A spot of good news for today’s retirees: Cash yields have hit their highest levels in at least a decade, cushioning the blow of soaring inflation and a slumping stock market. But while you might be tempted to make cash king of your portfolio, it’s important not to overdo your allocation.
index is down about 17% for the year, but the slide won’t be permanent. Stocks remain the best bet for outpacing inflation over the long haul. The consumer-price index rose 7.7% in October versus the same period last year, and cash yields can’t compete, as attractive as they are. Those tempted to hide out in cash until the market recovers should heed this finding from J.P. Morgan Asset Management: Over a 20-year period, missing the 10 best days results in annualized returns that are roughly half of what you would have gotten had you stayed invested.
The key, experts say, is to take advantage of cash yields while retaining a healthy stock allocation. Back into your calculation of how much you should hold in stock by first determining the share of your portfolio that should be in cash and bonds, says Christine Benz, director of personal finance for Morningstar. She recommends that retirees take a “bucket” approach, dividing their assets among different pots with different time horizons.
The first bucket should hold enough cash to fund two years’ worth of portfolio withdrawals. (That’s different from overall expenses, since retirees might have other sources of income, such as Social Security or a pension.) This cash can be kept in a high-yield savings account; many online-only savings accounts are yielding at least 3%. Or you can hold certificates of deposit, as long as you’re mindful of how long they’ll tie up your money. Brokered CDs, purchased through brokerage firms, are providing particularly attractive rates right now. Fidelity, for example, offers six-month CDs yielding 4.6%.
The next bucket holds short-term and intermediate-term bonds to fund expenses three to 10 years out. Stocks are reserved for expenses to be incurred more than a decade in the future.
Retirees can spend from their cash bucket as they go, then replenish it at the end of the year by selling some appreciated stocks, if there are any. In years when the market is down, like this one, hold off on replenishing and continue to draw down your cash reserves until the market rebounds. Says Benz: “2022 has been a great argument for holding two years’ worth of cash, not one.”
Write to Elizabeth O’Brien at email@example.com