How Much Cash Savings Do I Need for Retirement?

Retirement can be a bit of a scary thing. That's because you're going from earning a regular paycheck to suddenly having to live off of savings.

Now once you enter retirement, a lot of your income may come from withdrawals from an IRA or 401(k) plan. And chances are, those accounts will be loaded with different investments, as opposed to plain old cash.

That's a good thing, because you want your portfolio to keep generating returns during retirement. That opens the door to more income for you. And historically, assets like stocks have generated higher returns than savings accounts.

But it's also important to stockpile plenty of cash in the bank as a retiree. Doing so could prevent you from having to take serious losses in your investment account.

Save enough for one to two years of expenses

During your working years, you're generally told to build an emergency fund with enough cash to cover three to six months of expenses. During retirement, your cash savings should be able to cover one to two years of expenses.

How come? As a retiree, in the absence of regular income from a job, you're living off of savings, whether it's cash in the bank or your retirement account. But the investments in your retirement account could fluctuate in value.

One thing you don't want to do is liquidate investments in your IRA or 401(k) when they're down because you need income to pay your bills. If you do that, you'll lock in permanent losses in your account. If you leave those investments alone when they're down, they might recover their value in full, putting you in a better financial position.

If you have plenty of cash on hand, you'll likely be able to ride out a period when your investments are down, like a broad stock market decline spurred by a recession. But it can take time for investments to recover lost value, which is why you need so much cash on hand.

Should you put your cash into a CD during retirement?

CD rates tend to be higher than the rates you'll find in savings accounts. For this reason, it could be a good idea to put some (though not all) of your cash savings into CDs as a retiree. But what you'll want to do is set up a CD ladder so that you're not tying all of your money up at once, but rather, setting your CDs to mature at different intervals.

Also, at a minimum, you should really make sure to have at least six months' worth of cash outside of a CD and in a regular savings account. That way, you can pay your bills for half a year without running into any issues.

Fidelity suggests aiming for enough retirement savings to replace your ending salary 10 times over. The bulk of your retirement nest egg can come in the form of different investments. But make sure to keep some of that money in cash so you have the flexibility to ride out market downturns without hurting yourself financially in the long run.