Why Retirees May Want Several Years of Living Expenses in the Bank
- Retirees need to be financially prepared for life with no paycheck.
- In many cases, this means it's important to have several years worth of living expenses saved.
- Having money set aside in an accessible bank account could protect you from having to sell investments at a bad time.
Don't put your retirement at risk by having too little cash in the bank.
If you are retired already, or are thinking about leaving your job soon, it's important to take a close look at how much money you have in a high-yield savings account.
In most cases, it's a good idea to make sure you have several years worth of living expenses in savings in order to be financially prepared for life after the paychecks stop.
Here's why it's a good idea to put quite a bit of money in savings.
Having liquid savings is crucial to protect your long-term future
Once you're no longer getting a paycheck, you're obviously going to need to get money from somewhere to cover the bills. Social Security will likely provide some of it, but won't be enough to live on by itself because your benefits are only meant to replace about 40% of pre-retirement income.
If you don't have a pension, one of the best places to get your retirement money from is an investment account. If you have money invested, it can earn returns so your account balance grows each year without you putting any additional money into it. You can take money out of your investment accounts without your balance declining by the full amount of your withdrawal since you will be earning these returns.
But, investing inherently carries some risk even if you pick relatively safe assets to buy. There's a chance you could end up needing to make a withdrawal from your account during a market downturn. And that's bad news because you could end up locking in losses on investments by selling at an inopportune time in order to generate the money to take out.
If you have a few years worth of living expenses in savings, though, then this won't happen to you. If you need to get money to cover the bills when the market is down, you won't be forced to sell assets for less than you were hoping to. You can rely on your savings until the market recovers and you're able to sell at a profit when you must liquidate your investment to cover living expenses.
It's hard to know exactly how many years worth of liquid savings you need, but most experts recommend about two to five years worth so you'll have plenty of time to make it through even a long bear market.
If you have a good amount of money saved in an account where you can't lose it, and which you can access whenever you need it, your ability to wait out downturns should help you preserve your nest egg and ensure your account balance doesn't dwindle too fast and leave you without the funds you need.
How to save up so much money
It can be a challenge to save up several years’ worth of living expenses. But if you do it over time by investing a little bit each month, that makes it easier. The sooner you start allocating a little bit of your retirement savings to a high-yield savings account, the easier it will be to protect your assets by being prepared for a downturn.
If you downsize in retirement and make a profit on your home, you can also put some of the money into savings. Or if you end up selling some investments at a profit, this money could be used to bulk up your savings account as well.
It's worth the effort to make sure you have some money in a safe investment that you can turn to when the stock market declines and you need money to live on while you wait for your investments to recover.
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