Why Some Retirees Keep 25% of Their Portfolio in Cash and Treasuries
Conventional wisdom says cash in a retirement portfolio is a drag on returns, but for retirees drawing from their savings every month, ignoring that advice might be the only thing standing between a recoverable downturn and a permanently derailed plan.
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Most investing advice treats cash like it’s some kind of financial problem that is waiting to be solved. For someone who is still in the building phase of their portfolio working toward retirement, this is a reasonable thing to do. For a retiree who is drawing from their portfolio every single month, this advice skips over something important about how retirement savings actually fail. Putting 25% in cash and short-term Treasuries isn’t just about playing it safe. It’s often the only reason the rest of the portfolio can stay intact when the market gets difficult.
The Problem It’s Actually Solving
A bad decade in the stock market doesn’t end retirement on its own, as portfolios have long recovered from bad years and decades plenty of times. What actually can and will end a retirement is being forced to sell stocks at the worst possible time because there is no other money (think cash) to pay the bills. This is why a cash and Treasury allocation exists in the hope of making sure this moment never arrives.
The first 10 years of retirement are where sequence of returns risk does its worst damage, and most people don’t realize how little it takes to knock a plan off course permanently. A retiree with two years of cash when the market drops can simply wait things out. A retiree without the same cash reserve starts selling on the way down, and those shares are long gone before the recovery shows up.
What Treasuries Bring to the Table
Cash in a savings account used to earn essentially nothing over a long period of time. This is no longer true as Treasury bills and short-term notes are paying yields worth actually accounting for in a retirement income plan.
The bigger selling point is something equities and corporate bonds cannot match. If you hold a Treasury to maturity, the federal government guarantees the principal back. For money that exists specifically to cover near-term expenses and survive market shocks, this guarantee is worth more than chasing returns.
The bottom line is that the money isn’t just there to grow, it’s there to be used when it’s absolutely needed most.
How the 25% Allocation Works in Practice
The bucket approach is the single best way to look at this and it really does mirror how money can actually flow through retirement. The first bucket is the one that is funded by cash and treasuries and is in place to help cover 1-3 years of living expenses. Its only responsibility is to be available on demand, and not at all subjected to whatever the market is doing in any given quarter. As it draws down, it gets replenished from the second bucket, which holds intermediate bonds and income-producing investments.
The third bucket is the one that is going to stay in the market; it’s invested for long-term growth, with enough time in front of it to absorb the bad years without forcing a sale.
At most withdrawal rates, the 25% allocation lands somewhere around 2-3 years of living expenses. This is enough time to wait out most market downturns without ever having to touch bucket 3 while the market is underwater.
The Cost of the Strategy
Holding 25% in cash and treasuries has a real cost, and it’s something that needs to be plainly said. The money isn’t compounding at equity rates, and over a 25 or 30-year retirement the gap between what it could have earned is a number that’s hard to ignore. A retiree holding too much cash for too long is going to start losing the inflation fight.
What offsets this more than any spreadsheet can suggest is retirement behavior. Retirees who see a cash cushion sitting there are far less likely to panic and sell in a bad market, which is, again, one of the worst things a long-term investor can do. The cash allocation earns part of its keep simply by keeping the stock market portfolio intact through any stretch that matters most.
Who This Strategy Makes the Most Sense For
A 25% cash and Treasury allocation isn’t always going to be the right answer, and it’s okay for a retiree who has either Social Security and/or a pension that can cover monthly expenses that would otherwise be handled by cash. This person can reasonably run a leaner cash position and put more money into the market.
The retirees who benefit most are the ones drawing heavily from their portfolio and close enough to the starting line that a bad market year can do permanent damage. The group that gets it most is anyone who has understandably lived through a crash while pulling money at the same time. This experience is what teaches them about the value of a cash buffer that no retirement calculator can properly capture on paper.
For most retirees, having 25% of their money in cash isn’t money that is sitting around doing nothing, it’s the very reason they can leave the rest of their portfolio alone.
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David Beren has been a Flywheel Publishing contributor since 2022. Writing for 24/7 Wall St. since 2023, David loves to write about topics of all shapes and sizes. As a technology expert, David focuses heavily on consumer electronics brands, automobiles, and general technology. He has previously written for LifeWire, formerly About.com. As a part-time freelance writer, David’s “day job” has been working on and leading social media for multiple Fortune 100 brands. David loves the flexibility of this field and its ability to reach customers exactly where they like to spend their time. Additionally, David previously published his own blog, TmoNews.com, which reached 3 million readers in its first year. In addition to freelance and social media work, David loves to spend time with his family and children and relive the glory days of video game consoles by playing any retro game console he can get his hands on.
