How Excess Cash Can Hinder Your Portfolio — Even in Retirement

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Editor's Note: This story originally appeared on Personal Capital.

There’s a common saying that cash is king — but this isn’t necessarily true when it comes to your portfolio and retirement goals.

People tend to like cash because it can feel safe. However, over the long term, it is anything but a safe way to keep your investments.

For those nearing retirement, allocating excess cash is still an important consideration. Retirement-age individuals may be skewing too conservative, according to a recent survey by Personal Capital and Kiplinger Personal Finance.

The asset allocation of investors remains conservative across genders and ages and regardless of whether investors are retired or not.

On average, portfolios of surveyed retirees and soon-to-be retirees were made up of:

  • 35% stocks
  • 26% cash
  • 15% bonds
  • 9% real estate
  • 15% other

Higher-income investors ($200,000+) were almost three times more likely than less-affluent investors to say they became increasingly bullish in 2020 and added stocks to their portfolio.

They were also more likely to report a “significant” increase in the value of their portfolio during the coronavirus pandemic compared with investors who had lower income.

Why Do People Hold On to Cash?

Excited man in face mask holding up lots of cash money
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Oftentimes, investors hoard cash when they are nervous about market volatility and uncertainty.

Some older investors who haven’t yet invested cash may also feel like they have missed the boat and don’t feel comfortable investing it in their golden years.

But the truth is, if you want your financial strategy to sustain you for the rest of your life, cash is likely going to do more harm than good. For reference, a dollar in 1980 is worth about 30 cents today.

How to Use Cash to Your Advantage

Happy woman holding cash
Dean Drobo /

That being said, cash isn’t all bad; it has a place in any strategy.

That place, however, should be for any short-to-midterm liquidity needs. We generally recommend that you keep an emergency fund of three-to-six months of expenses along with cash for any larger purchases you have planned in the next 18-24 months.

One way to be strategic about your emergency fund is to be disciplined about it. For example, if you spend $100,000 per year, you will want to have somewhere between $25,000 and $50,000 in cash reserves that you don’t touch unless it’s a true emergency.

Once you hit the maximum amount you’ve set for yourself in those reserves, then commit to putting any excess over it to work in a diversified investment portfolio. This way, you likely won’t end up with so much cash that it actually works against you.

In addition, you will likely want to keep cash for any big expenses or purchases that may be coming down the pike in the next 12-18 months, such as a big family event or a home renovation project. You can use Personal Capital’s free Retirement Planner to plan for spending in retirement.

Why Cash Is Bad for Your Portfolio

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Cash might give you a sense of security when you are worried about market uncertainty, but believing cash is a good long-term investment is a mistake.

By holding too much cash, you are essentially losing money to inflation every year.

Comparing the long-term historical performance of stocks, bonds, and other alternatives, cash ranks the lowest.

How to Invest Your Cash

Man investing on his phone
panitanphoto /

When allocating cash, one of the most difficult decisions is choosing the right investments. There’s no one right answer, but there are a few factors to consider to help you choose the right investments for you:

  • Time horizon: Your time horizon is the number of years (or months) before you expect to use your investments. In the case of retirement funds, your time horizon is your life expectancy, as the assets must continue to work after you retire in order to support you. In general, the longer your time horizon, the more aggressive you can afford to be with your investments.
  • Diversification: Diversification is a critical component of investing. The general concept is that you spread your money across many assets, both across and within asset classes. The more diversified you are, the less the performance of a single investment will impact your entire portfolio.
  • Risk tolerance: Your risk tolerance is how comfortable you are with risk. Investors with a higher risk tolerance are comfortable experiencing greater volatility in their portfolio in exchange for a higher potential reward, while those who are more risk-averse will accept a lower potential return in exchange for lower volatility and variance in returns.

The Bottom Line

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There are times to hold cash, specifically for short-term purchases and emergencies.

But if you’re trying to grow your money over time, even in retirement, there’s almost no reason to be in excess cash. For most people, maintaining a large allocation of cash is simply a guaranteed loss over time.


Man analyzing data on a laptop
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The Kiplinger-Personal Capital national poll on the Impact of the Pandemic on Retiree Confidence was conducted June 17-24, 2021, with 772 respondents.

The survey has a margin of error of +/- 3.52%. Respondents were screened for age (40 and older), retirement status (fully or partially retired, or plan to retire within five years), and net worth (at least $100,000).

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