How Much Safe Money Do I Need On Hand Once I'm Retired?

If you're spending time with family , if you're going on trips , you know there's enough set on the side so that you can live the life you wanna live , knowing you have enough growing for you , outpacing inflation , so that you , in 20 , 30 years from now , is happy but at the same time , you're able to live comfortably today without going .

Oh my gosh , if something happens in the market , am I not gonna be okay ? Am I gonna run out of money ? And so today I'm gonna walk you through that framework of how much money should you have and just call it safe assets .

Now , I always if you know for a while , now , if you've been listening for a while , I should say I always go through the review of the week . Today I'm gonna do a little bit of a different approach . The reason for that is that I have an e-book and a lot of you have already known this and you've downloaded it . I have two e-books out .

I have one on just the complete guide to an early retirement and I have another that's a complete guide to health insurance for an early retirement . But when you download my first e-book just the complete guide to an early retirement I ask you what's something you're so excited to no longer have to worry about once you have retired early ?

Now I did a YouTube video going over the hundreds of responses that you guys had submitted for that , but I'm just gonna go through a few fun ones as of late , because I wanna go through early retirement content that's helpful .

At the same time , a lot of you are still a few years out from that early retirement and because of that , you need that inspiration to okay , why am I still doing those 401k savings ? Why am I doing the Roth IRAs ? Why am I making sure that I'm kind of sacrificing parts of today so that in the future I can live this life I wanna live ?

And , by the way , if you've heard my podcast enough by now , you know I don't want you to do that . There's that common phrase of fire movement financial independence , retire early . I don't subscribe to that . I'm part of that financial independence , recreational employment . So my definition is a little different . Where I don't want you to be going .

Oh my gosh , I'm gonna get to this perfect date and then at that date , my life shifts . It's what can we do today to start living that way ? And sometimes there's not much because you have to be in that job , and I recognize that . Other times it's no .

I can make a few shifts , and maybe not in giant waves , but can I do small shifts today that will make it a little bit easier every day until that date , and then life's even better from there . So here are a few of those responses , and I will always be anonymous .

So if you put your name and then put a comment in there and you say , oh my gosh , I hate my boss , jack or whatever it is , I'm never gonna say that on the podcast . I know a lot of you had concerns about that . No need to worry . Now . This comes from someone who says I can't wait to no longer have to attend unnecessary meetings .

The next one comes from someone who says this is a funny one . I never wanna sacrifice time with my wife so I can go make money . I feel like I haven't gotten enough of my true wife time in recent years , and so what the really referencing is . It's one thing to have your spouse .

It's another thing to say , hey , I really feel I'm getting real quality time with them . And the reason I'm laughing is quality time is my partner's love language and so I need to do a better job of that myself . The next one here is stay working for a company I don't like , even though they pay me well . I like that one a lot .

Don't stay at a company just because they are paying you well . It's kind of easy to hear that on paper , but in this example this person is saying , hey , I can't wait to no longer just be here , truly , for that paycheck .

And the last one I'll leave you with comes from when I got yesterday , and this says I can't wait to no longer have to worry about peeing , and I'm not a teacher .

And that joke is because I put out a newsletter a while ago and I had talked about someone who says , yep , already I am a teacher and it's just so hard to find time to pee during my day and because of that I can't wait to retire .

And so this person obviously saw that newsletter and said hey , I also want to be able to go to the bathroom without worrying , and I am not a teacher . So those are the four , five quick responses there .

Now I want to go into today's topic , and today's topic is , like I said , how much safe money do you need throughout retirement and really , how do you think through this ? That's the bigger thing . So you're going to have , you know , living monthly expenses . Just what does it cost to be able to groceries , gas , things like that ?

Now , on top of that , you're going okay , I have to manage . Maybe you have multiple income sources . Maybe there's going to be social security , but it doesn't start for a little bit . Maybe there's pension income and it starts right away . Maybe it doesn't have a cost of living adjustment . Maybe you're here and all of that going Ari , that's all foreign to me .

I don't even know what you just said . I just have my investment portfolio . Doesn't really matter where you fall . The framework is going to work for you , because you're all going to have taxes at some point and some of you are going Ari , I'm not going to have taxes because I have a really good strategy to protect against that . Awesome .

Maybe we do have very little in taxes or maybe we're doing strategies to make sure we don't pay a lot in taxes . I like it . Here's the framework I want you to think through . So , ignoring all of that monthly expenses , multiple income sources , taxes I've said this on previous episodes my job is to simplify your thinking .

There's a ton out there to worry about . I don't want you to worry about a lot of things that I think a lot of you might be worrying about , and the reason I know that is my clients tell me they worry about it until they started working with us . So the first thing that I want you to go through what is the big question here ?

We hear a lot about how do we manage a portfolio . Well , what I don't think a lot of people talk about is how do you incorporate the cash and short term assets into that and how does that change , which is the big thing ? How does it change from the way that you're invested right now , throughout your early retirement years and beyond that ?

So how should your portfolio change to reflect that ? Because you guessed it , and a lot of this is self-explanatory .

Before I go into my deep dive , which is , yeah , you're working today , a lot of you are , maybe you're 55 , you've got a few million bucks , but you want a little bit more cushion and you just , hey , all right , I'm not ready to pull the trigger yet on that early retirement or I've got consulting part-time income .

I'm ready to do it , but I just am gonna stay where I am . For now . I say great , as long as you're adding more dollars . It's easy to ride those waves of the market because you don't really care .

You're able to support your income needs through your W-2 income or , if you're self-employed , through your income or whatever is the way that you pull income today . Now the reality is , once you retire , you have to become your own employer . You are sending your own income .

So in this way , sometimes , if the markets do well , I'm telling my clients , hey , you're your own employer , give yourself a raise , the market's done well , almost like getting a bonus In other years . If markets aren't doing well , it's almost like , hey , the company's not doing well .

Can we scale back on some of these trips or experiences or some of these things , just temporarily , until that storm has weathered ? And if you don't , it's not the end of the world , but we might be leaving a lot on the table when we do that . So here is the easiest way to think through all of this .

Hopefully , in five to 10 minutes from now , you're gonna have a lot of peace of mind when it comes to understanding how much you should have in safe assets . So the first thing I ask people say why do you have each account ? They go all right . It's kind of a dumb question .

I have my Roth IRA , I want it growing , I've got my emergency fund and I've got it over here for emergencies . And they go through and outline of what their accounts are . And so another way to ask it is what if you didn't have it ? Meaning , what if you had everything in one account ? If you have a 401k , why do you have it ?

And you might say , ari , it's because I want the employer match and I like the way it just automates my investing . I don't have to worry about doing it comes out of my paycheck . I say great . Once again , what if you didn't have it ? Well , you'd be doing savings , but maybe it's elsewhere , maybe it's in a different account .

So why am I even bringing this up ? Well , the reason I bring this up is , if we go to cash reserves in an early retirement really any retirement what's the role of your emergency fund ? Well , most people would say it's because an emergency happens . Maybe you lose a job or your car dies or there's a big medical expense .

And so I'll say , okay , where's your emergency fund today ? And they'll say , ari , it's with my checking account or it's with my savings account , and so it's not really earmarked for an emergency . Meaning , mentally it is from a mental accounting , but it's really easier for them to spend it down because it's just in that same account .

So the first thing is with an emergency fund , can we create a barrier it's known as barrier financing where intentionally make it a little bit harder ? Maybe you put that emergency fund at a high yield savings account .

It's what a lot of people like to do , but I don't love doing that , and the reason for that is your emergency account should truly be for emergencies . Now , we're gonna connect this to retirement income in a second . But the whole idea here is how can we be very intentional with every single account that you own ?

So in case of an emergency , could you put it in a high yield savings and get a little bit more growth ? Yeah , but then when an emergency happens , you can't actually access the funds for a few days . So in my opinion it kind of defeats the purpose . What if you didn't have an emergency fund , just high level . Well , you'd be more stressed .

You may have to put funds on a credit card , which is high interest , so that costs you even more . And , worst case , maybe you have to pull money from a retirement account if you don't have it at all , or any other funds . And then there's taxes and penalties . So why am I even bringing up these really basic examples ?

The reason I'm bringing it up is because there are some things that are gonna change and some things that are not gonna change , and here's how I want you to think through it . Let's pretend that you are retired and you're collecting $5,000 a month , and I'll just say pension income . Okay , so $60,000 a year . But you're hearing that going .

Are you 5,000 a month or 60,000 a year ? I need 7,000 a month to do everything I wanna do , so 5,000 a month is coming in through the pension , or 60,000 a year , but really I need 7,000 a month or $84,000 a year . I say , okay , if that's the case , that means 2,000 has to come from your portfolio . Pretty simple so far .

But now what happens if you lose your job ? Well , if you lose your job , you're retired , so there's really not a risk there to keep the same amount you've had throughout your career in maybe an emergency fund or some other safe asset , because you're retired no-transcript income from your traditional employment which would have come from the emergency fund before .

The typical risk is you do lose your income . You need it to come from somewhere and you can live off of that . But now there are some expenses that are , of course , going to still be there . That might be a medical expense or your car dies and you need $5,000 right away or $10,000 right away , and so you could just take that from your portfolio .

So why do I bring this up ? Well , financially , you might need a whole lot less in your emergency fund now because you are retired . It's the ability to pull from accounts intentionally and not just saying , okay , why do we have what we have your emergency fund , why do you have it ? It's really there to provide peace of mind .

I recommend having a lower balance in your emergency fund than during your working years through the example I just gave . In addition to that , I have clients that like to break things down really intentionally separate savings accounts for separate short-term needs , a new car , vacations , property taxes .

It's just a way of spreading out what we'll call irregular expenses to normalize your cash flow , and then , on top of that , you have your portfolio , and so this is where you're going to pull income from when you need it . Now let's take a step back to go . Okay , got it .

I kind of understand where you're going with this already , but I'm not totally clear yet , because you haven't really given an example on the portfolio and how much I need in cash . I'm going to go through that now .

So the way I would go about it is the following I'm going to give you two examples , some of which you've already heard , but I'm going to put an extra layer in case you haven't . So here's what I tell people let's pretend that you have a pension and that pension covers $100,000 in a single year .

Okay , so $100,000 is coming from the pension and you tell me that you need $100,000 to do everything you want to do . Say great , how much other income do you have , potentially from your portfolio ? And you might say Ari , I've got my $100,000 from my pension and I only need $100,000 to live . But I've got this other $2 million .

That's just in my portfolio and I don't really need it , but it could create more income if I need it to . I say great , how much should we have in safe assets ? And they'll say Ari , I saw an article online that says 6040 , meaning 60% equities , 40% fixed income . But then , ari , I saw another article and it said 7030 .

You know which one is right for me , and you guys probably know this already , but I am anti-cookie cutter and what I mean by that is I don't believe in having a cookie cutter solution , meaning you are this age and here's the exact portfolio you need .

I say it has to depend , because we just learned that this person has all of their needs covered by their pension , which means , theoretically , their portfolio could be 100% equities . Now they might even hear something like that and go Ari , what on earth did you just say You're recommending 100% equities ? Did you not hear me ?

I'm getting older , I need to be more conservative . I go oh , I heard you , but what I'm hearing is you don't need that portfolio in order to be okay . And they go yeah , that's true , but isn't going to go down 30 , 40% ? I'm not looking for that experience . I go that's correct .

And if you're not looking for that experience , then we don't need to do 100% equities . But on paper , that's one answer and it's the financial answer and it's not the life answer . And so let's look at a second person here and the second person here .

They have $100,000 that they need to live the life they want , but they only have 50,000 coming from a pension . So , as opposed to the first person that had all of their income needs met by their pension , the second person has half of them met by their income , by their pension . So now they have an additional 50,000 that has to come from their portfolio .

And let's say they also have a $2 million portfolio . Well then , guess what ? The reality is ? They couldn't be 100% in equities more often than not , because the last thing they want to do is have to sell things at a loss .

That's what all of you are thinking really in the back of your head , whether you know it or not , is you don't want to have to go in to what you've worked so hard to accumulate . Sell things at a loss to create income . So you're thinking how much do I need on the side ? And just ultra safe assets , so I don't have to worry . And here's the answer .

The answer is the average market downturn is two to two and a half years . So that's on average . Now , if we look at averages , it makes life look really easy . But life doesn't just work in averages because you don't want to retire and go . Oh my gosh , ari .

I was kind of basing on that two to two and a half years , but it's really tough time right now . It's like a 2008 event just occurred and I retired at the worst possible time and now am I screwed for the rest of my retirement ? And the reality is , yes , if you don't plan well , but you're going to plan well so you don't have to worry .

The way I look at it is let's have two to two and a half years in super safe assets , but then let's double it Five years of just collect core safe assets . So let's take this example that first person they don't need Theoretically , the person who has all of their income being covered by their pension and then a separate two million .

They don't need a whole lot in what I'll say safe assets because their pension is covering what they want to do . Now . If they want to go take big trips or do additional amounts in the first five or ten years of an earlier retirement , which is not uncommon , then great .

Maybe we do want a little buffer there , but hypothetically in this scenario you don't need that . Now the second person , remember they only have half of their needs covered by the pension , so now they need another $50,000 .

That another $50,000 in my eyes that , if we look at an average , tells me that they really need call it , a hundred thousand of their two million to be in a safe asset . That safe asset could be a CD , it could be a short-term instrument like inflation-protected securities . It could be money market funds . It could be a few different things .

But if we're looking at this account and just going , that's the average . Well , now you have a $2 million portfolio and only $100,000 is invested conservatively , which means you're here in this going , ari , I've got my pension covers $50,000 of my $100,000 of needs .

You're telling me only $100,000 of my two million should be in what I'll call conservative safe assets . I go not exactly . That's if we look at averages . But let's take it a step further . We said we want really five years of core expenses there .

So I look at that and I go okay , if $50,000 has to come from the portfolio to supplement so you can have $100,000 , of which 50 is already coming from the pension . That tells me 50,000 times five years means really 250,000 should be coming in a sense out of your portfolio to supplement lifestyle needs , if we wanted five years of living expenses .

So now you're here in that , going okay , I've got a $2 million portfolio . At a minimum $250,000 should be in those what I call war chest or safe assets . That leaves another 1.75 million to be growing for you . That's the on paper financial answer . But then I'll ask my clients I go if you see your portfolio go down 30% , how would you feel in retirement ?

And some people go Ari , I'm totally good with it because I know I've got a plan and you showed me my income , I'm going to be okay . Other people go Ari , you showed me I'm going to be okay , but I'm not going to sleep that well . If the reality is my portfolio is fluctuating , like you mentioned there 25 , 30 , 35% I'd say great .

Then let's find that right mix , but let's have an understanding of how much cash reserves you really have , because some people come to me and they have a 60 , 40 portfolio .

So in this example , if you have 2 million bucks , they've got 1.2 million in assets outpacing inflation or growing and they've got $800,000 of what I'll call war chest or safe assets $800,000 .

I mean , that's the equivalent you can understand here , of 16 years worth of call it safe assets , 16 years worth of living expenses embedded in that portfolio , which I would argue is unnecessary . Now that's the financial answer .

Once again , we always want to tie it back to the life answer , but most people they reach out to me because they don't want to do fine , they want to optimize what they've worked so hard for . So ask yourself how much do you want to spend and what does that spending look like ?

Maybe it's the first year 100,000 , but really we want to add 10 years of travel on top of that . Maybe that's $20,000 . Then maybe it comes back down a little bit . Maybe it shoots back up in the latter years of retirement and that's called the retirement smile . You spend more while you have your energy and health comes back down a little bit .

Maybe it shoots back up in the other years . So what I ask my clients is how do you look at this five years worth of core safe assets and how are you framing it in your whole portfolio ? Because you might have a Roth IRA and maybe you have a 401k , maybe you have a emergency fund . It's how can we put those in the right places ?

So for most of my clients . I'll say let's have a year's worth of living expenses just in the account it might be a brokerage account , it might be an IRA , it might be a 401k of where we're pulling income from for that year . Then let's maybe have some fixed income that's providing a little bit more buffer .

It's not going to grow like crazy for us , but maybe it's something like iBonds or maybe it's something like inflation protected securities or maybe it's something like Tbills , something that's going to be able to get us some good return .

But we're not expecting it to hit out of the park and we don't want it to , because it's there to provide that buffer of income for the next . Call it two to five years . So you have your first year just set aside and cash . You know for that year where income is going to come from .

And then from there you say let's have two to five years of buffer just embedded in the portfolio , then anything beyond that that we want growing for you , not because we want extreme volatility , but because you want to really take advantage of compound interest , which works like crazy for you because of how well you've saved and invested up until this point .

So to summarize all of this , number one understand and be really realistic . How much do you want to spend in an early retirement ? And some people go all right , I don't know , I haven't done it yet . You can see , I have a YouTube video where I go through and actually give you a planner you can download to actually start to think through this yourself .

On top of that , you now know how much you want to spend . What income sources are going to start right away . Is it a pension , a rental income or social security ? If not , what role should your portfolio play ? And then I do a whole another podcast episode on what I call asset location . You've heard of it before .

It's not asset allocation , but asset location , meaning what types of investments should be in the right types of accounts . In this example here , if you have a brokerage account and you want to retire early , we're going to make sure the conservative assets are in that account , because that's where we're going to pull from . We don't want it being extremely volatile .

We need that money there for the next two , three , four , five years so that you can live the life you want to live , maybe before you can tap into some of your other retirement accounts which don't become penalty free and tax free until 59 and a half .

So we want to be really intentional and strategic about how we're looking at cash reserves , which , once again , that average is two to two and a half years for a market to recover , to just get back to where it is over time . But you go all right . What if it's not that ?

And that's known as sequence of return risk , which is a fancy way of saying what if I retire ? It's the worst possible time . I need to make sure that I'm going to be okay . I don't want to sell things at a loss . That's why we need to protect your portfolio through having the right amount in what I'll call war chest or safe assets .

So that's a summary today from a mental accounting perspective . The accounts that most of my clients have is number one . They have a brokerage account . That's the account that helps bridge that gap until they want to be able to tap into their IRAs or 401 or Roth IRA or whatever account that they have .

On top of that , my clients will have a checkings account . They'll have a savings account . They might have an emergency fund account that they can access . They're intentionally not putting it in a CD or anything like that . It's truly .

If an emergency happens , they have the funds ready for that , but it's a whole lot less than during their working career , because they don't need to rely on that income , because if they really need income , they can pull it from their portfolio . So why do I get passionate about these things ?

Well , like that example I explained before , if you had a 60 , 40 portfolio with $2 million , do you really need 16 years worth of living expenses just sitting there , waiting , not growing ? For you , that could be $500,000 or a million or $2 million , which , with just good intention , you could put to work , to give more or travel more or spend more .

I'm not obsessed with numbers for numbers sake . I'm obsessed with the fact of you getting the most out of your early retirement and if we can use numbers to do so . Great Money doesn't solve all happiness , as you know , but what it can solve is a lot of good for the world when you do well with your planning . So I want to help clients do that .

I've now helped over 250,000 people have more confidence towards an early retirement because of all of you , and if this podcast has been helpful at all , I kindly ask that you do leave a review . If you want a custom strategy . You can , of course , apply to work with me in the link below and , of course , I would look forward to speaking with you .

Hope this has been helpful . See you all next Monday . Thank you for listening to another episode of the early retirement show . If you have a question that you want answered in a future episode , you can always go to my website , earlyretirementpodcastcom .

That's earlyretirementpodcastcom , and you can go ahead and submit a question that I'll look to answer in a future episode . Thank you all for listening . Please do rate it , review it and share it with someone who you think would benefit from this information . If there's anyone out there that you know , I certainly appreciate it and I will see you all each week .

Hey guys , it's me again . Please be smart about this . Everything in this podcast should be construed as financial , tax or legal advice . Consult with your tax preparer or financial advisor before taking any action . This podcast is for informational purposes only .