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

Retirees holding 25% in cash and short-term Treasuries avoid forced stock sales during downturns, protecting the remaining portfolio from permanent damage.

The first 10 years of retirement carry the worst sequence-of-returns risk, and just 2 years of cash reserves can prevent selling stocks at the bottom.

Short-term Treasuries now pay yields worth factoring into retirement income plans while guaranteeing principal at maturity, an advantage equities and corporate bonds cannot match.

Most investing advice treats cash like it's some kind of financial problem that is waiting to be solved. For someone who is still in the building phase of their portfolio working toward retirement, this is a reasonable thing to do. For a retiree who is drawing from their portfolio every single month, this advice skips over something important about how retirement savings actually fail. Putting 25% in cash and short-term Treasuries isn't just about playing it safe. It's often the only reason the rest of the portfolio can stay intact when the market gets difficult.

A bad decade in the stock market doesn't end retirement on its own, as portfolios have long recovered from bad years and decades plenty of times. What actually can and will end a retirement is being forced to sell stocks at the worst possible time because there is no other money (think cash) to pay the bills. This is why a cash and Treasury allocation exists in the hope of making sure this moment never arrives.

The first 10 years of retirement are where sequence of returns risk does its worst damage, and most people don't realize how little it takes to knock a plan off course permanently. A retiree with two years of cash when the market drops can simply wait things out. A retiree without the same cash reserve starts selling on the way down, and those shares are long gone before the recovery shows up.

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Cash in a savings account used to earn essentially nothing over a long period of time. This is no longer true as Treasury bills and short-term notes are paying yields worth actually accounting for in a retirement income plan.