Retiring Soon? Keeping Some of Your Nest Egg in a Savings Account Could Be a Smart Move
- Retirees should have most of their money invested so they can earn reasonable returns.
- It's still a good idea to have some money in savings.
- Assets in savings can be accessed easily and can help retirees avoid selling assets at an inopportune time.
When retirement is imminent, you need to make sure you're ready to cover costs.
When you're retiring, you'll likely need to rely on savings to support you. Social Security benefits often aren't large enough to cover costs on their own, so you need money from other sources.
In most cases, the bulk of your retirement assets should be invested in a tax-advantaged account such as a 401(k), and you should have a good mix of investments including stocks and bonds. This allows you to earn a generous return so your principal balance doesn't dwindle too quickly -- while also minimizing risks.
As retirement draws near, though, you may not want to have all of your money in a brokerage account. In fact, it can be a good idea to put a substantial sum into a savings account. Here's why.
Why putting some money in savings is important for retirees
Once you are retired and you no longer have a paycheck coming in, you will have to begin relying on your savings to supplement Social Security.
If you have all of your money tied up in a brokerage account and invested, then you may end up having to sell assets at a bad time because you need the money to pay your bills. If you have to take a distribution from a retirement account to cover costs right after a market crash occurs, you could be forced into selling assets at a loss before they have a chance to recover.
If you have some money in savings, you won't need to worry about this. Your savings is more liquid, so you can take money out of it whenever you want to without having to worry that you're selling assets at a bad time. You can leave your funds invested in the market to wait for them to rebound while still ensuring you have the funds you need to support yourself.
How much should you put into a savings account?
The amount of money you should have in savings is going to depend on many factors, including your risk tolerance and the likelihood your money would end up running short if you have to sell investments at a loss due to bad timing.
In many cases, however, retirees should aim to have enough money in a savings account to cover around two to five years of living expenses without having to tap their brokerage accounts. Economic recoveries and market rebounds will usually occur within this amount of time, so having a few years of savings accessible to you should give you time for investments to bounce back.
Now, obviously this can mean amassing a lot of extra assets in a savings account that doesn't provide a good return on investment. But if you can significantly reduce the risk of suffering outsized losses in an investment account you need to rely on, it's worth trying to build up a big account if you can. It just may end up saving your financial security if economic conditions aren't favorable when you become a retiree.
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