Most retirees should hold 12 to 24 months of portfolio withdrawals in cash — not 12 to 24 months of total spending, and not the five years you hear recommended on financial talk radio. For a Boston-area couple spending $120,000 a year with $45,000 covered by Social Security, the portfolio only has to produce $75,000 annually, so the right reserve is roughly $75,000 to $150,000 — about 3% to 6% of a $2.5 million portfolio. Holding substantially more is one of the most expensive “safe” decisions people make in retirement.
From the Retirement Planning hub — Evergreen Wealth Management — flat-fee retirement income, withdrawal, and Social Security planning for Massachusetts retirees.
Why is the answer measured in withdrawals, not expenses?
Because Social Security, a pension, or rental income already covers part of your spending, and those checks keep arriving no matter what the market does. Cash only needs to bridge the gap your portfolio is responsible for.
This is the most common error I see. A couple spending $120,000 a year hears “keep two years of expenses in cash” and parks $240,000 in a savings account. But $45,000 of that is already covered by Social Security, so the portfolio is only on the hook for $75,000 annually — making two years of withdrawals $150,000. They are carrying $90,000 of unnecessary cash.
How much cash should you hold in retirement, by the numbers?
Start with your annual portfolio withdrawal — total spending minus Social Security, pension, and any other guaranteed income — then multiply by 12 to 24 months depending on how variable your spending is.
| Annual portfolio withdrawal | 12 months of cash | 18 months | 24 months |
|---|---|---|---|
| $60,000 | $60,000 | $90,000 | $120,000 |
| $75,000 | $75,000 | $112,500 | $150,000 |
| $100,000 | $100,000 | $150,000 | $200,000 |
| $150,000 | $150,000 | $225,000 | $300,000 |
Where you land in that range comes down to how predictable your life is. Twelve months is enough if your spending is steady, your income floor is high, and you are comfortable selling something in a down year. Push toward 24 months if you have lumpy expenses ahead — a roof, a wedding, a few years of private college — or if a market drop genuinely keeps you awake. A plan you abandon in a panic is worse than a slightly inefficient one you actually follow.
What does holding too much cash actually cost?
More than most people expect, because the cost compounds silently for decades. The gap between cash yields and a balanced portfolio’s expected return is only 2 to 3 percentage points a year, which sounds trivial and is not.
Take $250,000 of genuinely excess cash — the amount above a sensible 24-month reserve. Left in cash earning roughly 3.9%, it grows to about $537,000 over 20 years. In a balanced portfolio earning 6.5%, it grows to about $881,000. That is a $344,000 difference on money that was never going to be spent. Those are nominal, pre-tax figures and no return is guaranteed, but the direction of the gap is not in question.
This hides so well because cash never shows a loss on a statement. A portfolio that drops 18% is visible and painful. A cash position quietly forgoing 2.6% a year produces no such moment — which is exactly why it survives in so many portfolios for so long.
Where should retirees actually hold their cash?
Not in a brick-and-mortar savings account, which is where most of it sits. The spread between an average bank account and a Treasury bill is roughly 3.5 percentage points, and for Massachusetts residents the Treasury has a second advantage.
| Where the cash sits | Yield | MA income tax on the interest |
|---|---|---|
| National average savings account | 0.38% | Taxed at 5% |
| National average bank money market | 0.65% | Taxed at 5% |
| 4-week Treasury bill | 3.77% | Exempt |
| 13-week Treasury bill | 3.90% | Exempt |
| 26-week Treasury bill | 4.04% | Exempt |
| 52-week Treasury bill | 4.12% | Exempt |
Run $150,000 through that table. In an average savings account it earns $570 a year. In 26-week Treasury bills it earns $6,060 — a difference of $5,490 annually on a reserve you were holding either way. Check the current numbers yourself against the Treasury Department’s daily bill rates and the FDIC’s national deposit rate averages.
The Massachusetts wrinkle matters more than people realize. Treasury interest carries no state or local tax, while bank interest is fully exposed to the Massachusetts 5% income tax. Even against a competitive online savings account paying 4.00%, a Bay State retiree nets 3.80% after state tax — versus the full 4.04% on a 26-week bill. On $150,000 that is another $360 a year, earned by choosing the right container rather than taking more risk.
Treasury money market funds are the practical middle ground: same underlying government paper, daily liquidity, no ladder to manage, and most of the income still escapes Massachusetts tax. That is where I point people who would rather not think about maturities. Positioning this reserve alongside the rest of the portfolio is part of how we handle investment management.
Does a cash bucket really protect against sequence-of-returns risk?
Less than the marketing suggests. The honest answer is that a cash bucket’s main benefit is behavioral, not mathematical — and that is still a benefit worth paying for, just not an unlimited one.
The pitch is intuitive: hold two years of cash, spend from it during a downturn, never sell stocks at a loss. The problem is that when you refill the bucket, you sell those same depressed assets anyway — you delayed the sale, you did not avoid it. Studies comparing bucket strategies against a simple rebalanced portfolio with the same stock-bond mix find the difference is small, and often slightly favors rebalancing, because the bucket drags a permanent cash allocation along for thirty years.
So why do I still use cash reserves with nearly every client? Because a retiree who knows two years of checks are funded is far less likely to sell everything in March of a bad year, and that avoided decision outweighs the efficiency loss. The mistake is stretching the logic to five or seven years, where the drag becomes real money and the behavioral benefit stops growing. Deciding which account to draw from matters as much as how much cash you keep — the subject of tax-efficient withdrawal sequencing.
When should you hold more than 24 months of cash?
There are legitimate reasons, and they are all specific and temporary rather than permanent postures.
- A known large expense within 24 months. A $200,000 renovation, or a home purchase between sale and closing, does not belong in the market. Add it on top of the reserve.
- A bridge to Social Security. If you retire at 64 and delay benefits to 70, those six years of heavier withdrawals are a planned, finite drawdown — not an emergency fund. Many clients hold a larger short-term ladder for exactly this.
- Genuinely irregular income. Consulting income, a business still winding down, or variable partnership distributions justify a wider buffer.
- Very low withdrawal rates. If you are pulling 2% from a $5 million portfolio, the question is close to academic — cash cannot meaningfully change your outcome either way.
What is not a good reason: a feeling that the market is due for a correction. Cash held on a market view is a timing bet wearing a safety costume, and it tends to persist long after the worry that created it has passed — usually as cash raised in a scary month years ago that no one ever got around to reinvesting.
How does an advisor’s fee model change this advice?
More than it should, and this is worth understanding before you take anyone’s cash advice — including mine.
An advisor paid a percentage of assets under management has a built-in conflict here. If your cash sits at an outside bank, they are paid nothing on it. If it sits inside the managed account, many firms bill their full rate on it — 1% on a $150,000 Treasury reserve is $1,500 a year against $6,060 of interest. That is roughly a quarter of the yield going to a fee for managing an asset that requires almost no management.
Evergreen Wealth Management is a flat-fee firm. We charge a flat monthly fee regardless of portfolio size or how much of it sits in cash. On a $2.5 million portfolio, a typical 1% AUM arrangement runs about $25,000 a year, so the flat fee is roughly $16,000 less annually. More to the point here: I have no financial reason to tell you to hold more cash, less cash, or to move it anywhere. When I say 12 to 24 months, that recommendation costs me nothing either way. You can see how the pricing works on our flat-fee structure page.
Cash is one piece of a larger question — how you convert a portfolio into reliable monthly income. Start with building your own paycheck in retirement, then size the reserve around it, and see how this has played out for other households.
Frequently Asked Questions
Is 12 to 24 months of cash the same as an emergency fund?
No, and conflating them causes double-counting. An emergency fund covers surprises — a car, a furnace, an uninsured medical bill. A retirement cash reserve covers planned withdrawals so you are not forced to sell in a downturn. Most retired households I work with keep the reserve and treat $20,000 to $30,000 of it as the emergency layer, rather than holding a separate pot.
Should the cash be in my IRA or my taxable account?
Generally the taxable account, for two reasons: you can reach it without triggering a distribution, and Treasury interest held there escapes the Massachusetts 5% income tax. Inside an IRA that state-tax advantage is wasted, since everything comes out as ordinary income eventually. If nearly all your money is in an IRA, holding the reserve there is fine — just plan the withdrawal timing deliberately.
How does Evergreen’s flat fee apply to cash holdings?
It does not change at all. Evergreen Wealth Management charges a flat monthly fee whether you hold $50,000 or $500,000 in cash, and whether that cash sits with us or at your own bank. As a fee-only fiduciary, Nick Stevens, CFP® is compensated identically no matter what the recommendation is — which is the entire point of the structure.
The bottom line
Size your cash to 12 to 24 months of portfolio withdrawals, hold it in Treasury bills or a Treasury money market fund rather than a bank savings account, and revisit the number once a year instead of every time the market has a bad week. For most Massachusetts households in the $1 million to $10 million range, that lands between $75,000 and $300,000 — a real number, but a far smaller one than fear tends to produce.
If you want a second set of eyes on how much cash you are carrying and what it costs you, that is a normal first conversation here. Read about what becoming a client looks like, or more about Nick’s background and approach. No pressure, and no product waiting at the end of it.
Nick Stevens, CFP® is the founder of Evergreen Wealth Management in Boston, a flat-fee financial planning and investment management firm. Evergreen charges a fixed monthly fee regardless of portfolio size. Learn more about how we work at our fee structure page or get in touch.