If you are a baby boomer contemplating retirement, stock market gyrations are bad for your fiscal and mental health. A common reaction in recent years is to leave the market entirely and put your nest egg in cash and cash equivalents. Regular readers may recall that I agree with this strategy but only in part. More about that in a minute.

Lets assume that your retirement investment strategy includes leaving a portion of your nest egg in the market. Are there steps to take to reduce the risks associated with this strategy? Yes there are. Proper asset allocation is one.  Another strategy is to avoid being forced to sell investments in a down market. Consider a situation where personal financial circumstances cause you to sell equities that have been substantially devalued by negative market conditions. When the market recovers, your ability to participate is diminished. This, in turn, impairs the effectiveness of owning equities in your retirement portfolio.

The obvious solution is to stash away enough cash so that if you need more more income to spend during a down market, you can tap that cash rather than sell investments. Ive written before about this cash staff. I referred to it as a retirement emergency fund . The emergency in this case is not a car repair or broken water heater. Instead, the emergency is a need for cash to pay living expenses. In good times, you might sell shares of a mutual fund as part of your retirement plan. But in really bad market conditions, over a sustained period of time, you would need to sell many more shares than normal.

A recent article from Smart Money made brief mention of this issue. I was quite pleased to see this particular statement from the author:

Another way is to make sure that your portfolio generates enough guaranteed income (along with Social Security payments) to c over basic retirement expenses. so that you don’t have to depend on stock market returns to pay your bills each year.

That should sound familiar to my readers. If not, go back in my archives and check out these posts:

The author also quotes a financial advisor who suggested keeping your cash stash in a ladder of Treasuries and I-Bonds to provide your basic retirement income needs.

Here is a link to the Smart Money article:  Enough Cash for a Down Market.