When markets climb, holding cash can feel like leaving money on the table. When markets drop, it can feel like an emotional rollercoaster, causing you to tighten your grip on your current cash balance. The closer you get to retirement, the louder those feelings get, and how you respond to them starts to matter more than ever. All of this begs the question: What’s the right cash balance for your retirement plan?

To answer that, consider these three principles:

1. Cash reserves play a different role in retirement

During your working years, a market decline means your account balance temporarily decreases. You don’t have to sell anything. You can keep contributing, ride it out, and let time do its work.

Retirement flips that approach. You might now need to withdraw money while the market is down, which can affect how much you have left in the short term. This is called sequence-of-returns risk, and it’s one of the biggest threats to a retirement plan.

Knowing how to respond to a market drop helps you navigate this risk without worry. Cash is a key part of your response strategy. 

2. Cash is a first line of defense

A cash balance holds funds immediately available without selling investments or triggering a tax event. That’s what makes cash your first line of defense for surprises and opportunities. 

Life’s unexpected moments can bring the most stress in retirement.  

• Health events 
• Household changes 
• The need to help aging parents or adult children  

None of these circumstances wait for a good market. Cash helps you respond when needed without disrupting your long-term plan. An emergency fund is a common tool for these kinds of situations.  

Cash reserves also give you the means to say yes to what matters. 

• A spontaneous trip 
• Helping a grandchild 
• Supporting a cause you care about 

When you have liquid reserves to draw from, those decisions don’t have to come at the expense of your portfolio.

3. Cash is just one bucket of your wealth

Cash can be useful as a first line of defense, but it’s important to have more resources behind that line.  

A retirement income plan typically draws from different “buckets” of money depending on the situation, including:  

• Cash reserves – Easily accessible for unexpected expenses or opportunities (but with limited growth potential) 
• Taxable brokerage accounts – Open access to funds whenever you need them, with no withdrawal rules or age requirements (but gains are taxable).  
• Tax-free accounts – Roth IRAs, Roth 401(k)s, etc., allow you to withdraw funds tax-free, which can be valuable for managing fixed and recurring expenses.  
• Tax-deferred accounts – Traditional IRAs, 401(k)s, etc., are structured for long-term growth but are taxable upon withdrawal.  

The right mix and timing of these buckets depend on your specific situation, including your age, income requirements, estate planning goals, and other factors. The makeup of your different income buckets also impacts how much you choose to keep in cash. 

Regardless of your specific accounts, the flexibility principle is universal: don’t put all your eggs in one bucket and ensure some of those buckets — such as your cash reserves — are easy to reach. 

Final answer: The right cash balance for your retirement plan

Ultimately, there’s no right amount of cash for every retiree. Cash reserves are one piece of a larger retirement income plan, working alongside your stable income sources, withdrawal approach, and overall comfort with market swings and life changes.

When sized correctly, your cash balance gives you a buffer during market downturns and the means to respond when life takes an unexpected turn. The goal is to find the amount that gives you the flexibility to handle the unexpected and not worry about money while allowing your overall plan to provide you with the freedom to enjoy what you’ve worked for. 

A financial professional can help you weigh your personal factors, build a comprehensive plan, and discern an appropriate cash balance for your retirement. 

To discover a suitable cash balance for your retirement plan, reach out to an advisor using the form below. 

Want to read more like this? Check out “Holding Cash During Inflation: The Tradeoff Many Investors Overlook.” 

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