Cash feels safe. It is simple, accessible and reassuringly predictable. Unlike shares or property, its value doesn’t jump around from day to day, and money held in a bank account can usually be accessed quickly when an unexpected bill arrives.
For retirees, that sense of security can be particularly valuable. The problem is that holding too much cash can create a different kind of risk – one that is much harder to see.
That risk is inflation.
As the cost of fuel, groceries, insurance, electricity, travel and healthcare gradually rise, the purchasing power of your cash falls. A dollar may still be a dollar, but over time it buys less. Even when a savings account earns interest, the return may not always keep pace with rising living costs, particularly after tax.
This creates a balancing act.
Keeping an emergency reserve in cash can make good financial sense. It can help cover unexpected home repairs, medical expenses, car replacements or periods of market volatility without forcing you to sell investments at an inconvenient time.
Some retirees also prefer to keep enough readily available money to cover one or two years of planned spending. Others are comfortable with considerably less. There is no universal figure because the appropriate amount depends on your regular expenses, pension or superannuation income, investment portfolio, health, upcoming purchases and personal tolerance for financial uncertainty.
Where cash can become problematic is when a large proportion of long-term savings remains sitting in low-return accounts simply because investing feels uncomfortable.
Retirement can last 20 or 30 years, sometimes longer. Money that will not be needed for many years may therefore need some exposure to growth assets, such as shares or other investments, to help preserve purchasing power over time.
Security also deserves consideration. Deposits with Australian authorised deposit-taking institutions are protected by the Australian Government’s Financial Claims Scheme, subject to applicable limits. Anyone holding substantial cash should understand how those limits apply across their accounts and institutions.
A useful approach is to give your cash a job. Keep enough for everyday spending, emergencies and foreseeable short-term costs. Then ask whether money beyond that amount genuinely needs to remain in cash.
The aim is not to minimise cash. It’s to avoid confusing stability with complete safety. In retirement, protecting your money means considering both the risk of losing capital and the quieter risk of inflation slowly eroding what that capital can buy.