Take This Simple Step as You Approach Retirement

Building a retirement cash cushion can help cover spending needs and reduce market risk in the early years.

A well-funded cash bucket provides flexibility and peace of mind as you transition into retirement. Prostock-studio/Shutterstock

An important job in the two or so years leading up to retirement—right up there with figuring out your healthcare coverage and winding down your work activities—is building up a cash cushion. In addition to being there as a source of funding when you eventually retire, cash has the salutary effect of providing a buffer if  you retire earlier than you expected  due to unforeseen circumstances.

As you build out your Bucket portfolio, here’s some guidance on the amount, source, and location of those liquid reserves.

Rightsizing Bucket 1

Your cash bucket should consist of one to two years of portfolio withdrawals, not living expenses. That’s because at least some of your living expenses will likely be coming from outside your portfolio—Social Security or a pension, for example. And the composition of those cash flow sources may well change throughout your retirement.