To live comfortably as a senior, you'll need savings. And it's a good idea to house the bulk of your savings in an IRA or 401(k) for the tax benefits involved. Both of these accounts allow you to invest your money so it ideally grows into a much larger sum over time.
But should you invest all of the money you're earmarking for retirement? Or should some of it sit in a savings account so you have some cash on hand?
Your strategy should hinge on your age
When retirement is many decades away, it's smart to invest your money -- pretty much all of it. Keeping it in cash might earn you around 2% a year or so in interest (keeping in mind that today's bank account APYs of 4% and higher really aren't the norm). But investing it might earn you 10% a year, since that's the stock market's average return over the past 50 years. So you want to capitalize on that growth opportunity.
However, as you get closer to retirement, it's a good idea to move some of your long-term savings into cash instead of keeping it invested. The reason? Once you retire, you're likely going to be withdrawing from your nest egg regularly. But what if the stock market suddenly tanks?
In that case, you risk taking permanent losses by having to sell investments for money at the wrong time. The same thing could happen to the bond market, too. If you own a lot of bonds and have to sell them at a loss, you're in the same unfavorable position.
That's why it's important to keep some of your retirement savings in cash -- but only once you're nearing retirement. You probably don't want to keep a portion of your nest egg in cash in your 30s or 40s. But if you're 62 years old and expect to retire at 65, that's a good age to start turning some of your assets into cash.
The right amount of cash to have on hand
During your working years, you should aim to have enough cash in an emergency fund to cover three months' worth of living costs at a minimum. For retirement, you'll really want more like one to two years' worth.
The reason? Any market downturn that impacts your portfolio could be lengthy. You want to give yourself the opportunity to ride out a downturn while still being able to cover your bills.
If you keep one to two years' worth of expenses in cash, you'll be able to avoid selling assets for that long. In fact, if you're the more conservative type when it comes to risk, you could even opt to keep three years' worth of expenses in cash. You'll lose out on some growth by doing that, but it might give you more peace of mind.
With that said, different people have access to different income streams in retirement. If you own a rental property that generates steady income, for example, you may be able to get away with keeping a little less cash on hand.
But for the typical person, one to two years' worth of cash in the bank is generally best. Just don't make the mistake of moving that money over too early in life.
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FAQs
The right amount of cash to have on hand
How much of your retirement savings should you keep in cash? ›
With those time ranges in mind, it may be reasonable to hold cash to cover one to two years of living expenses (beyond predictable Social Security and pension income) in addition to your daily use account. The exact amount you want to have also depends on your risk tolerance and the amount you have saved.
What percentage of retirement account should be cash? ›
Designed for a retirement that's expected to last more than 25 years, this is for investors with a high capacity for risk: Cash: 8% of assets are kept in cash for years 1 and 2 of retirement. Bonds: 32% of assets are kept in bonds for years 3-10 of retirement.
How much cash should I hold in retirement? ›
In retirement, you should hold 1 to 3 years' worth of essential expenses. It's a sizeable amount, but once you're retired and typically living on a lower income, it's harder to top up your pot if you need to access it. We've used ONS data to show the average household expenditure for people aged 60 and over.
What is a good amount of money to have in your retirement account? ›
At ages 56 to 60, you should have saved 7.6 times your current salary. At ages 61 to 64, you should have saved 9.2 times your current salary. Source: Chief Investment Office and Bank of America Retirement & Personal Wealth Solutions, "Financial Wellness: Helping improve the financial lives of your employees," 2023.
How much cash should I have on hand at home? ›
“We would recommend between $100 to $300 of cash in your wallet, but also having a reserve of $1,000 or so in a safe at home,” Anderson says. Depending on your spending habits, a couple hundred dollars may be more than enough for your daily expenses or not enough.
How many people have $1,000,000 in retirement savings? ›
However, not a huge percentage of retirees end up having that much money. In fact, statistically, around 10% of retirees have $1 million or more in savings. The majority of retirees, however, have far less saved.
How long will $400,000 last in retirement? ›
Safe Withdrawal Rate
Using our portfolio of $400,000 and the 4% withdrawal rate, you could withdraw $16,000 annually from your retirement accounts and expect your money to last for at least 30 years. If, say, your Social Security checks are $2,000 monthly, you'd have a combined annual income in retirement of $40,000.
How much cash should a 70 year old have? ›
How Much Should a 70-Year-Old Have in Savings? Financial experts generally recommend saving anywhere from $1 million to $2 million for retirement. If you consider an average retirement savings of $426,000 for those in the 65 to 74-year-old range, the numbers obviously don't match up.
How much of net worth should be in house at age 65? ›
The rule of thumb: A common rule of thumb for real estate allocation is to invest no more than 25% to 40% of your net worth in real estate, including your home.
“It [varies from] person to person, but an amount less than $1,000 is almost always preferred,” he said. “There simply isn't enough good reason to keep large amounts of liquid cash lying around the house. Banks are infinitely safer.”
Is $100 a month enough for retirement? ›
Your Retirement Savings If You Save $100 a Month in a 401(k)
If you're age 25 and have 40 years to save until retirement, depositing $100 a month into a savings account earning the current average U.S. interest rate of 0.42% APY would get you to just $52,367 in retirement savings — not great.
What can I do with a lot of physical cash? ›
A smart strategy is to put the money into a savings account and take some time to consider how you want to spend it. You may decide to treat yourself with a small part of it, but use the rest to pay down debt, boost your investments or simply keep saving.
What is the average Social Security check? ›
Social Security offers a monthly benefit check to many kinds of recipients. As of December 2023, the average check is $1,767.03, according to the Social Security Administration – but that amount can differ drastically depending on the type of recipient. In fact, retirees typically make more than the overall average.
What is considered a good monthly retirement income? ›
As a result, an oft-stated rule of thumb suggests workers can base their retirement on a percentage of their current income. “Seventy to 80% of pre-retirement income is good to shoot for,” said Ben Bakkum, senior investment strategist with New York City financial firm Betterment, in an email.
How much do most people retire with? ›
What is the average and median retirement savings? The average retirement savings for all families is $333,940 according to the 2022 Survey of Consumer Finances.
Is 100k in cash savings good? ›
There's no one-size-fits-all number in your bank or investment account that means you've achieved this stability, but $100,000 is a good amount to aim for. For most people, it's not anywhere near enough to retire on, but accumulating that much cash is usually a sign that something's going right with your finances.
How much is too much cash in savings? ›
How much is too much savings? Keeping too much of your money in savings could mean missing out on the chance to earn higher returns elsewhere. It's also important to keep FDIC limits in mind. Anything over $250,000 in savings may not be protected in the rare event that your bank fails.
How long will $500,000 last in retirement? ›
Yes, it is possible to retire comfortably on $500k. This amount allows for an annual withdrawal of $20,000 from the age of 60 to 85, covering 25 years. If $20,000 a year, or $1,667 a month, meets your lifestyle needs, then $500k is enough for your retirement.
