When you retire, you will likely need to rely on your savings to support yourself. Social Security benefits are often not large enough to cover costs on their own, so you need money from other sources.
In most cases, most of your retirement assets should be invested in a tax-advantaged account like a 401(k), and you should have a good mix of investments, including stocks and bonds. This allows you to earn a generous return so your principal balance doesn’t decline too quickly, while minimizing risk.
As you approach retirement, however, you may not want to have all your money in a brokerage account. In fact, it may be wise to put a substantial sum in a savings account. Here’s why.
Why saving is important for retirees
Once you’re retired and run out of paychecks, you’ll need to start relying on your savings to supplement Social Security.
If you have all your money tied up in a brokerage account and invested, you may need to sell assets at the wrong time because you need cash to pay your bills. If you need to withdraw a distribution from a retirement account to cover costs right after a stock market crash, you may be forced to sell assets at a loss before they have a chance to recover.
If you have money in savings, you won’t have to worry about that. Your savings are more liquid, so you can withdraw money from them whenever you want without having to worry about selling assets at the wrong time. You can leave your invested funds in the market to wait for them to rebound while ensuring that you have the funds you need to support yourself.
How much should you put in a savings account?
The amount of money you should have in savings will depend on many factors, including your risk tolerance and the likelihood that your money will eventually run out if you have to sell investments at a loss due to bad timing.
In many cases, however, retirees should strive to have enough money in a savings account to cover around two to five years of living expenses without having to dip into their brokerage accounts. Economic recoveries and market rebounds will usually occur within this time frame, so having a few years of savings at your disposal should give you time to bounce back.
Now, obviously, that can mean accumulating a lot of extra assets in a savings account that doesn’t offer a good return on investment. But if you can significantly reduce the risk of incurring outsized losses in an investment account you have to rely on, it’s worth trying to create a big account if you can. This can end up saving your financial security if economic conditions are not favorable when you become retired.
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