Editor’s note: This is part five of a five-part series on supplemental income streams in retirement. Part one, Could Supplemental Income Strategies Work for Your Retirement?, is an introduction to the series. Part two is A Managed Account Offers Optimization and Tax Efficiency. Part three is Annuities Provide Peace of Mind and Lifetime Income. Part four is Three Investments That Put Your Money to Work With Less Risk.
We’ve all heard the phrase “cash is king,” and we’ve probably all heard it used to describe a variety of financial principles. While a stack of cash won’t multiply on its own to independently fund your retirement, cash reserves should be part of your overall retirement plan, offering liquidity and flexibility in uncertain or volatile markets.
The common emergency fund advice suggests having three to six months of cash on hand during your working years to address emergency needs like an unexpected expense or to buffer against job loss. But, when you’re done earning, with limited options to quickly raise funds, it is wise to have 12 to 24 months’ worth of your expenses accessible in cash reserves.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
That may seem like an awful lot of cash to leave metaphorically lying around — and it absolutely is — but the bottom line is you need a larger amount of cash on hand in retirement than you do when you’re working with a steady stream of income. Having access to a pool of reserves may help you avoid liquidating assets in down markets. And the good news is that having access to cash doesn’t mean it has to be idle.
There are ways you can maintain cash liquidity and still earn modest yields on your emergency fund while at the same time helping to combat inflation.
Set up a bank sweep
A bank sweep program transfers funds to a higher interest (FDIC insurance eligible) account once a certain deposit threshold is met. For example, a bank sweep could be set to transfer any excess cash from your checking account to a high-yield savings account or investment account once your balance reaches $10,000. A bank sweep can help you maintain enough cash on hand to manage everyday expenses while ensuring that the excess is going to work in an interest-bearing account. Sweeps are automated, requiring no extra effort from account holders.
Sweeps also can be set to help provide supplemental income from your investments by working in reverse. If your checking account dips below a set threshold, the sweep can automatically transfer money from your savings or investment account to your checking, ensuring you have the necessary liquid cash to meet your expenses.
Sweeps are a good and low-effort method of moving excess cash to an interest-earning account. It’s important to consider, though, that there may be fees to set up the account and potentially to transfer money out of interest-bearing accounts back to checking. Your financial adviser can help analyze your spending and future financial needs to help determine if a sweep account is appropriate for you.
Invest in a money market fund
Money market funds are another option for investors to earn modest returns without sacrificing short-term access to their money. Money market funds are invested in high-liquidity assets like corporate debt, short-term certificates of deposit (CDs) and government bonds. They are designed for investors who may need to enter or exit the investment quickly, so they carry limited barriers for entry, shorter terms and — as a result — limited capital appreciation for your investment.
Because yields from money market funds are generally minimal, they are not a recommended instrument for building your retirement assets. In fact, in a low interest rate environment, money market funds can struggle to keep pace with inflation. They can be effective to supplement your retirement income, though, especially when interest rates are high.
Since money market funds are not invested in stocks, participants stand little risk of losing on their investment, making money market funds a relatively safe option for realizing modest gains on your liquid cash. However, they aren’t ideal for long-term investing, as other investments may offer more attractive returns.
Consider a short-term certificate of deposit
When it comes to having quick access to your money, a CD may not initially be top of mind due to the traditional longer maturity terms of a few years to a decade or more. But CDs are also available in terms of a year or less and sometimes as few as 30 days. Short-term CDs can be a great way to set money aside for a planned future expense — like home repairs or a small trip — while earning a guaranteed rate of return for a specified period in the form of interest.
When investing in a short-term CD, it’s important to remember that your money is locked in for the term of the CD, and any early withdrawal will likely incur a penalty. Short-term CDs also traditionally earn a lower interest rate than longer-term instruments.
Still, you can always reinvest the proceeds of a shorter-term CD back into another CD or other investment vehicle once it matures. In a rising interest rate environment, short-term CDs can be a particularly effective investment for earning a small yield while considering your options for the future of your money.
A financial adviser can help you determine your unique mix to allocate for your emergency fund, liquid investments and growth and income solutions. As you enter retirement, it’s important to have access to cash for unexpected expenses.
And while it’s best not to count on your emergency fund as a high-growth investment opportunity, it also doesn’t mean you need to store it under your mattress. Low-yield, low-risk investments can help modestly grow your cash reserves without risking your ability to pay for a rainy day.
The other articles in this series:
Part one: Could Supplemental Income Strategies Work for Your Retirement?
Part two: A Managed Account Offers Optimization and Tax Efficiency
Part three: Annuities Provide Peace of Mind and Lifetime Income
Part four: Three Investments That Put Your Money to Work With Less Risk
related content
- When It Comes to Cash Yields, Cash Is No Longer Trash
- Are CDs a Good Investment in 2023?
- Financial Advisers Share the Best Financial Advice They’ve Ever Received
- Money Market Account vs. High-Yield Savings Account
-
I'm a Financial Planner: Here's How to Invest Like the Wealthy, Even if You Don't Have MillionsPrivate market investments, once exclusive to the ultra-wealthy and institutions, have become more accessible to individual investors, thanks to regulatory changes and new investment structures.
-
Four Ways a Massive Emergency Fund Can Hurt You More Than It HelpsSaving too much could mean you're missing opportunities to put your money to work. Redirect some of that money toward paying off debt, building retirement funds, fulfilling a dream or investing in higher-growth options.
-
I'm a Financial Planner: How to Dodge a Retirement Danger You May Not Have Heard AboutTiming is everything, and sequence of returns risk can mean the difference between a retirement nest egg that's overflowing … or empty.
-
Caring for Aging Parents: An Expert Guide to Easing the Financial and Emotional StrainEarly conversations, financial planning and understanding the progression of care needs can help to mitigate stress and protect family relationships.
-
I'm a Financial Adviser: The OBBB Is a Reminder for Older People to Have a Long-Term PlanThe new tax bill presents a good opportunity for retirees to revisit tax plans, look into doing some Roth conversions and consider plans for long-term care.
-
I'm an Insurance Expert: This Is Exactly Why Your Insurance Rates Are Soaring (and What You Can Do)A dramatic rise in the frequency and cost of severe weather and wildfires means you need to prepare, prepare, prepare — no matter where you live — for higher premiums.
-
Q3 2025 Post-Mortem From an Investment Adviser: Markets Continue to Climb, Gold ShinesThe third quarter saw market gains driven by Fed rate cuts and strong earnings, despite high valuations and concerns about speculative trading and job growth. Gold and international stocks could be potential hedges.
-
Moving Abroad? You Might Need a Cross-Border Financial AdviserIf you want to live in another country long term, you could benefit from an expert's guidance. Here's how to find a good qualified adviser to help with residency requirements, documentation, financial laws and tax impacts.
