One of the most common and anxiety-inducing questions retirees face is deceptively simple: How much cash should I keep on hand?
It might sound like a purely financial decision, but it’s also an emotional one. As Larry Heller, CFP®, CDFA®, explains in this episode of Retirement Unlocked, your cash reserve strategy plays a crucial role in not just how your retirement plan performs, but how well you sleep at night.
Let’s explore why.
Why Cash Feels Different in Retirement
When you’re working, cash flow is fairly straightforward: income comes in through your paycheck, and expenses go out. But when that income “spigot” turns off, even retirees with significant savings can feel a jolt of uncertainty. Add in a volatile stock market or rising interest rates, and that nervous feeling grows quickly.
Larry describes it as the “sleep factor.” Even if your investments are well-diversified, the emotional impact of watching portfolio values fluctuate—especially early in retirement—can lead to costly decisions, like selling during a downturn or holding too much idle cash.
That’s why having the right amount of cash on hand isn’t just about math. It’s about confidence.
Understanding the Psychology of Cash Timing
Cash feels safe when the market is down, but frustrating when the market is up. That’s human nature. It’s tempting to sell investments when they’re falling or to hesitate to reinvest when markets are recovering.
This behavior often leads to doing the exact opposite of what’s wise: buying high, selling low.
To combat this, Larry encourages clients to think ahead: plan for downturns before they happen by building a structured, intentional cash reserve. That way, you’re not reacting emotionally in the moment—you’re following a plan you already trust.
So… How Much Cash Should You Keep?
Larry uses a visual tool called the bull and bear market chart, which shows every major market downturn since 1945. The takeaway? Bear markets—those defined as drops of 20% or more—have historically lasted an average of 24 to 36 months.
That’s the number you want to remember.
A strong retirement cash strategy covers roughly 2–3 years’ worth of living expenses.
Here’s how Larry recommends calculating that:
- Start with annual expenses.
Include both monthly needs and big-ticket items like travel, home repairs, or gifts. - Factor in your risk tolerance.
A more conservative investor might want a full 36 months in reserves; someone with a higher risk tolerance may be comfortable with less. - Use a layered reservoir strategy.
This is Larry’s core framework:- Short-term reservoir: Holds your cash (or near-cash) to fund 2–3 years of withdrawals
- Intermediate reservoir: Includes income-producing assets like bonds or private credit
- Long-term reservoir: Growth-oriented investments like equities
Each reservoir has a role, and as your long-term investments perform well, they replenish the short-term one, just like a paycheck. This approach creates stability, even when markets fluctuate.
Why This Strategy Works
By preparing for downturns before they happen, you reduce the urge to sell in a panic. Your lifestyle remains uninterrupted, and your long-term investments can recover.
This strategy also allows for opportunistic rebalancing. When markets rise above your target allocation, you can sell high and refill the cash reservoir. If markets fall, your intermediate reserves buy low, without pulling from your equity positions when they’re down.
And perhaps most importantly, it gives you emotional permission to stick with your plan.
One Size Doesn’t Fit All
Your ideal cash reserve isn’t a static number. It depends on your lifestyle, spending needs, income sources (like Social Security or pensions), and how comfortable you are with risk.
What matters most is that it’s part of an integrated strategy, not just a guess.
Final Thoughts
If you’re approaching retirement, or already in it, now is the perfect time to review your cash strategy. Do you know how much you really need? Are you prepared for a bear market? Are you sleeping well at night?
The right answer starts with a conversation.
🎧 Listen to the full episode on Apple | Spotify | YouTube
Schedule a Comprehensive Financial Planning Call
- Phone: 631.248.3600
- Website: www.hellerwealthmanagement.com