Is Cash King in Retirement?

Conventional wisdom says that in retirement, you should take less risk with your investment portfolio, especially the older you get. There is some wisdom there, in a general sense. But as always, a person’s individual circumstances really define whether a strategy is right for them.

You could, for instance, take the conventional wisdom to one extreme and hold an all-cash portfolio in retirement. All of your mutual funds would be money markets, and you’d own CDs and savings accounts. A strategy like that would have served you well during the bear stock market of 2000 to 2002 or 2008. Instead of losing 10, 20 or even 30% in any one year, an all cash portfolio would have generated positive returns of 1 to 5%. Nothing smokin’, but better than having any losses.

Of course, on the other hand, an all-cash portfolio in retirement would have missed out on some really great years in the mid to late 90s or the mid 2000s. Stock funds were returning anywhere from 20 to over 40% per year. And these were the index funds that just try to match the market’s performance; some mutual fund managers certainly had better returns in any particular year.

But the biggest concern with an all-cash portfolio in retirement is inflation. If you live long enough in retirement (maybe 20 or 30 years or more), inflation will erode your standard of living. Even with relatively mild inflation rates like we’ve seen over the past several years, inflation can easily cut your purchasing power in half over a 20-year retirement period—particularly if you have high medical expenses.

If the number one fear of retirees is outliving their money, number two is probably being forced to live on less and less while life lingers on. Those are two good reasons for holding investments beyond cash in your retirement years. Even in retirement, diversification is still a good long-term strategy.

The bottom line is whether you have enough money to live on as you please in retirement. If an all-cash portfolio can generate the income you need to meet your living expenses throughout your golden years, then there’s no urgent reason to take any extra risk by investing in other types of investments (like stocks). But if you’re not 100% sure about the future, it might be wise to consider adding some other types of assets to your investment mix. That just seems like common-sense wisdom to me.

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About Mike Wilson

Michael L. Wilson, MBA, CFP®, CRC®, is the owner of Integrity Financial Planning. Prior to founding Integrity in 1998, he worked for two years as a faculty member at the College for Financial Planning in Denver, training other financial advisors. Mike has 10 years of experience in the mutual fund industry, having worked with Fidelity Investments and Invesco Mutual Funds. He holds an MBA in Finance from Baylor University. Learn more about his work at www.integrityplanner.com.
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