shock absorber and not enough engine... you’re not going to get very far...

If your investment portfolio isn’t built for the long term... with a mix of cash... and fixed income... and equities... you might not earn enough to overcome the inflation we’re all going to face for the rest of our lives... and once your expenses outstrip your investment returns... it’s only a matter of time before you start eating into principal, and well... I think we all know how that turns out...

So, let me take you through this process... from one end to the other... of how you might structure your finances in retirement...

Let’s start at the front end... 30% of your annual expenses... in this emergency cash reserve we’ve been talking about today... for all the reasons we’ve discussed...

We’re not overly concerned about earning a return on this money... if the bank pays you some interest, great... but the priorities here are safety... and liquidity...

Second... inside your investment portfolio... let’s invest whatever you plan to withdraw over the next five years... 10 years if you like to wear a belt AND suspenders... let’s put that money in high-quality... low-volatility... predictable... fixed-income investments... shorter-maturity bonds, for example...

What can investments like that do for you? They typically pay more income than a bank account... but in exchange for that return... you might see a little fluctuation in value over time... not a lot necessarily... certainly nothing like you see in stocks day-to-day...

But these are conservative investments... higher expected returns than cash... lower volatility than stocks... a nice second layer in your portfolio...

And then... beyond what you need for withdrawals over the next five to 10 years... now we can look at equities... stocks... preferably high-quality, dividend-paying stocks... and those dividends will go toward replenishing what you spend each year from the conservative end of the portfolio...

That’s not too complicated, is it? The truth is... successful investing... even in retirement... doesn’t have to be complicated...

But it does have to make sense... it’s got to be based on investment principles that have worked for generations... and whatever strategy you choose to get the returns you need... with the risk you can tolerate... and plenty of reserves to cover emergency expenses... should give you the confidence to stick with it... when times get challenging...

Stocks can give you returns over time that keep you ahead of inflation... bonds can give you stability and predictability, so you don’t have to sell stocks at the wrong time...

And a cash reserve... will help you sleep better at night... and we don’t have any retired clients... who don’t look forward to a good night’s sleep... AND NO ALARM CLOCK!

Thanks for your time today...

If you’d like us to walk you through this sometime... please don’t hesitate to get in touch... and we’ll talk again soon...

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Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC.

Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.  Brown Family Wealth Advisors is not a registered broker/dealer and is independent of Raymond James Financial Services.

Any opinions are those of Mike Brown and Brown Family Wealth Advisors and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a recommendation. There is no guarantee that these statements or opinions will prove to be correct. Investing involves risk, and you may incur a profit or a loss regardless of the strategy selected. Past performance is not indicative of future results. Prior to making an investment decision, please consult with your financial advisor about your individual situation.