A fall on paper is temporary. Selling into that fall to pay for groceries makes it permanent. The whole job of the safe part of a retirement portfolio is to make sure that never has to happen — and this works out exactly how much of it you need.
One of the highest-value calculations on this site, and one of the simplest.
When markets fall and you own shares, you haven't lost anything yet. The price is down; the number of shares you own hasn't changed. Historically, waiting has always worked eventually.
The moment you sell some of those shares to pay for groceries, the loss becomes permanent. Those units are gone, and they can't take part in the recovery. Do it for two or three years running and you've converted a market event into a lasting reduction in what your money can support.
So the entire job of the cash and short-bond portion of a retirement portfolio is this: make sure you never have to sell shares at a bad price. Not to earn a return — to remove a failure mode.
Bridget has $900,000, spends $66,000 a year, receives $27,000 of pension income and $16,000 of dividends and interest.
In a bad year her distributions get trimmed to around $12,800, so she needs roughly $26,000 from savings. Over a four-year downturn, allowing for inflation, that's about $111,000 she needs sitting safely.
She currently holds $95,000, which covers about 3.5 years — close, but not quite there.
The gap is smaller than it looks, because flexibility counts too. Being willing to postpone $12,000 of travel stretches her existing cash from 3.5 years to 5.7 years, and drops the buffer she needs from $110,800 to $63,100. Deciding in advance what she'd defer costs nothing, and does the same job as tens of thousands of dollars of extra cash.
Three to four years of the spending your portfolio funds handles the great majority of historical downturns. For reference: the dot-com bear market took 31 months just to reach its bottom, the 2008 crisis 17 months, and the 2020 COVID fall about one month.
Beyond five years you're insuring against something rare, and the cost of holding that much cash starts to bite. Under two years is where people get into trouble.
General information only — not financial advice. The buffer calculation assumes you draw on safe assets first and leave shares untouched through the downturn, which is the point of holding it. It does not account for tax on withdrawals, required minimum distributions where those apply, or the possibility that "safe" assets fall too — long-dated bonds did exactly that in 2022. Short-dated instruments are what this model has in mind.