The hardest part of retirement investing isn't picking investments. It's not having to sell the good ones at a bad time. A cash flow reserve is how we help with that.
What it is
A cash flow reserve is a portion of your portfolio set aside to cover a set period of planned spending, usually a few years. It's held in steadier, more liquid investments, separate from the part of your portfolio meant for long-term growth.
Why it helps
Markets go down. Not often, not forever, but reliably. When they do, a retiree without a reserve may have to sell stocks at lower prices to cover the monthly bills. A reserve lets you keep spending normally while the growth portion has time to recover.
It also helps with something harder to measure: sleep. Knowing the next few years of income are already set aside makes it easier to stay with a plan when the headlines get loud.
How we refill it
- In good years, we take gains from the growth portion to top the reserve back up.
- In weak years, we draw on the reserve and leave the growth portion alone.
- Every year, we revisit how much you're spending and whether the reserve is the right size.
“The four most dangerous words in investing are: this time it's different.”
Sir John Templeton
Is it right for you?
The right size depends on your income sources, your spending and how you feel about risk. Social Security, pensions and other income all change the math. That's why it starts with your plan, not a rule of thumb.
This article is for general education and is not individualized investment, tax or legal advice. A cash reserve may earn less than other investments, and no strategy assures a profit or protects against loss.
