5 Ways to Build a Cash Cushion for Retirement

It was in a college adult development class that someone first suggested to me that adults never stop growing up. There's no magical age at which we're fully cooked. We can be collecting Social Security and living in a retirement community but continue to grow and learn.

I think that may be one of the coolest things about getting older. We never stop learning. And one thing I've learned with age is that I was a bit of a dolt when I was younger -- particularly when it came to retirement planning. I knew I was supposed to build a retirement account, but I must have been absent the day others were learning the importance of a cash cushion.

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What is a cash cushion?

A cash cushion can be used to pay unforeseen expenses, such as major home repairs and medical bills. It can also be the money from which you draw when there's a market downturn, and you don't want to sell investments.

As I've begun to plan for the day when my husband retires, I've realized what a poor job I've done of building a cash cushion. I have an emergency account to draw from if the car breaks down or the water heater hits the skids, but the fund I'd need to pull money from during market downturns is a work in progress.

Building the cushion

The tricky part, at least for me, has been finding ways to build the cushion to the proper size while also paying bills and planning for other events. Here are five ways I've found that work:

1. Turn the budget upside down: Rather than paying bills first and saving what's left over, the first expense I pay is savings. My most recent household budget is based on what's left over after savings have been fed.
2. Spend less: I'm not good at bargain hunting. Fortunately, my husband has taken over the duty. He combs through the savings apps on his phone and digitally clips coupons to use at the grocery store. Based on those coupons, I come up with meal ideas (well, Google and I), and he creates a shopping list. Whenever we need to buy a tool or new shoes, he uses a cost-comparison app to ensure we're getting the best deal.
3. Tuck away "found" money: I understand that tax refunds are simply overpayments we made to the government, but I'm still shocked any time we get one. It feels like free money. This cash goes into the cushion.
4. Be consistent: By automating transfers from checking to savings, I don't have time to tell myself that I "need" the money for another purpose. Automating also means that the cash cushion is steadily growing.
5. Celebrate (at least a little): Once the cushion has been fed and our bills have been paid, I try very hard to ensure there's a little extra to put toward something special, like a weekend trip or special meal out. Otherwise, the entire process feels like deprivation. I prefer to see it as taking control strategically.

How much do you need?

It's recommended that you keep a cushion of 12 to 24 months of essential expenses. Before you say it can't be done, take a look at how the actual number is calculated:

1. Create a post-retirement budget that estimates only your essential expenses. For example, you'll include housing, transportation, and food. You won't include the cost of hobbies, vacations, regularly dining out, or any other expense you know you could live without for a while.
2. Add together expected sources of retirement income, including Social Security, pensions, annuities, rental properties, and income (if you plan to work in retirement). Don't include funds you would usually draw from a retirement account, in case you need to take money from the cushion during a down market.
3. Subtract your expected sources of income total from your essential expenses total.

For example, if your expected income is $3,000 per month and your essential expenses are $4,000, you have a $1,000 gap to fill each month. That means that to get to 12 to 24 months of cushion, you should aim to save $12,000 to $24,000 to get you through periods of rough financial waters.

Where to keep your cash cushion

The cash should remain liquid while also earning interest. The returns on this money will likely be lower than you could earn if it were invested, but these funds are meant to be easily accessible and serve as a safety net. Here are three ideas for where to keep the money:

• High-yield savings account
• Money market account
• Short-term certificate of deposit (CD): If appropriately laddered, the cash remains relatively accessible.

Can you survive retirement without a cash cushion? Absolutely. But the goal of having extra funds available is to help you get by with as little stress as possible.

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