How much cash cushion do you need near retirement?

What a cash cushion is

A cash cushion is money you can reach quickly, that does not go up and down with the market, set aside for spending. It covers surprises (a roof, a car, a hospital bill) and gives you time when income drops. It is not your retirement savings. It is the money that keeps you from having to sell investments or withdraw from a retirement account at a bad time.

How to count it: months of spending

1. Find your monthly spending. Add up one typical month of everything you spend, including the mortgage or rent, food, insurance, utilities, medical costs and fun. Look at your bank statements, not your memory.
2. Add up your cash. Checking, savings, money market and short-term Treasury bills. Do not count retirement accounts or the value of your home.
3. Divide. Cash divided by monthly spending is your cushion in months.

In Case File No. 2, Linda has $40,000 in cash and spends $4,400 a month. That is about 9.1 months. If her mortgage payment of $1,125 disappeared, her spending would be $3,275 a month, and the same cash would last about 12.2 months.

Why under six months is a warning light

The Case File tools flag a cushion under six months. It is a rule of thumb we use, not a law and not a promise of safety. Some people need more: if your income is uncertain, if you depend on a single Social Security check, if you have a large health deductible, or if you would otherwise have to sell investments in a downturn. Some need less: if you have a large, reliable pension and few bills.

Why the cushion matters more near retirement

• Order of returns. If you must sell investments after the market falls to pay bills, the loss locks in. Cash lets you wait.
• Medicare is not free. Original Medicare has a yearly Part B deductible ($283 in 2026) and no cap on what you can owe out of pocket. Many people add a supplement or use a Medicare Advantage plan, which has its own limit.
• A paycheck stops. The cushion is what covers the gap before Social Security or other income begins.
• One check can disappear. After a spouse dies, the household income drops. See why.

Where to keep it

• Insured bank accounts. FDIC deposit insurance covers up to $250,000 per depositor, per insured bank, for each account ownership category.
• Money market funds and Treasury bills are common for larger amounts. They are not FDIC insured, but are generally considered low-risk. Understand each before you use it.
• Not here: the stock market, a long-term annuity with surrender fees, or anything you cannot sell within days.

Cash cushion before you do something big

A cushion is the first check before many big moves:

• Paying off a loan: using cash to pay a loan can leave you without a buffer. See the mortgage guide.
• A Roth conversion: the tax is best paid from cash, not the account. See the Roth guide.

Test your own numbers in the free Payoff or Keep It tool, which shows your cushion before and after each plan.