Why cash is an important part of your retirement plan

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Retirement savers are often told that they’ll see greater returns in their retirement assets if they invest it—and that may be true—but it’s important to prioritize some cash in retirement planning, too.

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Retirement Tip of the Week: For those nearing retirement, consider keeping a portion of your retirement plan in cash — whether it’s in the portfolio itself, or in a separate account.

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Bank and money market accounts do not generate the same returns as investments, although with the volatility right now some investors may beg to differ. Investing in equities is a key factor in the puzzle for retirement income, as stocks and equity funds can create a sizable return over time, but there are instances — such as now — when retirees can actually access easily accessible cash. Huh.

Have a question about your own retirement concerns? See MarketWatch’s “Help My Retirement” column.

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As the saying goes, “cash is king.
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” This isn’t always true when it comes to preparing for retirement, but having cash on hand gives retirees the opportunity to avoid tapping into their portfolios during market volatility. Retirement savers may be stressed to see their balances fall week after week as major indices and sectors across the board are suffering from the current volatility.

Withdrawing money from an investment portfolio when it is on a decline can provoke a “sequestration of return risk”, which is when investors can suffer from lower potential returns over time because they have increased their investments during recessions. was tapped. Those looking to pull out of their retirement portfolio should do so conservatively, but if they can avoid it altogether, they are giving their investments time to rebound when volatility eases. Cash helps with this.

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Cash can also be built into an investment portfolio, which is a strategy some advisors use for their clients, especially later in life. Investors who haven’t yet dipped into their retirement plans, such as a 401(k) or IRA, may be forced to withdraw a portion of their portfolio because of the required minimum distributions, starting at age 72. There are. Advisors may set aside a few years the value of the required minimum distributions so that if the market fluctuates, as it currently is, the investment itself remains untouched.

Investors may want to try the bucket approach, which is when investments are divided by time or target segments. For example, three buckets can be divided into short-term (like five to 10 years), long-term (perhaps 25 years and beyond), and a bucket in the middle, between 10 and 25 years. Short-term buckets will be invested conservatively, such as cash investments, while long-term ones will be invested more aggressively to generate returns over that time horizon.

There is no one set amount of money that must be kept in cash – the answer depends on individuals’ individual circumstances and comfort levels. A rule of thumb is to keep about a year or two of living expenses in cash, which will be taken out when portfolios are riding the rollercoaster of the markets.

Credit: www.marketwatch.com /

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