How Much of a "Cash Cushion" Should Retirees Have in Their Portfolios?

There has been considerable discussion about the stock market's fluctuations during the first half of 2025, and for many Americans nearing retirement, the volatility has led to significant uncertainty. However, there are some basic tips that financial professionals seem to recommend across the board that can help you test your retirement readiness, and one of these methods involves ensuring that you have a comfortable "cash cushion."

Keep reading to learn more about how much of your portfolio should be kept in cash so that you can help ensure that you'll have enough of a cushion when you decide to hang up your work boots for good.

Create a 'cash cushion'

A "cash cushion" is money that is set aside in safe investments, or in some account, that can be tapped into when you can't make regular portfolio withdrawals. In general, advisors recommend retirees keep enough of this type of cash on hand in an amount that can cover expenses for one to two years.

When determining how much cushion you will need for retirement planning, consider your fixed monthly income, factoring in sources such as Social Security and pension payments, minus your expenses.

For example, if you do the math and determine that you'll need $1,000 each month to cover your expenses comfortably, then your cash cushion would need to be $12,000 for a single year or $24,000 for two.

Use the 60/40 rule to create a 'cash cushion' with equities and bonds

When coaching clients on best retirement planning practices, financial advisors often suggest a 60/40 rule for investing in stocks and bonds. This involves allocating 60% of your money to equities, which are considered riskier, and 40% to bonds, which may yield lower returns but are considered safer.

Depending on your retirement plans, fixed income, and other factors, you may decide to switch to a 50/50 strategy, or you may want to try and further reduce your risk by putting 60% in bonds and 40% into equities. Either way, financial advisors say that this type of "derisk" maneuver can help give retirees more ready access to secure cash in times of uncertainty.

Cushion your accounts to ride out volatility

Another reason to ensure you have a cushion, and to perhaps opt for the two-year backup, is that having that security net will enable you to ride out the volatility of a bear market without selling off stocks to access your cash. A typical bear market — which is the term used when stocks drop at least 20% — lasts about 10 months, so having a one year cash cushion can help you stay secure during an uncertain time.

On a related note, financial advisors typically advise their clients to avoid making financial mistakes during economic downturns by trying to ride them out without panicking every time the market fluctuates. Sometimes, doing something as simple as not checking your balance every day when you know the stock market is volatile can help you avoid the temptation to panic sell.

Use your 401(k) to pad your 'cash cushion'

Anytime there's talk of recession, some financial advisors will recommend their clients eliminate risk from their portfolios. This may mean switching up where you direct your 401(k) contributions. For those nearing retirement, a Roth 401(k) can put you in a better position to easily access your cash down the line, without being penalized (or taxed).

The difference between a traditional 401(k) and a Roth 401(k) is when you are taxed. You will not get a tax break when you put money into the Roth 401(k), but after age 59½, you can take money out tax-free — or let it sit and grow for as long as you want. With fewer rules and regulations, the Roth 401(k) could be a cash source you tap into when needed.

Use gains to slowly add to your 'cash cushion'

As the stock market ebbs and flows, retirees or those nearing retirement, can take advantage of temporary gains to further pad their cushion in the ways mentioned above by slowly selling off stock allocations until they reach their goals.

But you don't have to be limited by the gains made in the market to make these moves. You can also look at some of the items you have around the house, such as vintage clothing, well-maintained furniture, or even used cars. There's a market for all of that, and these sales may yield some major earnings that'll help you pad investment or savings accounts.

Bottom line

Whether you are looking to sell your house and relocate, move in with family, or stay put in your current home, careful saving, investing, and planning are the keys to a stress-free retirement. A well-balanced portfolio, a comfortable cash cushion, and carefully selected retirement accounts (or accounts) should be part of that planning.

Just remember, no amount of financial advice is guaranteed to work out as you hope, and sometimes taking a cautious approach to investing by keeping a substantial portion of your portfolio in cash can help you feel more financially secure as you enter retirement.