Is It Possible To Save Too Much For Retirement?
Many individuals find themselves awash in cash for various reasons, including fear of market volatility and insecurity surrounding the pandemic. Diane Marra
If you’re like many Americans, pandemic lockdowns saw you decrease your spending and increase your savings. Now, though, you might be looking at your cash reserves and wondering if your portfolio is as balanced as it could be.
While it’s true that every retiree has different liquidity requirements and risk tolerances, all are wise to avoid having too much cash in their portfolios. For one thing, stockpiling cash can lower a portfolio’s returns, a phenomenon referred to as “portfolio drag.” Portfolio drag can then create cash shortfalls when you no longer work.
However, it can be challenging to determine if you have the right cash balance for your retirement and income. According to financial researchers, a $10,000 investment in Treasury bills, which are essentially proxies for cash, grew to over $21,000 over 30 years ending in December 2020. $10,000 invested in the S&P 500 index during the same 30 year period increased to over $211,000. This situation illustrates one of the biggest concerns about having too much cash in your portfolio, “opportunity cost.” Even when interest rates are low, the actual return on money (after tax liabilities and inflation) can be harmful. Only a diverse, balanced portfolio can potentially outrun inflation.
Seniors and cash
Financial experts often point out that millions of American seniors have under $100,000 saved for retirement. Yet, other studies indicate another lesser-known but potentially problematic issue. Thousands of seniors have too much cash in their retirement and income plans.
Diligent saving is an admirable accomplishment, but there can be side effects for portfolios skewing too strongly toward cash, including seeing your savings eaten away by inflation or taxes. The erosion of your savings could then result in the inability to offset longevity risk.
Of the many retirement risks, including sequence of returns risk, inflation risk, and health risk, longevity risk is perhaps the most troubling issue faced by retirees. If seniors fail to protect their savings from erosive forces such as inflation, there is a real chance they could deplete their assets long before they pass away.
Should you use excess cash to buy an annuity?
If you are fortunate enough to have a work pension, you already have at least one source of lifetime income. If this is the case, you may not need as much money in your investment matrix’s “safe money” section. However, the only way to guarantee income for life beyond Social Security and company pensions is to create an additional pension with annuity products.
Annuities are risk management tools that shift the burden of longevity from you to an insurance carrier and should never be purchased on the promise of returns. An annuity is usually not the right choice unless you want or need income for life, protection of your initial investment, a safeguard against living too long or a legacy for loved ones.
If you do want any or all of these things, it’s a good idea to partner with a safe money specialist who can explain the pros and cons of annuities and how they can help you guard against some of the more obvious threats to your economic well-being.
Annuities are controversial products for some people, but they are the only way to build a guaranteed lifetime income stream. Nearly everyone has at least one annuity in the form of Social Security, but you might also need an additional annuity in your portfolio.
Funding a retirement that lasts thirty years is a very different process than financing a ten-year retirement. There is a delicate balance in ensuring that a person has enough cash in their emergency fund to weather emergencies and not so much that they cannot take advantage of opportunities. You will want to sit down with your financial advisor on a regular basis to evaluate and balance your retirement and income plan to determine if you have the right amount of cash and if you might need more safe money options.
Investment advisory services offered through Horter Investment Management, LLC, a SEC-Registered Investment Advisor. Horter Investment Management does not provide legal or tax advice. Investment Advisor Representatives of Horter Investment Management may only conduct business with residents of the states and jurisdictions in which they are properly registered or exempt from registration requirements. Insurance and annuity products are sold separately through Diane Marra. Securities transactions for Horter Investment Management clients are placed through E*TRADE Advisor Services, TD Ameritrade and Nationwide Advisory Solutions.