Now that you've retired from the railroad, how much money should you keep in the bank?
Welcome everyone to another edition of the Highball Advisors, Railroad Retirement Whiteboard. My name's John McNamara of Highball Advisors. And today we're going to talk about leaving money in the bank, especially when you're retired. And with interest rates so low, how much cash should you keep in there? And what are you using that cash for? So to speak, because as we know interest rates at the bank you'll get a handshake at the bank. That's about it. You're not going to get much interest, 0.1, 0.2, whatever the interest rate is. It's not really good.
So let me walk you through this about cash on hand and see if this helps you out a little bit here. So for non-retirees, I always recommend three to six months of cash in the bank of living expenses, because you're not working. So check out my video, Five Ways To Prepare For Railroad Retirement. And that will walk you through some of the ideas for emergency cash.
So what I'm talking about here are, really retirees or right on the fringe of retirement. Retirees. So you want to have some cash on hand. What is that going cash going to do? It's going to help buffer your living expenses. You have that monthly amount you got to make. And it will help you avoid selling your investments in down markets. Nothing worse than selling the low in the market. Panic. I need cash. I'm selling at the low. We know all how that ends up.
So we don't want to be doing that. So that's why you want to have a little cash on hand. So the question is now, how much cash do I really need on hand? Because remember your real rate of return at the bank is negative, because of inflation and the low interest rates. So we don't want to keep too much there. So how much? So what we need to do is figure out our monthly income. So we have for railroaders, these are guaranteed income sources.
Your tier one's guaranteed. Your tier two is guaranteed. Some of you have a pension. All right, so that's all guaranteed. So that's firm, that's set in stone. You know you're getting that much a month. Then you have your monthly expenses. Now, whatever that difference works out to you want to have about 12 to 24 months to cover that.
Now, what I didn't put in here, is as you draw down your nest egg, your 401(k) or whatever, that's a variable and we don't want to deal in variables. We want to say these are the fixed. So we want to know how much cash that we going to have. So let me give you an example. So let's say a couple, their tier one is $3,000 a month. Tier two is $2,000, and maybe their pension is a $1,000. So that's $7,000. They have expenses of $8,000. So they actually have a $1,000 deficit every month, because of the guaranteed. Once again, remember I didn't talk about drawing down your variable, your 401(k), your IRAs, that type of thing.
But you need a $1,000 a month. So cash on hand would be $12,000 to $24,000. That's right between one year and two years of cash. That would probably be the best way to do it. Now, some of you might want to have some more cash on hand. That's fine. But think about what you're doing with it. If you're saying, "I'm going to keep a little extra cash on hand, because maybe the market's going to come down a little bit and I like to buy some cheap assets." That would be a good reason to just keep some extra cash on hand.
Just to have it, to look at a number is probably not a good reason to do. So, I hope you found this helpful, give you something to think about how your expenses and your income, how that all looks in railroad retirement, and how much cash you should have on hand. Feel free to reach out to me. This is the kind of stuff we do on the Boarding For Railroad Retirement process. So if you're nearing retirement or in retirement book that meeting and we can go through things like this, take a deep dive and make sure that you had the proper amount cash on hand.
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. Highball Advisors encourages you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Highball Advisors, and all rights are reserved.from Highball Advisors, and all rights are reserved.