Why Some Retirees Keep 25% of Their Portfolio in Cash and Treasuries

Retirees often retain 25% of their portfolio in cash and short-term Treasuries to prevent forced stock sales during market downturns and protect the remaining portfolio from significant damage. The initial years of retirement present the most substantial sequence-of-returns risk, with just two years of cash reserves potentially averting the need to sell stocks at their lowest point.

Short-term Treasuries now provide yields that can be incorporated into retirement income plans, offering a guaranteed principal at maturity, a feature not shared by equities and corporate bonds. Retirees should view cash as a strategic component of their retirement savings, not merely a financial burden. By allocating 25% to cash and Treasuries, retirees can avoid the necessity of selling stocks during challenging market periods, thereby preserving their wealth.

This allocation supports the "bucket approach," dividing retirement funds into three tiers: a cash and Treasury bucket for immediate expenses, an intermediate bond bucket for income generation, and a long-term growth bucket. The 25% cash allocation generally covers 2-3 years of living expenses, allowing retirees to weather market downturns without tapping into their long-term growth investments.

While holding significant cash reduces its compounding potential, retirees with substantial savings can offset this by having other income sources like Social Security or pensions. Ultimately, a 25% cash and Treasury allocation safeguards retirees' portfolios, enabling them to maintain a disciplined investment strategy and enjoy a financially secure retirement.