The theme this week on the One Minute Retirement Tip podcast is: Get These 4 Things Right For A Successful Retirement. 

What are these 4 things? They’re known as the 4 L’s of retirement and the concept was developed by retirement researcher, Dr. Wade Pfau.

The 4 Ls of retirement are longevity, lifestyle, liquidity, and legacy. Today, we’re focusing on liquidity. 

Liquidity is all about maintaining an emergency fund and extra savings that are set aside for emergencies and other curve balls that will inevitably come your way in retirement. This could include supporting elderly parents when you didn’t plan on doing so, a house fire, flood, or lawsuit, or absorbing the impact of an unexpected death or disability. 

According to the creator of the concept of the 4 L’s, Dr. Wade Pfau, “Such assets [for emergencies] must not be earmarked for other goals, as unexpected contingencies relate to anything falling outside of the planned retirement budget.”

So while most of planning for retirement is about planning for what you expect to happen, the plan can go sideways pretty quickly when the unexpected happens, which is why it’s so important to maintain cash, so you can cover most of those inevitable unexpected events that will come up during your 20-30+ year retirement. 

There are no guarantees in life. And that’s the hardest part of planning for retirement, but that doesn’t mean it’s futile. It just means you’ll need to have enough of a cushion, that’s liquid enough to provide for those emergencies. 

The other challenging part about this is we don’t know anything about how much we’ll need to unexpected expenditures. You might have $50,000 or $500,000 of unexpected expenses in retirement. 

With all that in mind, how much should you have set aside in cash to cover your liquidity needs in retirement. Too much in cash can drag down the overall returns of your portfolio, but too little in cash can cause you to sell assets, perhaps at the worst time. 

Ideally, my recommendation to clients is to have enough cash on hand to cover their basic needs for 6 months. So if your basic spending needs are $3,000 a month, you’ll need $18,000 in cash on hand. In addition to that, I recommend another 12 months of your portfolio withdrawals  in cash to cover those big emergencies and allow you to stop your portfolio withdrawals if the stock market and your portfolio take a nose dive. Notice I said portfolio withdrawals, not your total monthly expenses. So if you withdraw $2,000 a month from your portfolio, you’ll need another $24,000 cash on hand. 

That’s it for today, but before you go, I’m planning an upcoming weekly theme on the podcast of “ask me anything”! What’s weighing most heavily on your mind right now as you approach retirement? Submit your question to me, I’ll pick 5 of my favorites, and answer them on the podcast. Just send me an email to [email protected]. That’s [email protected], and even if I don’t pick your question to answer on the podcast, I’ll do my best to reply and send you an answer anyway.

Thanks for listening! 

My name is Ashley Micciche and this is the One Minute Retirement Tip. 

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