Retirees advised to build a cash cushion before retirement

Financial advisers recommend that people approaching retirement set aside a cash reserve equal to one to two years of portfolio withdrawals, rather than covering living expenses. The reserve acts as a buffer against early retirement or unexpected costs and complements Social Security or pension income.

For example, a 66‑year‑old planning to retire in two years with an $80,000 annual spending target from a $1.5 million portfolio could keep $160,000 in cash to fund the first two years. The remainder might be allocated to high‑quality bonds for the next eight years and the balance to a diversified equity portfolio.

Key considerations include where to hold the cash—taxable versus tax‑sheltered accounts—since taxable accounts are usually drawn first due to higher ongoing tax costs. Retirees may also benefit from early withdrawals from tax‑deferred accounts to reduce future required minimum distributions. To grow the cash bucket, advisers suggest directing new 401(k) and IRA contributions to cash, using bonuses or inheritances, and rebalancing equities into cash and bonds.