Is there a certain balance I should keep in a checking account when my retirement accounts are set?
I am four years away from retirement and I already have enough income for retirement. I have a lot of money in my checking account. Is there a certain balance I should keep in a checking account when my retirement accounts are set?
There is no magic number here. I'd likely have emergency funds in checking and any foreseeable expenses coming down the pipe line that are above and beyond your retirment income. For instance, if you know you are going to be needing a new car or special vacation I'd go ahead and put that in checking/savings. Quite frankly all of these cash reserves I'd put into a high yield savings account like one at live oak bank or synchrony. Then I'd invest the rest into a non retirement investment account to be honest. If you were going to force a number in my head I'd have like $20,000 sitting in traditional checking account, the rest in savings for the known expenses, and go invest the difference. Hope that helped.
I would recommend keeping an amount equal to one month's expenses and then have an amount equal to, two month's expenses in a savings or money market account at the same bank that has your checking account. These three month's of household expenses will serve as your emergency fund and the rest of your money can be invested.
The rule of thumb I use with clients is to have an amount equal to three months expenses if there are two incomes in the home or if you are retired. Six months is suggested for a single income household or a self-employed person.
If you were my client, I would want to be clear on a number of questions before I would feel confident in providing an answer to your question.
Assuming you are strictly talking about a checking account, I would agree with other posters. If you are talking about where to keep money which will be needed to cover cash flow needs in retirement (which you should be if only 4 years away), I think your question requires much more detailed analysis.
When you say that you have enough income for retirement, what is the source of that income?
- If based on portfolio withdrawals, what are your assumptions for returns, withdrawal rate, longevity, inflation, future tax rates, etc?
- Guaranteed pension? Does the pension have an inflation adjustment? A joing survivor option?
- Social Security. Have you considered spousal claiming strategies?
- Other annuitized income
- Rental, or other passive income
Finally, what is your overall plan which should include strategies to mitigate taxes, and an asset allocation based risk tolerance and risk capacity?
Hope this provides some additional things to think about.
I would suggest keeping 1-2 months worth of expenses in your checking account. In addition, have about 6 months of expenses in a savings account as an emergency fund. While you are working continue to take advantage of making maximum allowable contributions to your retirement accounts. All other funds need to be working for you in a diversified portfolio that is consistant with your timeline and risk tolerance. A fee-only investment advisor can help you determine what is appropriate for you. Bear in mind that money that is not invested, even conservatively so as to overcome the impact of inflation, effectively looses value every year due to inflation which has averaged about 2.7% over the past 25 years. Therefore, doing nothing, or keeping money in a checking account, is effectively causing you to lose purchasing power.
First of all congratulations on having enough income for retirement.
I would recommend that you keep only a few months of expenses in your checking account. Even though you have enough for retirement and are risk averse with this cash, there are cash alternatives that will at least earn you some return over the next 4 years. These would include a savings account, CD's, money market funds, and short term treasuries or municipal bonds. With the federal reserve raising interest rates, you should be able to get above 2% on this money vs. nothing in a checking account.
Of course there are other alternatives as well, but this should all be part of a well developed plan that is customized for your situations.