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In conditions of high inflation and rising interest ratesthere are concerns about a prolonged downturn in the stock marketand some retirees may be vulnerable without a cash cushion, financial experts say.
However, there is also a risk of declining purchasing power annual inflation rose 8.5% in March.according to the US Department of Labor.
Meanwhile, according to DepositAccounts.com, the average return on savings accounts as of May 4 is still below 1%, making cash less attractive.
The right amount of cash depends on the situation of each retiree, said certified financial planner Brad Leinberger, president of Seaside Wealth Management in Carlsbad, California.
“There is no silver bullet or magic answer,” he said.
Consultants may offer to keep living expenses from three months to six months available during the client’s years of employment.
However, as you retire, that figure could change, said Marisa Bradbury, a financial and wealth adviser at Sigma Investment Counselors in Lake Mary, Florida.
Many counselors recommend that retirees keep a larger cash buffer to cover the economic downturn. A retiree with too little money may have to plunge into their portfolio and sell assets to cover living expenses.
“The worst thing you want to do is sell your wonderful investments while they are priced at low prices,” Leinberger said.
Bradbury invites retirees to keep living expenses from 12 to 24 months in cash. However, the amount may depend on monthly expenses and other sources of income.
For example, if their monthly expenses are $ 4,000, they receive $ 2,000 from a pension and $ 1,000 from social security, they may consider keeping between $ 12,000 and $ 24,000 in cash.
Another factor is the share of stocks and bonds in the portfolio.
Research shows how long it may take to recover some appropriations after stock market adjustments, said Larry Heller, CFP of Melville, New York and president of Heller Wealth Management.
For example, in the worst case, the recovery of a portfolio of 50% of stocks and 50% of bonds could take 39 months, according to a study by FinaMetrica. That’s why Heller can offer to keep cash for 24 to 36 months.
However, some retirees refuse to keep large sums of cash in today’s low interest rates.
“It’s much easier to leave that money in a bank if it earns 3%, 4% or 5%,” Bradbury said. However, advisors can remind their clients that growth is not the goal of short-term reserves.
“Look at cash as a security blanket that allows you to invest in the most incredible car that creates wealth, and that’s stocks of great companies,” Leinberger said.
While some advisors suggest that retirees hold cash from 12 months to 36 months, others may recommend less liquidity.
“We’re looking at cash,” said Rob Greenman, CFP and chief growth officer at Vista Capital Partners in Portland, Oregon.
“Without tomorrow’s newspaper, there’s really no reason to sit on cash and wait for a better opportunity,” he said.
Retirees in need of quick access to funds may consider other sources, such as a credit line as equity, a health savings account, a credit line with mortgaged assets and more, Greenman said.
Of course, the ideal amount of money depends on the unique situation of each retiree. Those struggling with decision making may find it helpful to weigh the implications of more or less cash with a financial advisor.
“Retirement is not an easy point, and it’s not just a one-stop shop,” Leinberger said. “It’s very personalized and our emotions can really influence decision making.”