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May 22, 2019
Many people want to enter retirement with a) investments that may have benefited from years of growth and compounding, b) a manageable debt position, and c) a cash reserve for emergencies. Just how large should that cash reserve be? There is no simple answer to that question because the answer is different for each retiree.
As pre-retirees save and invest, in pursuit of their retirement objectives, they are commonly encouraged to create a portfolio and accept some market risk. After all, keeping too much money out of the financial markets could carry an opportunity cost (lost yields, lost tax benefits). Retirees, however, may wish to maintain a cash reserve to deal with the unexpected. A health emergency may come with significant out-of-pocket costs. An air conditioner or water heater may break down, a storm may damage a roof or cause flooding – and a retiree household may face sudden home repair costs. In these situations, monthly cashflow may be disrupted and having a cash reserve can certainly help.1