How much cash should you have near retirement? (Bucket strategy explained)

This page is educational and does not constitute personalized investment, tax, or legal advice. Clockwise Capital is a registered investment adviser. The frameworks below are commonly used in retirement income planning; whether and how they apply to you depends on your specific situation.

The cash question is one of the most consequential decisions in retirement planning, and one of the most under-discussed. Hold too little, and a bad year early in retirement forces you to sell stocks at a low, locking in losses that compounding can't fully repair. Hold too much, and you sacrifice the returns that keep your portfolio growing through a 25–30 year retirement. The right number is specific to you, but the framework for thinking about it is general.

The cash bucket exists to solve one specific problem

The single most important risk in early retirement is not market crashes in general, it is having to sell stocks during a market crash to pay for that year's spending. This is sequence-of-returns risk, and it is fundamentally different from the long-term return risk that dominates accumulation-phase planning.

A simplified illustration: two retirees both have $1 million, both withdraw $50,000 per year (5%), and both earn an average 6% return over 25 years. Retiree A experiences strong markets in years 1–5, then weak markets later. Retiree B experiences the opposite, weak markets first, strong markets later. The math says they should have the same average outcome. The reality is that Retiree B can run out of money decades earlier, because withdrawing from a depleted portfolio early means there's less to recover even when returns turn positive.

The cash bucket is the simplest, most practical hedge against this risk. By holding 1–3 years of essential expenses in instruments that will not lose dollar value, you separate spending decisions from market decisions. You can let the equity portion of your portfolio recover on its schedule, not the schedule your bills demand.

How much cash is "enough"?

A common practitioner answer is 1–3 years of essential expenses, with the exact number scaled to a few factors:

• What's your guaranteed income? Social Security, pension, and any annuitized income reduce the gap that the cash bucket has to cover. If guaranteed income covers 90% of essential spending, you need much less cash than if it covers 40%.
• What's your other liquidity? A retiree with a paid-off home, a HELOC, and a large taxable brokerage portfolio has multiple ways to bridge a downturn. A retiree with most of their assets in a 401(k) and limited other liquidity has fewer options.
• How flexible is your spending? Households that can cut discretionary spending materially during a downturn (defer travel, postpone large purchases, reduce charitable giving) effectively have a smaller required cash bucket than households whose spending is mostly fixed.
• How risk-averse are you behaviorally? A retiree who panic-sells at a 20% drawdown needs a larger cash bucket than one who can stay invested through 50%. Self-knowledge matters here.

The Center for Retirement Research at Boston College and Wade Pfau's Retirement Researcher both publish research on different bucket-sizing approaches; the specific math gets quite involved, but the rough answer of "1–3 years for most households, more if guaranteed income is low" is a defensible starting point.

Where to hold the cash bucket

For amounts under FDIC limits ($250,000 per depositor, per insured bank, per ownership category), high-yield savings accounts are the simplest option. They are fully liquid, FDIC-insured, and require no decision-making. Yields vary; the mechanics don't.

For larger amounts or for slightly higher yield:

• Short Treasury bills via TreasuryDirect.gov or a brokerage. T-bills are backed by the full faith and credit of the U.S. government and are state-tax-exempt (a meaningful benefit in high-tax states; consult a tax professional for your specific situation, see IRS Publication 550).
• Money market funds: particularly government money market funds, which hold short-term Treasury and agency securities. SIPC-protected against brokerage failure but not FDIC-insured.
• Short-term CDs: which lock in a yield for a defined period. Useful for portions of the cash bucket that you know you won't need before maturity.

What to avoid for the cash bucket: long-duration bond funds (can lose 5–15% in rising-rate environments), high-yield bond funds (correlate with equities in stress), and any instrument with surrender charges, lockups, or material price volatility. A cash bucket that loses 10% during a market downturn isn't a cash bucket, it's a partial bond bucket pretending.

Refill discipline matters more than the original allocation

Once a bucket strategy is set up, the most consequential ongoing decision is when and how to refill the cash bucket as it depletes. Two reasonable approaches:

• Calendar-based refill. Refill cash from intermediate bonds annually, regardless of market conditions. Refill intermediate from equities on a longer schedule (typically 3–5 years). This removes market views from the decision and makes the strategy automatic.
• Threshold-based refill. Refill cash only after equities have recovered to their target allocation following rebalancing. This naturally pauses cash refills during downturns (when you're letting equities recover) and resumes when they're back to target.

Both work. The wrong approach is "I'll refill when I think markets feel right", that reintroduces all the market-timing emotion the bucket is supposed to eliminate.

When to talk to a fiduciary

If you're within 5 years of retirement and don't yet have a written cash strategy, that's a clear trigger to have a structured conversation with a fiduciary advisor. The cash decision interacts with Social Security claiming strategy, Roth conversion timing, Medicare IRMAA brackets, RMD planning, and tax-efficient withdrawal sequencing in ways that are hard to optimize in isolation.

Verify fiduciary status via SEC IAPD or BrokerCheck. A non-fiduciary may still recommend the right cash structure, but the conflict of interest in steering you toward commissioned products (annuities, certain CDs) is significant in this part of planning. For a deeper framework on advisor evaluation, see Is my financial advisor a fiduciary?.

Honest summary

There is no formula that produces the "right" cash bucket for everyone. There is a framework: enough to bridge 1–3 years of essential spending above your guaranteed income, held in instruments that won't lose dollar value, refilled on a rules-based schedule. The work is in the specifics, and those depend on your full picture, not on any general rule.