Six weeks into retirement, a 60-year-old former Charlotte police officer named Mike called The Ramsey Show with a question most retirees never think through until it hurts them: how much cash should sit outside the market when you’re finally living off your savings?
Mike and his wife have built a $2.2 million net worth, with $1.5 million in investments and a $60,000-a-year pension. Their annual expenses run about $90,000, which means they need to pull roughly $30,000 a year from investments to cover the gap the pension doesn’t. Their emergency fund currently sits at $96,000, up from a prior target of $35,000 after Mike parked his severance there. His framing to the show: “My thought is I would avoid having to pull from our investments once I’ve used all of my severance. A lot of our expenses are what I would say optional. We’re completely debt-free.”
The Verdict: Kamel’s 1-to-2 Year Rule Is the Right Anchor
Ramsey personality George Kamel gave Mike a clean answer that generalizes well beyond his situation: “It’s generally recommended to have 1 to 2 years of expenses if you can, to stomach a downturn in the market so that you’re not pulling out $90,000 when the stock market is down 20%. That kind of really hurts the nest egg more. And so if you can have 1 year, you’re doing great. If you can have 2 years because you want to be super conservative, you’re doing even better to have $200,000 there.”
The math behind that guidance is sequence-of-returns risk. Selling shares during a drawdown locks in losses compounding can never repair, because the shares you sold at the bottom aren’t around to recover when the market rebounds. A cash buffer lets you leave the portfolio alone during ugly years and refill during good ones. Kamel described the practical version this way: “Some people say, hey, every January take as much out of investments as you need for that year and then don’t touch the investments the rest of the year. You now have your expenses sitting there in a high-yield savings account.”
The current environment sharpens the tradeoff. The federal funds rate is almost 4%, down from about 4.5% in September 2025, so high-yield savings and money market yields have drifted lower.
The FDIC national average 12-month CD rate is only about 2%, though top online banks routinely pay several times that. Meanwhile core PCE inflation is grinding higher, with the index rising from 126.43 last July to 130.08 in May. Cash held beyond what you actually need is quietly losing purchasing power.
The Variable That Changes Everything: How Flexible Are Your Expenses?
Kamel’s 1-year versus 2-year range is not arbitrary. The right number for you depends almost entirely on how much of your spending you can cut during a bad market stretch. Mike told the show, “A lot of our expenses are what I would say optional. We’re completely debt-free. So when the market would be down, we would not take out as much.” That single sentence is what makes his $96,000 buffer perfectly reasonable.
Consider two retirees with identical $90,000 budgets. Retiree A has a paid-off house, no debt, and roughly $30,000 of that budget going to travel and dining. In a 20% market drop, they can compress to $60,000 of spending and lean harder on the pension, effectively stretching a 1-year cash buffer into 18 months or more. Retiree B carries a mortgage, a car payment, and health premiums that consume most of the $90,000. They cannot compress much, which is why the 2-year buffer, or even more, makes sense for them.
Kamel praised Mike directly for that flexibility: “That’s the key to a great retirement is having flexibility. I’m so proud of you guys.” He also volunteered his own target: “Personally, when I retire, your boy’s gonna have 2 years.”
What to Do This Week
- Calculate your true annual burn in retirement: what actually leaves your accounts after taxes and pensions.
- Separate fixed costs (housing, insurance, medications, utilities) from discretionary costs (travel, dining, gifts, hobbies). The fixed number is your floor in a downturn.
- Choose 1 year if discretionary spending is a large share of the total, 2 years if it isn’t. Multiply your annual burn by that number to size the buffer.
- Park the buffer somewhere it earns real yield. A high-yield savings account or short Treasury ladder currently pays multiples of the roughly 2% national CD average.
- Set a fixed annual refill date, ideally in January, and only refill from investments if the market cooperates.
The size of your retirement cash cushion comes down to one thing: how much of your spending you can turn off when the market tells you to.
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