We all know that one person who often stashes cash around the house. Maybe you’re helping your parents or in-laws move out of their home to downsize and keep finding hundred dollar bills everywhere. They’re stuffed under the mattress, in the family bible, between old jars of canned goods in the basement. In today’s world of online banking, virtual workers, and a generally online/non-cash-based world, it can be tough to imagine the driving desire behind keeping such large cash reserves hidden around your home. Unless of course, you consider yourself to be “risk-averse.”
However, sometimes it’s not always as dramatic as finding your Great Aunt Agnes’s $500 stockpiles in different dresser drawers around her house. Sometimes, as a financial planner, I see similar habits in pre-retirees. They’ll save hundreds of thousands of dollars in a savings account – more than they’d ever need for their immediate goals, expenses, or even a sudden and expensive emergency.
So, what’s motivating retirees to keep cash tucked between the chapters of their favorite book, or to have hundreds of thousands of dollars in a low-interest savings account at the local credit union?
The answer is simple: fear.
Many retirees and pre-retirees are afraid to invest in the stock market, because there’s a constant worry of losing all of their hard-earned savings, and being unable to live comfortably. So, while it may seem easy to tease Great Aunt Agnes about the cash underneath her floorboards, you may need to take a look at your own spending and saving habits before assuming your quirks are that much different.
When Is It Too Much Cash?
A question I get a lot from pre-retirees who know they have a bit of a cash-hoarding mentality is: How much is too much cash to have sitting around?
The truth is there’s no one right answer here. Risk-averse can mean very different things to different people.
Ultimately, you need to feel comfortable and confident with your retirement plan – even if that means keeping more of your funds in directly-accessible cash reserves than most do. However, it’s still important to understand the different trade-offs you’re making when you avoid the stock market.
For example, cash savings won’t keep up with inflation the same way the returns on stock investments could. Over time, the value of your cash will slowly decrease, which could mean you have less spending-power later in retirement when you may have large medical expenses, or other living expenses crop up.
Investing Can Help With Longevity Planning
One of the biggest benefits that comes with investing during retirement is that you’re able to extend the life of your money. When you’re planning for longevity, your goal is to have plenty of savings to cover your expenses for the rest of your life.
Then, anything that’s left over becomes part of your estate plan. When you invest you’re able to take advantage of compound interest, which can help you to grow your nest egg – even as you take distributions from your savings to cover retirement expenses. Of course, there’s still a risk that comes with investing.
Being Risk-Averse in the Context of Your Retirement Plan
Depending on your retirement lifestyle goals, you may be able to invest during retirement with minimal risk. Contrary to popular belief, I don’t think that you have to stuff as much money as you can into the stock market during retirement to extend the life of your savings. I think it’s more important to balance the trade-offs that come with keeping more of your funds in cash, and how that will impact your goals.
A good example of how lifestyle impacts the need to take on more or less risk in your retirement plan is how you plan to spend your day-to-day. Do you plan to hang out around the house with your spouse or partner? Maybe dabble in a few DIY projects, and spend time with your grandkids? You may not need as much risk in your portfolio.
However, if you’re looking to leave a legacy after you pass away, or travel the world multiple times throughout retirement, you might need more risk to accomplish those goals comfortably. Even if, when it comes to your savings and investments, you think of yourself as risk-averse.
The most important part of determining whether you need to take on more (or less) risk as part of your retirement plan is to determine what’s important to you. Ask yourself these questions:
What do I want to accomplish?
When do I want to accomplish it?
With those questions in mind, you’ll be well on your way to partnering with a financial planner who can help you create a strategy that makes you feel comfortable while still putting you on track to accomplish your goals.
You may consider yourself as risk-averse, but your aversion to risk could prevent you from accomplishing other things that are important to you and those your care about.
Ready to learn more? Request a call today! I’d love to help you get started creating your retirement plan.