Key Points
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A stock market crash could put your long-term savings at risk.
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Maintaining a solid cash cushion could protect your portfolio.
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The exact amount of cash you stockpile should hinge on your income picture, spending needs, and desire for peace of mind.
If you’ve spent the better part of your life saving for retirement, you may be gearing up to embrace that next stage of life. And hopefully, you’re doing so with a solid nest egg to fall back on and the right investment mix.
It’s a common thing to reduce stock exposure in retirement. But you don’t want to dump stocks in your portfolio completely. If you do, you may find that your savings can’t keep up with inflation.
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At the same time, it’s natural to worry about a stock market crash wrecking your retirement and putting your savings at risk. It’s one thing to ride out a downturn in your 40s or 50s when you have another decade or two before you’re tapping your IRA or 401(k). But once you’re using your savings, the idea of a market decline can be terrifying.
The good news is that there’s one easy step you can take to protect your savings from a stock market crash and avoid a big hit to your retirement plans.
It’s all about the cash cushion
The problem with a stock market crash in retirement is that if you need your assets to cover your living costs and you sell investments at a loss, you automatically lose the opportunity to have that portion of your portfolio recover. A better bet is to leave your stock holdings untouched when they’ve lost value.
To pull that off, maintain a cash cushion that can cover several years of living costs. If you can pay every single bill using cash alone, you can potentially wait out a market crash completely.
Of course, right now, keeping money in cash isn’t such a raw deal. Interest rates are fairly generous, and high-yield savings accounts and CDs are offering pretty decent returns.
Things could change over time, though. As rates come down, overfunding cash savings could become more of a problem. So you’ll need to think about how much cash you actually want to hold.
On a basic level, you may want to start with one to two years of living expenses. But remember, if you have guaranteed income, such as a pension or Social Security benefits, it may reduce your reliance on cash.
In other words, if your annual spending needs are $90,000 but $30,000 of that comes from your Social Security checks, you should only need $60,000 in cash per year to cover your remaining bills.
Also consider how much cash you need to sleep at night. If having a three- or four-year cash cushion reduces your stress, it may be worth accepting a lower return on that money.
A market crash doesn’t have to be a disaster
Many retirees end up having to cope with a stock market crash, and chances are, you will, too. The key is to set yourself up with enough cash to protect against that scenario.
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