Is a two-year cash buffer too conservative at 64?

[Ellen R.]

I retire next spring and the plan calls for holding two years of withdrawals in T-bills and savings. That is roughly $95,000 sitting outside the market. Part of me says this is exactly the sequence-risk protection the article described. Part of me looks at it and sees six figures not compounding. How did others land on a number here?

[Tom Beckett]

I went with eighteen months rather than twenty-four, mostly because I also have a small pension covering about a third of my fixed costs. The buffer only has to cover the gap between guaranteed income and spending, not total spending. That reframing cut mine by a lot.

[Dana Whitfield, CFP®]

Tom has the key adjustment: size the reserve against the portfolio-funded portion of spending, not the whole budget. The other thing worth doing is deciding in advance how you will refill it. A common approach is to top the buffer back up in any year the portfolio finishes positive, and leave it alone in years it does not. That rule turns the buffer into a working mechanism rather than a static pile of cash. Educational only, of course — your own plan may warrant something different.

[J. Mwangi]

Worth adding that “cash” doing nothing is less true than it was. A T-bill ladder at current short rates is not a painful place to park two years of spending.

[Ellen R.]

The gap-funding framing is what I was missing. Recalculated against fixed costs net of Social Security and it comes to about fourteen months, which I can live with much more easily. Thanks both.

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