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  • How much cash should I hold in retirement?

    We look at why you need a larger cash pot in retirement. How to get the best returns on your money, and how to keep it simple.

    Cash plays a pivotal role in retirement planning.

    It’s predictable, reliable, and boring. And that’s exactly how it should be. Ready to help you out when planned or unexpected costs arise.

    But if you’ve stopped working and you dip into your emergency pot, it takes longer to build that buffer back. Therefore, you need a bigger cash safety buffer.

    This article isn’t personal advice. If you’re not sure what’s right for your circumstances, please seek advice. Please remember that inflation reduces the future spending power of cash.

    How much cash should you hold?

    To cover your emergency cash buffer, we think you should hold one to three years' worth of expenses.

    It’s a sizeable amount, but once you’re retired and typically living on a lower income, it’s harder to top up your pot, should you need to access it. We’ve used ONS data to show the average household expenditure for people aged 60 and over. The figures are split into essential expenses, which are goods or services purchased because they meet a basic need (food, shelter, or healthcare). And total expenses which include essential and non-essential purchases.

    These figures are based on people aged 60 and over, but their retirement status is unknown.

    1 year 3 years
    1 adult 1 adult
    Essential expenses £15,118 £45,356
    Total expenses £23,008 £69,024

    One to three years may seem broad, but the amount you should hold in cash differs depending on your circumstances. And especially, where your income is coming from in retirement.

    If all your spending is covered by the state pension, Defined Benefit (DB) pension scheme or an annuity, you may only need to hold one year of expenses.

    If all your income is coming from your investments, then you may want a larger buffer in case of sudden drop in the market or investment income.

    In addition to your emergency fund, you should keep any planned expenses in the next five years as cash rather than investing the money. That’s because investments can fall as well as rise in value and it shelters you from needing to sell investments during a market downturn. So, you may choose to hold a higher cash balance than what we’ve outlined above.

    How should you hold it?

    Up to three years' worth of expenses is a lot to hold in an easily accessible account, and you will almost certainly lose out if you don’t use fixed terms for portions of your cash.

    For example, holding £20,000 in an average instant access account gets you £546 in interest after a year (assuming the rate stays the same)*.

    If you fixed that money in the average one-year fixed rate, you’d come away with £1,086. That’s almost double the returns, just by switching.

    And if you switched to the top one-year fixed rate? You’d walk away with £1,222 (as at 18 October 2023), which is a big difference after just 12 months.

    *Average rates were sourced from the Bank of England. Top market rates were sourced from Moneyfacts. Both were accessed on 17 October 2023 at 17:19pm

    Finding what's right for you

    Despite generally offering lower returns, you’ll need to keep some money in instant and easy access products.

    Otherwise, in an emergency you might not be able to access your money quickly enough.

    Fixed terms generally offer a higher interest rate, but they usually don’t let you withdraw money until the term ends.

    You can fix in terms from a few months to several years. Holding a portfolio of fixed rates which cover a range of terms means your cash will be getting higher rates at each period.

    Keeping it simple

    Setting up your savings like this could be a lot of work, but it doesn’t need to be.

    Our Active Savings service helps you take control of your cash, while saving you time.

    You can pick and mix from easy access and fixed-term savings products from different banks and building societies, with one online account.

    You’ll get better rates and more choice than a typical high street bank, and it’s all in one place.

    Moving money between banks and products can be done in minutes.

    So, you can get on and enjoy your retirement in the knowledge your money is working hard.

    Instant access products allow immediate cash withdrawals, Active Savings offers easy access products where withdrawals usually take one working day.

    This website is issued by Hargreaves Lansdown Asset Management Limited (company number 1896481), which is authorised and regulated by the Financial Conduct Authority with firm reference 115248.

    The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised and regulated by the Financial Conduct Authority (firm reference number 915119). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money. Hargreaves Lansdown Asset Management Limited and Hargreaves Lansdown Savings Limited are subsidiaries of Hargreaves Lansdown plc (company number 212214).

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