How Much Money Should You Keep in a Savings Account in Retirement?

You spend your working life funneling as much as you can into a retirement account, where it can save you money on taxes and grow through the power of investing. But eventually, that money needs to come back out again.

Taking it all out at once isn't a good idea, because you could wind up with a massive tax bill and you'll miss out on the opportunity to increase your wealth even more. It makes more sense to take out just what you need for the near term, but that looks different for everyone. Here's what you need to know to decide how much you ought to keep in a savings account in retirement.

How much will you need for the next year or two?

Typically, you only want to keep one to two years' worth of cash in your savings account in retirement. We've already touched upon why you don't want to take out too much more, but it could also be dangerous to keep a lot less in retirement.

If you withdraw cash as needed on a monthly basis, you could find yourself in serious trouble during a recession or stock market correction. You may have no choice but to make withdrawals when your investments are down, and that could cost you a lot more compared to selling some of your investments when their share prices are higher. 

Think of it this way: Say you want to withdraw $10,000. You have 100 shares of a stock worth $100 each. You can sell them all and get the cash you need. But if you waited a few months and those shares shot up to $200 each, now you could only sell half of them to get your $10,000 and leave the other half to grow.

You can't predict exactly what the market's going to do and trying to time its lows or highs generally isn't a good idea. But if you have at least a year of savings in cash, you have a little more flexibility to make some judgment calls. If you know your portfolio's value is down right now, you could wait a few weeks or a few months to see if it recovers before you try to take out more. You don't have this option if your savings account is empty because you only kept a month or two of savings there.

As for what a year or two of retirement expenses looks like, that depends on who you ask. It could even vary for you from one year to the next. Think about how much you spend on your regular bills and any planned upcoming expenses. You'll probably want to take some extra out for emergency costs as well.

Which savings account will you trust to hold your cash?

Any savings account can keep your money safe and accessible, but that's a pretty low bar to clear. These days, a savings account can help you grow your wealth over time, albeit at a slower rate than a retirement account might be able to.

A high-yield savings account is your best bet if you hope to maximize your gains on your savings account funds. These accounts generally have no maintenance fees, so you won't pay anything to own them. They also offer competitive interest rates.

Currently, some of the best high-yield savings accounts offer rates of 5%. If you have $40,000 in your savings account, that could make you $2,000 in one year. 

It's worth noting that high-yield savings account interest rates fluctuate over time and they're not expected to stay this high forever. But even if they dip, you'll probably still earn considerably more than you could with a brick-and-mortar savings account. These often have interest rates of just 0.01%.

If you don't already have a high-yield savings account, it's worth comparing a few options before deciding which bank you want to work with. Some offer ATM cards if you'd like the option to withdraw cash directly, but you can always transfer your cash to a checking account first, too. If you prefer banking all in one place, choose an institution that offers all the major account types you expect to use. Then, all you have to do is contact the bank, verify your identity, and make your initial deposit.