
Determining the ideal cash allocation in a retirement portfolio can be a daunting task. Most financial experts agree that a general rule of thumb is to have 5-10% of the portfolio in cash.
Having too little cash can lead to liquidity issues during market downturns. In fact, research suggests that having at least 5% of the portfolio in cash can help prevent significant losses during economic downturns.
A common misconception is that having a large cash allocation will earn lower returns. However, this is not necessarily true, as having some cash on hand can actually help reduce overall portfolio risk.
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Retirement Portfolio Allocation
Building a retirement portfolio that balances risk and liquidity is crucial.
Investors will continue to debate the ideal ratio of cash to other investments in a well-diversified portfolio.
Some investors believe you should keep 3 to 5% of your portfolio in cash, while others think it is acceptable to keep up to 20%.
The right investment mix for you will likely fall somewhere in between, taking into account your personal risk strategy and overall cash flow.
Don't let a financial opportunity pass you by because you didn't have the necessary resources on hand.
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Risk Management and Diversification

Diversification is key to managing risk in your retirement portfolio. It's a strategy that involves spreading your money across several types of assets, such as stocks, bonds, and cash equivalents.
Investing in stocks generally provides higher growth potential but more exposure to market volatility. Diversification takes advantage of the fact that different assets respond differently to shifts in the market.
Bonds are typically less volatile than stocks but offer lower return potential. Most bonds provide regular income payments, which may serve as a buffer against more-volatile assets.
By diversifying your portfolio, you may be able to lower risk while keeping your financial goals on track. This can help you build your savings to support the retirement of your dreams.
Related reading: Portfolio Risk Analysis
Reevaluate Risk Tolerance
As you move towards and through retirement, your risk tolerance evolves over time. This means you'll likely want to adjust your portfolio to minimize losses and ensure your money continues to grow.

You might have had a heavy weighting towards stocks with higher growth/higher risk potential when you had decades before retirement. Now, with less time to make up for losses, it's time to rebalance your portfolio.
Your goal is to position your portfolio to maximize the chances of continued growth without exposing yourself to unnecessary losses. This might mean increasing the percentage of lower-risk investment choices as you inch closer to retirement.
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Remember Diversification
Diversification is the answer to tempering an unexpected blow to your portfolio. It's a strategy that helps spread your money across several types of assets.
Investing in stocks generally provides higher growth potential but more exposure to market volatility. This means you could lose money if the market shifts in the wrong direction.
Bonds are typically less volatile than stocks but offer lower return potential. They provide regular income payments, which can serve as a buffer against more-volatile assets.
Cash equivalents include money markets, certificates of deposit, and other high-quality accounts offering relative stability and lower risk than stocks and bonds.
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The Downside of Cashless

Keeping cash on hand can be a challenge, especially when it's not earning any returns.
In 2023, the average savings account interest rate nationwide was only 0.42% for all balances, making it difficult to grow your money.
You may be losing value due to inflation, which can erode the purchasing power of your cash over time.
This is why it's essential to look for alternative options that can earn interest while providing you with the flexibility to move your funds when needed.
A Secure Money Market Account can be a great solution, as it offers high-yield interest and check-writing privileges, allowing you to access your money quickly.
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Portfolio Balance and Strategy
The bucket strategy can be a smart way to manage your investments by dividing your money into short- and long-term "buckets." This approach helps you strike a balance between low-risk investments for emergencies and riskier investments with long-term growth potential.
You should keep your short-term bucket, or cash reserve, in low-risk investments or savings vehicles. This will ensure you have a safety net in case of unexpected expenses.

A trusted financial advisor can guide you in customizing a plan that fits your risk tolerance and long-term goals. They can help you determine the right mix of investments for your short- and long-term buckets.
Investors often debate the ideal ratio of cash to other investments in a well-diversified portfolio. Some believe you should keep 3 to 5% of your portfolio in cash, while others think it's acceptable to keep up to 20%.
The right amount of cash in your portfolio will depend on your personal risk strategy, when you plan to retire, and your overall cash flow.
How Much for Your Reserve?
You'll want to consider your age, total savings, lifestyle plans, and monthly expenses when deciding how much to hold in your cash reserve. This will help you determine the right amount to keep on hand.
A good rule of thumb is to keep one to two year's worth of living expenses in cash. This will give you some flexibility if your investments fluctuate over time.

Having a cash reserve also makes withdrawals much faster and easier, without having to sell off your assets. You can simply log on to the computer or head over to your local bank and take the money out.
The specific amount will depend on your individual circumstances. You may want to hold more cash if you have a large planned expense coming up, like a major surgery or replacing the roof on your home.
Here's a rough guide to help you get started:
You may also want to consider the timeframe driving your cash reserve. Some experts suggest holding enough cash to cover three to six months of expenses, while others recommend one, two, or even three years.
Sources
- https://www.americancentury.com/insights/cash-reserves-in-retirement/
- https://beanvest.com/blog/how-much-cash-portfolio
- https://www.fool.com/retirement/2024/03/22/how-much-cash-should-you-have-on-hand-in-retiremen/
- https://www.moneydigest.com/1626002/how-much-cash-investment-portfolio/
- https://www.ufbdirect.com/insights/how-much-cash-should-you-have-in-your-portfolio
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