Single-income households should have six to 12 months of regular expenses set aside. For dual-income families, three to six months should suffice.
It makes sense for retirees to build a cash cushion of one to two years of living expenses so that they can tap their emergency fund to ride out a market decline without having to sell retirement savings at depressed prices.
“It’s about protecting your long-term assets,” said Ward, adding that research shows most balanced portfolios (60% stocks, 40% bonds) recovered fully from the bear markets of 2000 and 2008 within one to two years.
- Major expenses or intermediate-term goals. If a big-ticket purchase such as a new car, college tuition or the down payment on a new home is on the horizon, you should have the money socked away for it, too.
You can’t afford to risk money you’ll need in a few years in the stock market. High-yield savings or money market accounts, or even conservative short- or intermediate-term bond funds, are good choices for this goals-based bucket.
- Investments. For money earmarked for the long term, the less cash the better.
“We don’t see cash as having a place in an investment portfolio,” said McKenna, who recommends no more than 2%. Even a 5% to 10% cash weighting can act as a headwind. To maximize long-term returns, emulate the low cash holdings favored by fund managers.
