Is keeping too much cash secretly hurting your retirement? Here’s the smart fix

How much money is considered too much?

Having cash on hand is important to pay bills and store money in case of injury, illness, or job loss. But how much cash did you actually have to save?

“After six months” [worth of expenses] Cash in a bank account to cover living expenses is sufficient. “For those who want to be conservative, 12 months can also be an option,” says David Rosenstruck, director of Wharton Wealth Planning.

According to Rosenstruck, there are only three reasons why a person might keep cash in their bank account:

• Save that aforementioned emergency fund for six to 12 months
• To provide for large, planned future expenses (such as a down payment on a home)
• Have additional cash reserves to offset risky investments

Rosenstruck cautions that individual investors should not over-allocate cash or cash-like investment products, such as certificates of deposit (CDs).

The hidden cost of cash

The main reason investors are wary of carrying too much cash or cash-like investment products is that inflation can erode gains considerably, especially over the long term, which is why carrying too much cash can be so disastrous for retirement savings.

“Cash and cash equivalents – CDs, money markets, high-yield savings [accounts]- They generally do not exceed inflation rates over time, so they should be considered savings rather than investments. Although saving money is important, it alone will not lead to financial freedom. “You need the power of compound interest, and your money making more money, to reach your full financial potential,” Rosenstruck says.

In addition to inflationary risk, there is also the opportunity cost of holding your wealth in cash. If invested properly, the money can earn about 7% annually in the stock market — for example, the long-term inflation-adjusted annual average for the Standard & Poor’s 500 index since 1957 was 6.68%, which is higher than the interest offered on most savings accounts and CDs, as of September 2025.

Why do retirees gravitate toward cash?

Retirees gravitate toward cash because it makes them feel secure. You can see the money in your account, and if you need to spend it tomorrow, you can. It’s not going anywhere.

At the same time, investing can feel like gambling. Money invested over the long term in reliable investment products such as stocks and bonds is sure to generate positive profits. But there may be years of stagnation, and that is scary.

To make it even scarier, that initial point when someone invests money can feel like they’re spending it. In one case, the cash is in their bank account. The next day, he was gone.

For retirees, the fear of spending is real. About a quarter of retirees are already reducing their spending in retirement.

Better alternatives to excess cash holdings

Overcoming the fear of spending and using cash is crucial to achieving healthy retirement savings – but how should retirees invest?

“Given cash rate yields, there is a strong case for investing in bonds right now. One is that when you buy bonds and long-term fixed income investments, you are able to lock in a higher return for a longer period. So, if you buy a five-year bond or a 10-year bond, that means the interest rate will prevail for as long as you hold it, Rosenstruck says.

Fixed income instruments and equity index funds are also always a good bet, he adds.

“As we think about the possibility of lower interest rates in the future, a fixed-income investor would benefit from some upside in such an environment,” Rosenstruck says.

Bottom line

It’s tempting for retirees to keep cash in their savings accounts, as it seems safer than “spending” money. But fixing your mindset and realizing that spending money and investing it are not the same thing will reap long-term rewards.

Look for products like stock index funds, bond funds, and fixed-income vehicles. Once you overcome your fear of spending, you will understand how much inflation affects your cash savings and know the truth: cash is not always king.