Does Your Age Change How Much Cash You Should Keep?

Take a made-up 34-year-old who spends $4,000 a month. He keeps $12,000 in savings. His mother, made-up and 68, spends $5,000 a month and keeps $100,000 in cash. Is he under-saved and she over-saved? No. Cash does a different job at each age, so the right amount differs.

This chapter gives common rules of thumb, not rules. Your own spending and income matter more than your age.

How much cash should you keep in your 30s?

A common starting point is three to six months of essential spending. Essential means rent, food, utilities, insurance and minimum debt payments. At $4,000 a month, three to six months is $12,000 to $24,000.

You keep less cash at this age for one reason. You still earn a paycheck. If you lose a job or face a big bill, you can rebuild. Money beyond the cash cushion can go toward goals that are years away.

Choose the high end if your income is uneven or one paycheck supports a household. See the chapter on how much to keep in savings.

How much cash should you keep in your 50s?

In your 50s, most people have more to lose from one bad month. A job loss can last longer at this age. Kids, parents and a mortgage may all need money at once.

Many people move toward the high end of the range, or past it. At $4,000 a month, six months is $24,000, and a year is $48,000. Some add a second pot for known costs, such as an old roof or a car with high mileage. That keeps the emergency money untouched.

How much cash should you keep in retirement?

A retiree has no paycheck to rebuild with. Spending comes from savings and investments. This creates a new risk: a market drop early in retirement, while you are taking money out.

Here is why. Say a retiree needs $60,000 for the year, and her stocks fall 20%. To raise $60,000, she must sell $75,000 worth of shares at their old prices. That is 25% more shares than she would have sold before the drop. Those shares are gone when the market recovers.

Cash avoids this. A made-up retiree who spends $5,000 a month holds $60,000 to $120,000 for one to two years of spending. With $100,000 in cash, she covers about 20 months of $60,000-a-year spending and sells nothing during a drop.

Why not keep a lot of cash at every age?

Cash is safe, but it grows slowly. Money you will not touch for ten years can usually earn more elsewhere, with more ups and downs. That is the cost of holding extra cash, and it is larger when you are young and have decades to go.

Cash also has a job beyond emergencies. It lets you say yes to a plan without selling something at a bad time. A reserve that is too small forces bad choices. A reserve that is too big leaves money idle. The ranges above try to sit between the two.

What if your situation is different?

The ranges move with your life. Lean toward more cash if you are self-employed, if your pay swings from month to month, or if one income supports the household. Lean toward less if you have a steady job, a second income and other money you could reach in a hurry.

Your health, your home and your family count too. A person with a 20-year-old roof and an aging parent has more known costs than the ranges show. Put those costs in their own pot, so they do not eat into emergency money.

How do required withdrawals change the plan?

Traditional IRAs and 401(k)s come with required withdrawals, called required minimum distributions. The IRS says they generally start in the year you reach age 73. Federal law sets age 75 for people born in 1960 or later, so check your birth year. The first can wait until April 1 of the following year, but then you take two in that year.

A cash reserve helps here too. If the market is down in a year you must withdraw, cash covers your spending. The required amount can still come out of the account, and you can keep it in savings until you need it. You owe tax on the withdrawal either way.

Missing one is costly. Say a made-up retiree owes a $24,000 withdrawal and takes none. The IRS says the missed amount may be taxed at 25%, which is $6,000. If she fixes it within two years, the rate is 10%, or $2,400. See the IRS rules.

What should you do next?

1. Write down your monthly essential spending. Use real bills, not a guess.
2. Multiply by your range. Three to six months while working. One to two years of spending if you draw from investments.
3. Keep it where you can reach it. Insured savings suit money you may need soon. Money you will not need for a year or more can go in a CD or short Treasury bill.
4. Look at the rates. Cash can earn interest. See what the Fed's rate changes mean for your cash.

Limits of this guide.

• The ranges are common rules of thumb. They are not IRS rules or advice for your situation.
• The households, spending amounts and the 20% market drop are made up.
• Required withdrawal rules depend on your account type and birth year. Check the IRS and your plan.