How Much Savings, How Much Growth? (A Guide to Your Own 'Right' Retirement Blend)

By James O'Brien.

The market might be enjoying record highs , but investors are increasingly committed to their cash. And that includes retirees.

A recent report from State Street's Center for Applied Research shows that investors are leaning in the direction of cash allocation. In part, that means they're opting for perceived security, when it comes to holding onto their money against potential market changes, but it also means that many of them are giving up the returns that higher-risk instruments can provide.

It's the kind of data that opens a vista onto how retirement planning can slip out of balance. Striking an optimal balance  meaning, having cash reserves in the face of risk, but also keeping high-quality investments in your portfolio so that your account not only sustains you but beats inflation and provides new options  our current love affair with cash might well be cutting into that goal.

And so, let's look at the numbers in the report, then consider some key ways to lift your retirement account out of the low-returns zone that over-reliance on cash can represent.

Cash Money: Assets Askew?

The State Street report indicates that, overall in the U.S., investors are skewing assets toward cash allocation  to the tune of 36% of their holdings.

And, investors over the age of 67? The demographic most often associated with retirees is socking away 43% of their assets in cash. Interestingly, the emphasis on keeping dollars at hand doesn't dwindle very much as the demographic gets younger, either.

• Baby Boomers allocated 41% of their assets to cash.
• Generation X is allocating at 38%.
• Millennials came in at a 40% cash allocation.

Is there a problem here, for retirees  having more than a third of your assets in cash form?

Yes, if you mean for your portfolio to grow at a pace that both minimizes the effects of inflation and sustains your costs of living for the decades you'll draw on it after leaving work. The cash crutch is overemphasizing the effect of one kind of risk but turning a blind eye to another.

That is, we worry about losses, when it comes to investing. We often think of equity investments as volatile  and they can be  and in general most individuals would choose fixed income over unexpected changes.

But retirees also have to pay attention to a second scenario: beating inflation. Stuffing the mattress, as it were, might satisfy our affinity for steadiness, of an immediately at-hand balance. But the purchasing power of that money almost always dwindles over time  though it can do so at such an imperceptible rate that it takes 2030 years to realize the effect.

So, how to strike some kind of equilibrium? We turn next to a strategy that can help a three-step approach to keep your money safe from sudden market changes, but also meet your retirement needs over time.

Safety and Growth: Seeking the Right Cash-Investment Blend

Cash can be just the thing when one needs to ride out a market downturn without having to sell, sell, sell. Yes, buffers allow your stocks to recover, but it's important to divvy up resources so that the potential drawbacks of a cash reserve don't outweigh the advantages.

The three steps that follow are about creating a sustainable way to do just that.

• Create a reserve. If you're drawing on a pension or an annuity, your annual income as a retiree could well be in good shape to start with. From there, start to separate some cash into a reserve that accounts for living expenses, should something unexpected happen in the market  or in your life, such as having to replace the roof or care for a sick relative. Some individuals put 48 months aside as an emergency fund. To get your assets into a place where they can create some tangible change in your portfolio, however, map your way to accruing 23 years of annual withdrawals in reserve, splitting those assets between cash and short-term, high-grade bonds. Now, you can begin to worry less about bear markets, enjoy some modest growth in the reserve you've just built, and alsoturn to the next step of a strategy that prompts further growth.
• Think about "buckets". Once you've got a cash/bond reserve in place, start to think about your assets in terms of buckets. The reserve you've built up is bucket one. Bucket two is your next project. The goal is to fill it with a relatively non-volatile mix of stock and bonds. You're reaching into bucket one at times to do that, but the concept is that bucket two will reap returns that allow you to periodically put back  and even increase  what you're working with from the safety funds.
• Invest to keep the buckets full. It's time to think about long-term growth. While bonds have helped balance the blend in buckets one (with cash) and two (with some stocks), bucket three is going to be mostly stocks. When you have gains from bucket three, you can siphon those returns into bucket two  and even all the way back to bucket one. The contents of this third bucket are more susceptible to the market, so sometimes you'll see a loss, but remember that you've got a reserve tucked away and the exposure from bucket three is only a part of what's now a blend of instruments for your continued retirement income.

Of course, planning for retirement is initially about how to bring together the assets you need in the first place.

The strategies we've just considered are about building assets over time once you've left work. You don't need to enact them at light speed. Shift gradually from fixed-income scenario  graduating your allocations from cash to bonds to stocks as each step proves successful, as you begin to see gains replace the cash you spent to earn them.

Remember that every retirement blend is an individual recipe, and so learning to mix yours is about adding and subtracting in increments. You'll know you've got it right when you're out of the cash-versus-inflation marathon and into a wider playing field of savings and growth over time.