How much money do you really need to retire without losing sleep at night? If you think your 401(k) alone will cut it, think again — one wrong market move could put your entire retirement plan to sleep.
But figuring out how much cash you’ll need to enjoy your retirement isn’t exactly straightforward. Between health care, housing, groceries and maybe even a vacation or two, the costs can add up fast.
And the reality? Everyone’s “magic number” is a little different.
If you’re looking for a solid starting point, personal finance icon Suze Orman has some rules that might help you get a good night’s sleep, though her magic number may surprise you.
Orman recently shared her thoughts on her Women & Money podcast, and her advice is all about playing defense — especially in unpredictable markets.
Her first rule: don’t rely on your 401(k) or IRA. Sure, you’ve been diligently contributing to your 401(k), Roth IRA or traditional IRA for years, but the stock market doesn’t always play nice.
“It’s not always that stocks go down and bonds go up, or bonds go down and therefore stocks go up. Sometimes everything can go down,” Orman said on the podcast.
Translation? If your entire retirement plan is riding the market rollercoaster, you could be in for a wild ride just when you’re hoping for smooth sailing.
So, how much cash should you have on hand? To cushion the blow in a market downturn, Orman recommends stashing away three to five years’ worth of living expenses in a liquid, low-risk account, like a high-yield savings or a checking account.
This “just-in-case” fund should not be tied to the market. That way, if things go sideways, you’re not forced to sell investments at a loss just to cover rent or buy groceries.
“If you really wanna be on the safe side, it’s five years,” Orman said. “If you wanna just play it so that you have at least three years, okay, you can do that, as well. Maybe you split it and you do four years.”
According to the Federal Reserve’s 2022 Survey of Consumer Finances, the average American household has saved about $333,000 for retirement.
If you haven’t started building that emergency fund yet, here’s how to begin.
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Building a solid cash cushion isn’t just about peace of mind. Having easily accessible funds can help you navigate emergencies, smooth out your cash flow and even take advantage of surprise investment opportunities.
A great place to start is with a high-yield savings account. These offer better interest rates than traditional savings accounts, so your money works harder while remaining liquid. Plus, they’re usually FDIC-insured, so you don’t have to lose sleep over risk.
Another option is money market funds. While they’re not FDIC-insured, they tend to offer higher returns by investing in short-term, high-quality debt. They’re still fairly liquid, but if safety is your top priority, weigh the risks carefully.
If you’re comfortable locking your money away for a bit, short-term certificates of deposit (CDs) might be worth a look. They offer fixed interest rates and are FDIC-insured — just keep in mind, there are penalties if you withdraw early. CDs are best for funds you know you won’t need soon.
The earlier you start building your cash reserve, the better. Compound interest can do a lot of the heavy lifting if you give it enough time. Even setting aside a little each month can make a big difference later. The U.S. Department of Labor’s Retirement Savings Toolkit is a helpful resource.
Another easy win is to trim your discretionary expenses. Cutting back on extras like streaming services, frequent dining out, and impulse buys can free up cash for savings, where it can actually earn interest instead of disappearing.
Automating your savings is a game-changer, too. Set up a recurring transfer from your checking account to your savings, and you’ll build up a nest egg without thinking about it. It’s one of the easiest ways to stay consistent and avoid spending that extra cash.
If you’re nearing retirement and your savings aren’t quite where you want them to be, don’t panic. In some cases, delaying retirement by even a year or two can make a huge difference. You’ll have more time to save, fewer years to fund and you may increase your Social Security benefits in the process.
It’s also wise to keep your investment portfolio balanced. A smart mix of asset classes can help manage risk while generating income or growth to pad your cash reserves over time.
And remember, don’t set your plan and forget it. Life changes, markets fluctuate and your goals may shift. Check in regularly with your financial advisor and adjust your strategy as needed.
Start small, take what you need and build up your safety net before stepping away from a steady paycheck.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
