Having cash on hand can provide a sense of stability and peace of mind at any stage of life. However, in retirement, holding too much cash may limit your long-term returns and erode your purchasing power over time.

So, how much is too much? In this week’s Money Wisdom Question Series, Ian Fergusson, RICP® explains that the answer is highly personal and best determined with the guidance of a financial advisor. He also discusses how your financial strategy should evolve as your life circumstances and goals change.

The Limits of Holding Cash

Cash is undoubtedly an important component of a well-balanced retirement portfolio. When unexpected expenses arise, such as healthcare costs, home repairs, or car maintenance, having readily accessible funds can be especially valuable.

However, the long-term returns on cash are typically much lower than those of market-based investments or other assets. While cash plays a vital role, relying on it too heavily can make it difficult to keep pace with inflation.

The Emergency Fund Benchmark

A common benchmark recommended by financial professionals is to keep three to six months’ worth of essential (non-discretionary) expenses in cash as an emergency fund. While this is a helpful guideline when managing your portfolio, it’s not always one-size-fits-all.

Several personal factors can influence how much cash you should hold: What other investments do you have? Are there major upcoming expenses, such as buying or selling a home? Are you relocating or moving into a retirement community? These variables can significantly shift how much liquidity you may need in retirement.

Finding the Right Balance

Ultimately, this decision should be made in the context of your overall financial plan. By working with an advisor to assess your retirement needs and goals, you can create a strategy that aligns with your broader portfolio and long-term objectives.