posted in: Investment Advice

How Much Cash Should You Hold In Retirement?

Cash is one of the trickiest balances to get right in retirement.

It comes up in almost every conversation we have with clients looking for a retirement planning advisor in Sydney to help them navigate exactly these decisions.

Hold too little and a market downturn can force you to sell good assets at the worst possible time. Hold too much, and you’ve got money sitting idle that could be working for you.

The honest answer to how much you should hold is that it depends on what you spend and how your portfolio is built, but there are some clear principles that make the decision much easier.

In this article, I’ll walk through why a cash buffer matters, where that cash can actually sit, how to make sure it’s earning what it should, and the signs you might be holding too much. Then we’ll bring it back to how you find your own number. In my experience as a financial advisor in Sydney, the right answer is rarely as straightforward as it first seems.

Why A Cash Buffer Matters

The first job cash does in retirement is protective. It’s there so a bad year in markets doesn’t force your hand.

Cash is always important to have a good buffer because we don’t want to sell your assets when they’re under pressure.

This is the heart of it. When markets correct, the worst thing you can do is sell quality assets while they’re down to fund your living expenses. A healthy cash buffer means you can ride out the dip and let your investments recover, rather than locking in a loss to pay the bills.

Cash Doesn’t Have To Sit In The Bank

A common assumption is that your cash buffer lives in a bank account. It doesn’t have to.

Cash might be sitting in your portfolio. For example, cash might not necessarily be in the bank. Cash might be in the portfolio, it might be personally.

Your buffer can be held inside your investment portfolio as well as in your personal accounts. What matters is that it’s accessible and stable, not that it sits in any one place. This gives you more flexibility than people often realise when structuring where the cash lives.

Make Sure Your Cash Is Actually Working

Holding cash is one thing. Holding it badly is a quiet drain that’s easy to miss, and it happens more often than you’d think.

Sometimes what tends to happen is people pay off their mortgage, they close the mortgage down, and they previously used an offset, for example, which is a great way to save some money on your loan, but then the bank would just put you in a basic savings account and you might be getting 0.4% per annum, which is not good. We want to make sure you’ve got it in a high interest savings account. At the moment you can get some much better numbers than 0.4% per annum.

This is a classic trap. An offset account is a great place for cash while you have a mortgage. But once the loan is closed, that money often gets swept into a basic savings account earning a mediocre rate, and it just sits there. The fix is simple: make sure your cash is in a high interest account earning a competitive return, because right now you can do considerably better than 0.4%.

You Can Also Hold Too Much

Just as important as having enough is not having too much. Cash that isn’t needed as a buffer is cash that could be growing.

We don’t want too much. If we’re talking about you having half a million dollars in the bank in cash, we can probably deploy them better.

Half a million dollars sitting in cash is a lot of capital doing very little. Unless you have a genuine reason to hold that much, it’s usually money that could be invested to generate income and growth instead of slowly losing ground to inflation.

So, How Much Cash Is Right For You?

Here’s the honest answer: the right amount of cash is tied directly to what your lifestyle costs.

It depends on what you’re going to spend as well, of course. If you’ve got a lifestyle that cost you half a million dollars a year, then yeah, probably a good amount to have in cash. But if you’re spending about a hundred grand a year, we could probably rebalance that and get more of that money working a little bit harder for you.

That’s the principle. If your lifestyle costs half a million dollars a year, then half a million in cash might be entirely sensible. If you’re spending closer to a hundred thousand a year, that same balance is far more than you need as a buffer, and the surplus can be rebalanced to work harder. Start from your real spending, hold enough to protect yourself through a downturn, make sure every dollar of it is earning a proper return, and put the rest to work.

Book a quick Wealth Planning Consultation and we’ll help you see where you stand, what’s possible, and how to make it happen.

• Stop feeling uncertain about your financial future
• You won’t need to make big sacrifices
• You won’t drown in paperwork or endless meetings

Whether you’re just starting to think about retirement planning in Sydney or ready to act, come have a chat with our team.

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About the Author: Ethan Stein is a financial planner with expertise in investment structuring, superannuation strategy, shares, property investment and other planning strategies. This article reflects general financial commentary only and does not constitute personal financial advice.

Financial Disclaimer: The information provided in this article is for general knowledge and informational purposes only and does not constitute financial advice. Individual circumstances vary significantly. It is essential to consult with a qualified and licensed financial planner before making investment decisions. Past performance of any asset class is not indicative of future results.