Retiring? Here's How Much Cash to Stockpile First.

In the course of preparing for retirement, there are probably a few key tasks you know to tackle -- figuring out when to claim Social Security, deciding when to begin IRA or 401(k) withdrawals, and navigating Medicare enrollment. But there's another key action item to focus on before bringing your career to a close -- building a cash reserve.

Many retirees kick off their senior years with the bulk of their money invested in assets whose value can rise or fall with market conditions. While it's a good thing to stay invested during retirement, you also need cash as protection. Here's how much you should aim to stockpile, and why it's important.

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A cash cushion can protect your retirement savings

One of the biggest risks retirees face is having to sell investments during a market downturn to generate income. When you're no longer receiving a paycheck, your portfolio often becomes your primary source of spending money (unless you have modest expenses and large Social Security checks coming your way).

If the market declines sharply, withdrawing funds from an IRA or 401(k) could lock in losses that may take years to recover -- if your portfolio even recovers at all. That's why you need a cash reserve in retirement. That way, you can leave your portfolio untapped when the market isn't in good shape, potentially allowing your investments to regain lost value.

It's also important to have cash on hand to cover unplanned costs -- think home repairs, medical bills, and so forth. Even if the market isn't in the midst of a crash, those surprise expenses could arise at a time when selling investments isn't optimal. A cash cushion lets you avoid that and could minimize your stress.

How much cash to set aside

Working folks are often told to set aside three to six months' worth of living expenses in cash. In retirement, the bar gets higher, simply because you're generally not using cash to tide yourself over during a limited period of unemployment. Rather, you're buying yourself protection in the face of a market crash with what could be a years-long recovery.

For this reason, it's a good idea to aim for 12 to 36 months' worth of living costs in cash. It gives you a nice buffer in case your portfolio loses a lot of value and is slow to regain it. It also gives you peace of mind knowing that if your roof suddenly needs to be replaced or your boiler gives out, you don't have to scramble to liquidate investments to come up with the money.

So as you do all of your retirement preparations, don't neglect your cash cushion. Make sure to allocate enough money to cash so you're able to safeguard your portfolio during market downturns and manage all of the surprises your senior years throw your way.

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