Rules of thumb to build cash cushion for your retirement

QMy husband is retired and draws a defined-benefit pension. I hope to retire in five or six years. We have no savings apart from our (rather large) IRAs. I have suggested that it would be a good idea for us to build a cash reserve before I retire so that in retirement we can avoid having to make withdrawals from our IRAs (beyond the required minimum distribution) to cover living expenses just after a market sell-off.

He says this amounts to trying to time the market -- something we both agree is foolish. I've always thought that the admonition against trying to time the market was a caution against frequent trading in an attempt to beat the market. What do you think?

ELAINE

AYes, active trading is hazardous to the wealth of most people. Trying to profitably time market swings by the day, the week and the month far too often turns into a profitless strategy of buying high and selling low. However, I don't think you're trying to outwit the market. Instead, you're thinking about creating a margin of financial safety as you enter into your retirement years. I like the approach of creating a money cushion that allows you to meet necessary expenses without having to worry whether stocks or bonds have fallen into one of their periodic bear markets. Cash reserves are good.

Here's one way of thinking about it. Jack Bogle, founder of the Vanguard mutual fund behemoth, uses the rule of thumb that the fixed-income portion of a retirement portfolio should equal your age. So, if you are 30 years old, fixed-income securities comprise 30 percent of your portfolio; 55 years old, the fixed-income portion is 55 percent of your portfolio; and so on. When I interviewed the octogenarian Bogle during the 2008-09 bear market, he told me that with so much of his portfolio in fixed-income securities the sharp drop in stocks didn't affect him financially.

Of course, like all rules of thumb, tapping into your age as a guidepost is simply a starting point. You can decide to pursue a more conservative or aggressive approach, but the age rule of thumb helps you reason through your decision. I would also stick with high-quality investments, such as U.S. Treasury securities, I-bonds, federally insured certificates of deposit and savings accounts, and the like. The money should be in both taxable and tax-deferred accounts. (For insight on conservative finances take a look at "Risk Less and Prosper: Your Guide to Safer Investing,'' by Zvi Bodie and Rachelle Taqqu.)

Now, I'd like to broaden my answer. You're about six years away from retirement. You and your husband should have a good grasp of your expenses, your goals and your desires. The transition toward retirement is a good time to delve deep into figuring out how to best match your overall savings and household spending.

One approach is to set up a consultation with a fee-only financial planner. The advice of a professional might help you and your husband set up your finances for the next stage of life. Alternatively, you could go the DIY route with you and your husband working with one of the in-depth online financial planners, such as ESPlanner.com and Analyzenow.com.

Chris Farrell is economics editor for "Marketplace Money." His e-mail is cfarrell@mpr.org.

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