How Much Cash to Keep

The story: Ruth’s rainy-year money

Ruth shows neighbor Walt how two years of cash made it possible to ride out a market drop without selling any investments.

1. Narrator: Ruth’s Social Security and a small pension cover most bills. The rest of Ruth’s spending comes from savings.
2. Ruth: I spend about $12,000 a year more than my guaranteed income. That’s my gap. These are example numbers.
3. Narrator: Ruth keeps two years of that gap in cash. Then the stock market drops hard.
4. Walt: Did you have to sell your investments while prices were low?
5. Ruth: No. I spent from my cash and left my investments alone to recover.
6. Narrator: When markets came back, Ruth refilled the cash from investments. Cash bought Ruth time.

What you’ll learn

1. What retirement cash is for

   Cash covers surprises and the gap between your guaranteed income and your spending. When markets fall, you spend from cash instead of selling investments at low prices.

2. Size it by your spending gap

   Many planners keep one to two years of the spending gap in cash. That’s a rule of thumb, not a law. A bigger guaranteed income floor means a smaller gap, so you need less cash.

   Example: spending $40,000 a year, guaranteed income $28,000. The gap is $12,000, so one to two years is $12,000 to $24,000.

3. Refill in good years, keep an emergency piece

   Top up your cash from investments after good market years, not after bad ones. Keep a separate emergency piece for surprises like a new roof, so your spending cash isn’t drained.

4. Too much cash has a cost

   Cash is safe from market drops, not from inflation. Years of extra cash can quietly buy less and less. Bank deposits are insured up to $250,000 per person, per bank, per ownership type.

Key words

cash reserve

your safe spending money, set aside for the next year or two

spending gap

your spending minus your guaranteed income

refill

topping up your cash from investments, usually after good years

Common questions

Where do retirees usually keep a cash reserve?

Often in savings accounts, money market funds, CDs or Treasury bills. The fact card shows how bank deposit insurance works.

Is one to two years a rule I must follow?

No. It’s a rule of thumb. People with a bigger guaranteed floor, or spending that can flex, often keep less.

Remember this

Cash buys you time when markets fall.

Try it: Size your cash reserve

1. Try the public emergency fund calculator.
2. Work out your spending gap: yearly spending minus guaranteed income.
3. Set a cash reserve goal of one to two years of that gap, and write it down.

No account: use the public emergency fund calculator, and write your goal on paper.

Live facts

Numbers that change over time, with when they were last checked and where they come from.

• FDIC insurance

  $250,000per depositor, per insured bank, per ownership category

  How much of your money at an FDIC-insured bank is protected if the bank fails

  As of February 8, 2026

  Source: FDIC.gov(opens in a new tab)