Retirement Cash Reserves in 2026: How Much Is Enough?

In today’s episode, we’re tackling these topics:

💸 Cash isn’t risk-free — it simply changes the type of risk you’re exposed to.

📉 Too little cash can lead to stress and forced selling during market downturns.

📊 Too much cash results in inflation drag and tax inefficiency.

🧠 Think of cash as a runway, not a bunker.

🏦 Consider modern cash management platforms to optimize yields.

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The Hosts:

Kevin Kroskey, CFP®, MBA – About – Contact

Tyler Emrick, CFA®, CFP® – About – Contact

Episode Transcript:

Tyler Emrick:

Have you ever wondered what the right amount of cash is? Too little creates stress, too much can quickly erode your retirement plan. Well, today we got you covered, covering how much cash is actually enough in retirement, how interest rate changes, that trade off in 2026, and where cash really lives inside of a well-built portfolio. All coming up today on Retire Smarter.

Walter Storholt:

Back on another episode of Retire Smarter, I’m Walter Storholt, as always joined by Tyler Emrick, certified financial planner and a chartered financial analyst, one of the wealth advisors at True Wealth Design. If you want to find us, you can go online at truewealthdesign.com. Lots of great information there for you on the website, including not only these episodes, but the great blog that the team puts together and so much more. Tyler, looking forward to a great episode with you today as we talk about cash, right?

Tyler Emrick:

We do.

Walter Storholt:

Not a bad topic at all.

Tyler Emrick:

Yeah.

Walter Storholt:

Really likes talking about cash.

Tyler Emrick:

Absolutely. Cash is always fun. It’s always good when you’re getting higher interest rates too on your cash, right?

Walter Storholt:

Yeah, yeah, absolutely.

Tyler Emrick:

But, yeah, as I was doing a little bit of research for the podcast today, this comment came up and I liked it, so I’m going to say it to start out. But it was this whole idea of cash does not eliminate risk, it decides which risk you’re taking. So I’ll say it again, right?

Walter Storholt:

Okay.

Tyler Emrick:

Cash does not eliminate risk, it decides which risk you’re taking. So I think it gets down the crux of a little bit about what we’ll get into today. But touching on one, hey, is what is the right amount of cash? What’s too much? What’s too little? How should you be thinking about it, framing it? We’ll move into interest rate movements and inflation and just talk a little bit about the Federal Reserve and some expectations for this upcoming year. Then finally finish up with just diving into what your options are for your cash and what you should be thinking of. So it should be a pretty fun, jam-packed one today. Yeah, [inaudible 00:01:54].

Walter Storholt:

Yeah, this is one of those Goldilocks kinds of conversations, right?

Tyler Emrick:

Right.

Walter Storholt:

This is the too hot, too cold. This is like you can have too much cash, too little cash. What’s the right amount? It’s not exactly the same for every person. Even the experts disagree on how much emergency savings you should have. The standard three to six months-

Tyler Emrick:

Six months, yeah.

Walter Storholt:

… but I’ve heard somebody say three years at one point to be really secure. So, yeah, I’m looking forward to you helping cut through some of that noise for us a little bit.

Tyler Emrick:

Oh no, absolutely. Yeah, I mean I think it really is very much a personal decision and really trying to figure out like, hey, what’s the right balance for you and your family? Yeah, getting into that idea of like, “Well, hey, what’s too little? What do we mean by having too little in cash?”

Well, really what we’re trying to avoid, especially for individuals, is … You’re heading into retirement or thinking about, you’re in retirement right now, the big thing that we want to avoid is for selling and down markets. I mean, Walt, how many times have we talked about sequence of return risks?

Walter Storholt:

Sure.

Tyler Emrick:

So if we think about your current cash levels and maybe what runway that you have to live off of, we want to be mindful of, well, hey, if the market were to run into a little bit of trouble, maybe the market were to head off on a cliff, ideally we do not want to be selling out of those investments while they’re down and depressed. So we want to have enough runway or enough cash reserves or potentially bonds, however you want to look at your cash reserves, to get us through that and really help us with some of those more complex issues for early retirees, that sequence of return risk that we talk about a little bit.

So when I say too little, that’s really the crux of what we’re trying to avoid. Now on the flip side of that, hey, we can have too much. This is when we get into these drags, inflation drag, tax drag. This is the concept that your … One, especially in the idea of inflation drag, is the idea that your cash isn’t necessarily keeping up with inflation or that inflation is really dragging into those interest rates that you’re getting, this whole idea of nominal interest rate versus an actual real interest rate and accounting for that.

In 2022, interest rates were going up very quickly. Well, actually this is one of the worst bond markets that we’ve had on history, but when those interest rates were going up, part of the reason for that was because we had very, very high inflation. So even though your savings accounts, your money market accounts, maybe they were returning 4 or 5%, in some months there, year over year inflation was up in the 7, 8% range. So when we compare those two together, it might seem like you’re getting a nice interest rate, but in actuality, if your costs are going up faster than that, we’re eroding those long-term plan results as we think about retirement. So that’s inflation drag.

When we think about tax drag, this is this whole concept of, well, hey, if you have a bunch sitting in cash, you’re getting a nice interest rate on it, of course all of that generally is going to hit your tax return when you earn it, because they pay it in the form of interest payments.

Walt, if you’ve ever gotten a surprise tax bill, these high interest rate payments can be a pretty big culprit of that. So that idea of, well, hey, if you’re getting X percent on your cash, well, after you account for paying taxes on it, what is that true after-tax net return, and being able to pay attention to that I think is very important. So when we have too much in cash, that inflation drag and that tax drag can really start to rear its ugly head and become a little bit of an issue on it.

Walter Storholt:

Yeah. I think the too little in cash is a little bit easier to identify emotionally, right?

Tyler Emrick:

Sure.

Walter Storholt:

You mentioned the word stress. I feel like if you’re just on the edge of that emergency savings not being built up very much, you don’t have a whole lot of cash in the account, you find yourself having to constantly rob or dip into that account, those are all things that are, in my mind, just stress causing, or if you’re thinking, “Oh man, if we’re down, I’m going to have to sell because I can’t pull from anything in cash because there’s nothing in there.” Anything that causes stress is probably like that sign that you’re on the too low side, so maybe a little easier to identify.

Tyler Emrick:

100%. I even had on here, like I had a comment like, “Well, hey, when does higher cash levels potentially make sense?” It goes back to that emotional aspect of it and potential need. I mean I think I like your first year of retirement. Hey, your expenses, you’re still maybe trying to get a handle on it. They might be a little higher than what you expected. Maybe you have some big travel plans or something like that, so you have some big one-time expenses that first year of retirement, kind of ticking off the old bucket list items, shall we say.

So there are times that you think about just your life where higher cash levels could potentially make sense. I think about that higher … That first year of retirement is one that really comes to mind as you’re trying to get a handle on that comfortability because, to your point, the emotional aspect of that cash reserves and flexibility and comfort and just really getting comfortable around spending and retirement I think is a big deal for a lot of retirees. So your cash levels certainly can reflect that.

But on the flip side, while we absolutely want to be careful not to have too much there, because when we think about like, “Well, hey, I have this big expense coming up. I don’t want that to be in the market. I want it to be there if I have cash,” well, is that big expense really going to come to fruition? Could it get kicked out another year? Could it get kicked out another year on top of that? So is it really coming up in the next handful of months?

You can get in this trap to where you keep telling yourself, “Hey, I have this high cash level because I’m going to buy a car.” Well, are you really going to buy a car? Are you going to finance it? How’s that going to work? And just being mindful that, hey, what we have in cash, I like to think of it as a runway, and it could be a short runway. I mean a lot of our investments we can get out of now within a day or two, especially ETFs, mutual funds, normal electronic funds transfer times to get to you.

So there is a whole wide bond market out there that’s not necessarily as risky as stocks and not maybe going to have as much expected volatility. So the question becomes is is like managing that cash level doesn’t necessarily mean, hey, all my big expenses that could potentially come up in the next 12 months or 18 months I need to have in cash. I would urge you to really think through that and making sure that you’re not leaving some of that interest on the table. So think of cash as a runway, not necessarily like a bunker that you’re going to keep it in there and it’s just going to protect you.

Walter Storholt:

That’s a great way to visually think about it a little bit differently.

Tyler Emrick:

Yeah. Now as you think about the cash level, hey, what’s too high or what’s too low? I think one of the big factors here, where interest rates go and some of those trade offs. The interest rate environment that we’ve been in, well, I mean short term interest rates have been well above the last decade’s average. So they’ve been high. We’ve been getting some pretty nice interest rates, at least when we compare it to the prior decade, that have been as high as 5%. Some of these CD rates and money market rates, certainly in the last year, those have come down a little bit, and markets, I think, expect some gradual normalization there, not necessarily a return to zero.

We’ll see how it shakes out. I think the Fed chair announcement in the news here earlier on this week is a big one. So we’ll see where the Fed wants interest rates to be and what their mandate’s going to be and how they’re going to handle it.

But for our retirees, what that means is, hey, cash is going to get more competitive rates than just zero, but we still shouldn’t be thinking of it as like a growth asset, because that opportunity cost, the inflation drag, the tax drag, all that stuff matters. I think the market is anticipating the Fed to take a measured approach to cutting rates, possibly later in 2026. We’ll see how that comes to fruition. Obviously they’re going to pay attention to where inflation’s at in the labor markets, that dual mandate, to make sure that they’re doing their jobs.

So we’ll see, but if short term rates do start to decline, well, hey, we’re going to be in that situation where those CDs and those money markets are just going to continue to pay less and less attractive rates over time.

So understanding that, being prepared for that, and having a plan I think is important. Maybe even just as important is understanding and focusing on real after-tax, after-inflation outcomes when you start thinking about how much you’re having in cash and what that interest rate that you’re getting on it actually is.

Speaker 3:

What would your life look like if you designed it around your true wealth? It’s a powerful question and one that True Wealth Design helps individuals, families, and business owners answer every day. With a fully integrated approach to financial planning, tax strategy, investments, and business advisory, their team can bring clarity and confidence to every part of your financial life. Take the first step toward a stronger financial future with a no cost, no obligation discovery meeting. Just click the link in today’s show description to get started.

Walter Storholt:

Brings to mind, I guess, a lot of different arenas like other options for folks. I mean maybe we think of the traditional ones where you can put cash, but that market’s a little bit broader than maybe we think or the casual investor thinks.

Tyler Emrick:

It can be, absolutely, and I think this is important, I mean especially as you just look at your current banking relationship. Do you have a checking account and a high-yield savings account? Are you managing both those balances appropriately? Walt, as you know, checking accounts, I mean they’re really not paying you anything whatsoever. So being deliberate and being managed on how much you keep in those and then maybe using some type of high-yield savings account.

Right now we have a multitude of what I consider to be like cash management platforms that are available to individuals as well. These are platforms where they partner with a multitude of different banks and allow you to, within their platform, park your cash and your savings at different banks that are all FDIC-insured to ensure that you’re getting the highest, because we’ve all played the whole, “Hey, I’m going to move to this savings account to get the higher rate. Oh wait, it was a promotional rate. It’s only for six months and now it’s going to go down to nothing.” Do I really want to leave it in here? Do I want to go through that rigamarole every six months or every year when those promotional rates run out?

Walter Storholt:

It’s like trying to find the best cable provider or something, right?

Tyler Emrick:

Yes, yes, it is, and that pays.

Walter Storholt:

Remember the days where you’d get Dish Network and then you’d be like, “All right. Well, that promotion’s ended. But, hey, DirecTV will steal my business. I’ll go over there now and then … Oh, Time Warner’s doing something, or Spectrum. Let’s go over there,” and just constantly bouncing. I guess phones are like that nowadays. We’ll buy you out of your old contract and give you a free phone just to get you on their platform, and vice versa.

Tyler Emrick:

No, you got it. 100%. That can be daunting or a pain to switch that and opening those accounts [inaudible 00:12:30].

Walter Storholt:

Yeah. Those games were fun in your 20s, when you’re trying to save-

Tyler Emrick:

I know.

Walter Storholt:

… a couple bucks here and there. Now it’s just like, “Please don’t hassle me.”

Tyler Emrick:

No, absolutely. Absolutely.

Walter Storholt:

“I just want things to stay the same.”

Tyler Emrick:

Well, and I think a big missed opportunity is like for those families that have taxable brokerage accounts, I mean you have access to money markets, short-term bond funds, treasuries, things like that inside of your brokerage account. You certainly can use your brokerage accounts as that high-yield savings. Again, you can transfer money back and forth typically within a few days. So you can pretty much keep your money very liquid, but still be efficient and try to get those better rates of return.

I see this a lot with individuals taking that next step and maybe asking about, “Hey, should I do a CD ladder or should I do a bond ladder?” This is where you pick multiple CDs with multiple maturities, or bonds with multiple maturities, spread them out and roll them over, play in the game.

My thing with that is you’ve got to be very mindful of, one, what type of maybe CD or bond that you’re purchasing and the underlying risk. I had an individual a couple years ago that came to me that actually bought a callable CD and didn’t realize it. So a callable CD is where the bank can actually call it back and give you your money. So if it’s like they’ll entice you with higher interest rates, but yet they’ll be callable. So if the interest rates start to decline, the bank will just say, “Hey, here’s your cash back, go find another place to put it in.”

Walter Storholt:

Wow.

Tyler Emrick:

So little minute details like that I think potentially become important. Also, as you think about these ladders, I mean they certainly can have some flexibility downsize to where they’re illiquid, can be hard to get in and out of them, can certainly be hard to maintain and make sure that they’re managing efficiently. With the changes in ETFs and the tax structure and things like that, we’ve seen these ladders go by the wayside over the years because they are so inflexible, but certainly CD ladders and bond ladders come up quite a bit and the pros and cons and talking through that.

Then, finally, I mean I think the other big caveat that I want to leave everybody with is the tax efficiency and somewhat of the other options with your cash, because I get questions on municipal funds as well. These are municipal bond funds, traditionally are often exempt from federal and even state taxes. So you can alleviate that tax drag that we talked about before with these municipal bonds or municipal bond funds. But of course we do need to be mindful that traditionally and generally speaking, your expected return or interest rate in those are going to be lower than a similar taxable bond or money market fund.

Like I said before, I mentioned it, but these ETF structures where ETFs are starting to pay in the form of capital appreciation versus interest-bearing investments can be very good trade off where you’re maintaining higher expected return and capturing some of that tax efficiency.

So as you’re talking to your advisors, you’re thinking about your portfolio, obviously we want to be thinking about the level of cash, but we also want to be thinking about, well, what vehicles are we using and are we doing it in the most efficient manner to make sure that we are putting ourself in a good spot for good outcomes?

Walter Storholt:

It’s another great example about how financial planning really comes down to so much more than just what stock am I buying? What am I investing in in one particular portfolio? It’s putting all of those things together. Where’s your cash? Where’s your pension? Where’s your social security? Combining all of those things together, talking about spending.

So many of those topics came up today, Tyler, but not nearly all of them. You guys really cover in your financial plans all of these different angles. Tax efficiency, we just touched on it for a moment, but obviously you go into much greater detail when somebody comes in and becomes a client.

And so, if you’re watching today’s video or listening to the podcast and you’re interested in talking a little bit more about how much cash is right for your particular situation, it’s often a great starting point to launch into a larger financial planning conversation.

It’s very easy to touch base and get in touch with Tyler and start talking that out. All you have to do is go to truewealthdesign.com. We’ve got that linked in the description of today’s show. You can schedule a 20-minute conversation, a discovery call with the team to see if you’d be a great fit to work with one another. Again, truewealthdesign.com or just click the link in the description of today’s show to set up that time to chat, and you’ll be well on your way to a better financial future after that conversation for sure.

Tyler, great breakdown today. Appreciate it. We’ll look forward to the next episode. Teaser, I think we’re talking taxes. Tax filing season is right upon us.

Tyler Emrick:

We are. We are. Absolutely.

Walter Storholt:

Excellent.

Tyler Emrick:

We’ll catch you on the next one for sure.

Walter Storholt:

Yeah. We’ll see everybody again next time right back here on Retire Smarter.

Speaker 4:

Information provided is for informational purposes only and does not constitute investment, tax, or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance reference is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.