Why cash is an important part of your retirement plan
Originally published: August 19, 2022
Updated: August 18, 2026
Retirement savers are often told they’ll see a greater return in their retirement assets if they invest it – and that may be true – but it’s important to prioritize some cash in a retirement plan as well.
For those close to retirement, consider keeping a portion of your retirement plan in cash – whether that be in the portfolio itself, in the bank, or in another safe retirement product like a fixed index annuity.
Bank and money market accounts do not typically generate the same type of returns as investments, though when the stock market is in decline, some investors may argue that safe money with low returns is better than losing money. Investing in equities can be an important piece of the puzzle while you are younger and planning for future retirement income, as stocks and equity funds create large returns sometimes over time.
But there are instances – such as during periods of significant market volatility – when more mature investors, especially those who are already retired, could really benefit from having some of their money placed safely away from the volatility of equities, stocks, mutual funds, etc. In fact, some more mature investors find that Fixed Index Annuities, especially those with lifetime income benefits, can serve as a very good middle ground since they tend to grow at a more reasonable rate of return than a bank account or money market account, during years when the stock market is doing well but their principal is designed to be protected from market declines (subject to any applicable withdrawal charges).
As the saying goes, “cash is king.” That’s not always true when it comes to preparing for retirement, but having some cash on hand does allow retirees the opportunity to avoid tapping into their portfolio during market volatility. Retirement savers often find value in the fact that products like Fixed Index Annuities can sometimes provide just enough access to their cash (typically allowing a 10% penalty-free withdrawal yearly) to ensure liquidity needs are met when they need it most. Retirees may also feel stressed watching their investment balances drop as major indices and sectors across the US stock market go through periods of volatility, and an FIA can alleviate that stress as well, since its principal is protected from market declines (subject to any applicable withdrawal charges), even in times of investment strife.
Since taking money out of an investment portfolio and converting it to cash when it’s on the decline can provoke the “sequence of returns risk,” an FIA can provide a better way to liquidate for safety while still maintaining some potential for indexed interest accumulation. This means, when investors are suffering from deficits in their portfolio, they can still maintain a reasonable rate of return over time on some of their money using an FIA. Of course, people who do need cash in retirement should withdraw from their portfolios – albeit conservatively. Having cash on hand in the bank, or receiving a cash payout or income benefit from your Fixed Index Annuity, can help avoid excessive withdrawals from other investments.
| Feature | Cash in Hand / Bank Account | Money Market Account | Fixed Index Annuity (FIA) | Equities / Stock Investments |
|---|---|---|---|---|
| Liquidity access | Immediate | High | Limited (contract-specific penalty-free withdrawal provision, commonly cited around 10% of account value per year) | High, subject to market timing |
| Principal protected from market decline | Yes | Yes | Yes (subject to any applicable withdrawal charges) | No |
| Growth potential | None to minimal | Low, steady interest | Potential for indexed interest accumulation; no loss credited in down years | Higher long-term growth potential, but variable and can decline |
| Typical role in a retirement plan | Emergency and short-term liquidity buffer | Short-term liquidity buffer | Middle ground: some liquidity plus principal protection and interest growth potential | Long-term growth engine, especially earlier in retirement planning |
If the thought of riding out a down market sounds daunting, safe money strategies, like a fixed index annuity can really help. They can provide cash access and can also be a useful tool to supplement other income sources like social security income and pensions.
There’s no one set amount of money that should be kept in cash – the answer depends on individuals’ personal circumstances and comfort level. One rule of thumb is to keep about a year’s worth of living expenses in cash (source), which could be drawn against when portfolios are riding a rollercoaster investment market. During these times, for many people, cash can be kept safe, pursue interest growth potential, and last a lifetime with the help of a fixed index annuity through Summerlin Benefits Consulting.
Summerlin Benefits Consulting has helped many people determine what type of strategy makes sense for them and their families and we can help you too!
Important Tax and Legal Information
This content is for informational purposes only and does not constitute tax or legal advice. Summerlin Benefits Consulting does not provide social security, specific advice related to taxes, or legal advice. Consult a tax/legal professional for guidance with your individual situation.
Important Retirement Planning Information
Every retirement strategy is unique, and not all annuity products offer the same features, guarantees, or level of protection. References in this article apply only to the specific retirement solutions discussed and should not be interpreted as applying to all annuities. The right strategy depends on your individual goals, financial situation, and retirement objectives. This is something Summerlin Benefits Consulting can help you determine.
Frequently Asked Questions
Q1: Why is it important to keep cash in my retirement plan?
A1: Keeping cash in a retirement plan lets retirees draw on it during a market downturn instead of pulling from their portfolio, which helps reduce sequence-of-returns risk. A common guideline is about a year’s worth of living expenses in cash, though the right amount depends on personal circumstances (https://www.fool.com/money/banks/articles/how-much-money-should-retirees-have-in-cash/).
Q2: How does a Fixed Index Annuity protect my retirement savings when the stock market drops?
A2: A Fixed Index Annuity’s principal is protected from market declines, subject to any applicable withdrawal charges, so its value isn’t reduced when stocks fall. In years when markets perform well, it also offers potential for indexed interest accumulation, making it a middle ground between cash and equities.
Q3: Can I access cash from a Fixed Index Annuity if I need it?
A3: Many Fixed Index Annuity contracts include a penalty-free withdrawal provision, commonly around 10% of account value per year, without triggering a surrender charge (https://annuityjournal.org/annuities/annuity-withdrawal-rules/). Exact terms vary by contract, so confirm the specific provision with your insurance professional before relying on it for liquidity needs.
Q4: What’s the difference between keeping cash in the bank versus in a Fixed Index Annuity?
A4: Bank and money market accounts offer full liquidity with modest, steady returns. A Fixed Index Annuity offers less immediate access to funds but provides potential for indexed interest accumulation without loss of principal from market declines, subject to any applicable withdrawal charges, making each suited to a different role.
Q5: How much cash should I keep on hand when I retire?
A5: There’s no single right amount – it depends on personal circumstances and comfort level. A common rule of thumb is about a year’s worth of living expenses in cash (https://www.fool.com/money/banks/articles/how-much-money-should-retirees-have-in-cash/), which can be drawn on during market volatility rather than selling investments at a loss.
