Retirees who maintain a cash cushion can stay invested in stock markets without panic-selling during downturns. Financial advisors recommend keeping one to two years of expenses in easily accessible cash, beyond the typical three to six month emergency fund suggested for working people. This buffer lets you cover living costs without forcing withdrawals when markets drop.
The cash cushion works because retirees have less time than younger workers to recover from market losses. Knowing you can pay bills from savings reduces stress about stock price swings and helps you make logical investment decisions rather than emotional ones.
High-yield savings accounts (HYSAs) and short-term certificates of deposit (CDs) can grow this cash cushion while keeping money accessible. HYSAs let you withdraw anytime. Short-term CDs offer guaranteed returns without long waits to access funds penalty-free.
Holding too much cash creates a different problem. Money sitting in traditional savings accounts typically fails to keep pace with inflation, and you forfeit the higher returns available in stock markets. Balance matters. Lock cash into CDs only if you know you won't need it before the term ends.
You should also consider income from Social Security and other sources when calculating your target cash amount. This influences how large your cushion needs to be.