retirement cash reserve: how much Archives

You did it—you’re officially retired!

Your bucket list is ready, your calendar is wide open, and your dreams are finally within reach. You’ve saved and planned like a pro. Now it’s time to enjoy what you’ve built.

But then… the real questions start to pop up.

Where do I withdraw money from first?
What if there’s a market crash?
How do I manage taxes across my accounts?
How do I make my investments last?

This is when your retirement income plan becomes just as important as your retirement savings plan.

Let’s set the basics for building a simple, flexible income plan—including how to protect your portfolio from market downturns and withdrawal mistakes. Plus, we’ll walk through the concept of a cash reserve and why it could be your most underrated retirement tool.

Why You Need an Income Plan

Knowing you have “enough to retire” is only half the equation. The other half is understanding how to turn that nest egg into a paycheck.

One of the biggest risks retirees face is the withdrawal sequence risk—the possibility of selling investments at a loss during a market downturn. If the first few years of retirement coincide with a bear market, this can significantly reduce the long-term sustainability of their portfolio.

Withdrawal Sequence in Three Scenarios to illustrate risk. — Withdrawal Sequence in Three Scenarios to Illustrate Risk.

It’s why even well-prepared retirees feel overwhelmed when they look at 10+ accounts and multiple income sources.

Imagine this: you retire at the top of a bull market, start drawing income, and the market drops 20% in your first year. Now you’re forced to sell lower-priced shares to meet your income needs—locking in losses early and potentially throwing your entire plan off course.

Retirees with dividend-only or high-yield portfolios hope to avoid selling shares. But we know high yield often comes with higher risks, so this isn’t always a better strategy.

So what’s the solution?

The Cash Reserve Strategy: Your Retirement Shock Absorber

One of the most effective ways to manage withdrawal risk is using a cash reserve—a buffer of liquid, low-risk funds outside the market.

What is it?

A cash reserve is money you set aside in a high-interest savings account, money market fund, or short-term GICs—not in the market.

Why use it?

If your portfolio doesn’t generate enough dividends to cover your retirement spending needs, the difference (the “gap”) typically comes from selling shares. But during a bear market, you can instead draw from your cash reserve—giving your investments time to recover.

Example:

Retirement income needed: $50,000/year
Dividends generated: $20,000/year
Gap to cover: $30,000/year

If markets are down, you draw that $30,000 from the reserve instead of selling at a loss.

How Much Cash Reserve is Enough?

There’s no one-size-fits-all answer. It depends on two key factors:

How big your income gap is
How much volatility you’re comfortable with

As a general rule:

1–2 years’ worth of gap = moderate protection
3+ years’ worth = maximum protection (especially for conservative investors)

Keep in mind: while a large reserve offers security, it also limits your exposure to long-term market growth.

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Retirement Loop webinar visual. — Retirement Loop free webinar visual.

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A Simple Framework to Build Your Income Plan

There are many variations, but the foundational steps are consistent:

Run Your Retirement Projections: Estimate your needs, withdrawal rates, and growth assumptions to see if you’re on track.
Identify All Sources of Income: Include CPP, OAS, pensions, dividends, and any part-time work or rental income.
Calculate the Gap: Subtract total income from your spending needs. That’s the gap you must fill each year.
Build the Cash Reserve: Set aside 1–3 years of your gap in liquid, low-risk assets.
Invest the Rest: Focus on dividend growth equities to protect against inflation and grow your income. Add fixed income if volatility keeps you up at night.

Keep it Simple (and Flexible)

Managing multiple accounts doesn’t have to be complicated. Whether you use managed solutions or self-directed portfolios, a clear set of 3–4 rules can guide when and what to sell.

For example:

Only sell from accounts with the lowest tax impact
Prioritize capital gains over income in non-registered accounts
Rebalance once per year to refill your reserve and stay diversified

And remember: selling isn’t a mistake—it’s part of the plan.

Revisit Your Plan Every Year

Markets change. Life changes. So should your income plan.

Rerun your retirement projections each year and adjust your withdrawal strategy accordingly. The goal is to spend more time enjoying retirement rather than constantly recalculating it.

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Having a cash reserve on-hand makes it easier to transition from your investment accumulation years to your retirement years and protects your portfolio during times of volatility.

Throughout your retirement, you’ll go through bull and bear markets. During a bear market, selling shares to generate your homemade dividend could hurt your retirement plan.

That’s when the cash reserve helps; it’s money that is not invested in the stock market anymore. It must be secure and easily accessible.

How to use the cash reserve

Your cash reserve bridges the gap between what your portfolio generates in dividends and your retirement budget; it prevents having to sell shares when it is not advantageous to do so.

If you need $50,000 per year and your portfolio generates $40,000, the gap is $10,000 per year.

The $10,000 gap could be filled by selling shares. Selling shares at a depreciated value could hurt your retirement, whereas dipping into a cash reserve keeps your portfolio intact. When the market recovers, you can sell additional shares to refill your cash reserve.

How much cash reserve is enough?

There’s no clear answer to this question. You want to mitigate the impact of market volatility on your withdrawal sequence, but you also want to maximize your portfolio returns.

A large cash reserve increases the short-term protection of your withdrawals but amputates your portfolio’s ability to generate higher returns on the market over the long haul.

Therefore, the amount of the cash reserve depends on the gap to fill and your tolerance to volatility. Some investors are comfortable without any cash reserve; they simply accept that they will sell shares yearly to complete their retirement budget, regardless of how the market is doing.

Others prefer a large cash reserve to cover all potential catastrophes. While most bear markets take around 24 months to recover, some have taken more than four years to fully recover.

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Create a cash reserve

To create a cash reserve, you can stop reinvesting your dividends a few years before retiring and let the cash build up in your account. It’s on autopilot, simple, but it could take a few years to reach the required amount; during that time, the cash doesn’t generate any meaningful returns.

To let your portfolio work at full speed until the very last moment, you could sell one- or two-years’ worth of your financial needs in shares on day 1 of your retirement. However, if you retire at the bottom of the market, you’d be selling at a very bad time.

Cash reserve example

Imagine you have a $1M portfolio, an average dividend yield of 3.5%, and a retirement budget of $50,000/year. Since the portfolio generates $35,000 in dividends ($1M X 3.5%), the gap between what you generate and what you need is $15,000.

To ensure you don’t have to sell shares during a bad year, you decide to create a cash reserve of four years’ worth of the $15,000 gap, so $60,000.

Create and manage the cash reserve

In this example, a few years before start of your retirement, you stop reinvesting your dividends to let them accumulate. A year before your retirement date, you have your $60,000 cash reserve on hand.

You manage your cash reserve through a three-year ladder of Guaranteed Investment Certificates (GICs), Certificates of Deposit (CD), and/or bonds that would look something like this:

$20,000 for 1 year at 3%
$20,000 for 2 years at 3.25%
$20,000 for 3 years at 3.30%

You also keep accumulating your dividends in cash rather than reinvesting them.

At the end of the year, you retire

As you retire, your 1-year GIC/CD is worth $20,000 + $600 (one year of interest). Since you stopped reinvesting your dividends 12 months ago, you’ve also accumulated $35,000 in dividends ($1M X 3.5%).

Income on hand for year 1 of retirement

GIC/CD with interest	$20,600
Dividends	+ $35,000
Total	$55,600
Budget	($50,000)
Difference	+ $5,600

You reinvest that extra $5,600 for another 3 years to feed the ladder and keep it going.

If it’s a good year and your portfolio is up, you sell shares to have just enough money to “refill” your bond ladder. Then you have another $20K to invest for 3 years. With the extra $5,600 on hand, you only have to sell $14,400 of shares to reach $20K and complete the ladder.

Notice that $14.4K on $1M equals a 1.44% capital gain. On most years, you’ll be able to do that easily without chipping away at your capital.

What if the market is bad?

If it’s not a good year and your portfolio is down, you can easily wait 6 months or a year and see where the market is at that time before selling shares. Really? Yes, because you already have your income for the year and, at the end of year 1, you’ll have this on hand for year 2 of retirement:

2-year GIC/CD with 3.25% interest	$21,321
One year of dividends*	+ $35,000
Total	$56,321
Budget	($50,000)
Difference	+ $6,321

* This is the same amount as the previous year; by investing in dividend growers, it is likely that some of your holdings increased their dividends, so this could be higher.

If at the end of year 2 of retirement the market is still bad, you still have your 3-year GIC/CD worth $22,046, and another 12 months of dividends from your portfolio.

Of course, waiting to sell shares during a bad spell in the market means that eventually you’ll have to sell more to refill your cash reserve ladder.

Considering that most crashes happen over a few months or a year, after which the market starts recovering, and that the cash reserve ladder ensures you have over two years of buffer, you’ll be in a good position to refill the ladder using only or mostly your capital gains and dividend increases, thus securing your retirement for year to come!

How to Build a Retirement Income Plan That Actually Works