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Cash: It’s the asset class investors love to hate. Even
as a declining interest-rate environment has helped
both stocks and bonds deliver decent returns during
the past decade, poor cash investors have had
to settle for ever-lower yields. Today, money market
yields are barely positive, and even higher-yielding
cash options like high-yield savings accounts won’t
likely keep up with inflation over the long run. Nor
are cash yields likely to get appreciably better anytime
soon, as the Federal Reserve has telegraphed its
intention to move slowly on rate hikes, lest it disrupt
an economy that is not precisely booming.
But even though cash looks like a big, “Why bother?”
today, it remains an essential ingredient in all
financial plans, including those of retirees. Not only
can it help meet unplanned expenses, which occur
in retirement just as at other life stages, but it can
also help on the peace-of-mind front. A cash compo-
nent is the linchpin of the “bucket strategy” for
retirement portfolios, enabling retirees to tolerate the
fluctuations that will accompany the stock and
bond components of their portfolios. And given that
market valuations aren’t especially cheap today,
opportunistic investors may also like the idea of main-
taining some “dry powder” that they can put to
work in beaten-down assets, whether stocks or bonds.
Yet even as cash provides stability and liquidity, low
yields are an opportunity cost, so it’s important
to not go overboard. If you’re retired or getting close
to retirement, here are some key steps to take as
you assess the liquidity component of your portfolio.
Step 1
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Reassess Your Emergency Fund
Given that one of the key reasons to hold an emer-
gency fund is to tide you over in case of unexpected
job loss, it may not seem necessary to maintain
an emergency fund once you stop working. But at
least some type of an emergency fund remains
essential in retirement, too, in that it can allow you
to cover large, unexpected expenses without
having to raid your long-term assets. Think new cars,
new roofs, big vet or dental bills, or emergency
calls to aid family members.
Just how large your in-retirement emergency fund
should be depends on your personal circumstances.
What “lumpy” expenses have tended to catch you off
guard in the past? What new ones could crop up in
retirement? In a past Morningstar.com Discuss forum
thread, summarized in this article, many posters said
that dental bills were the biggest cost that surprised
them in retirement. And despite Medicare Part D
coverage, pharmaceutical costs can represent another
big-ticket, out-of-pocket outlay for many retiree house-
holds. (Of course, if you have a recurring prescription
expense, it’s wise to factor that into your household
budget and find the Part D plan that best covers the
prescriptions that you take.) If you own a home (espe-
cially an aging one) and are on the hook for ongoing
maintenance costs, that argues for a larger emer-
gency fund than if you’re a renter; people who own
cars or have pets are also likely to have unplanned
outlays from time to time. It’s also a fact of life that
financially healthy family members are sometimes
asked to help adult children or siblings who are in a
financial bind; if you’ve been a financial savior for
your relatives in the past, you could find yourself in
that spot in the future, too.
Step 2
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Consider the Bucket System
In addition to setting aside an emergency fund,
retirees may also want to consider a cash component
as part of their long-term portfolios. The virtue of
that cash “bucket” is that in difficult market environ-
ments, either for stocks or bonds, the retiree can
How Retirees Should Assess Their
Liquid Assets
Portfolio Matters
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Christine Benz