Enough Cash That a Bad Year Never Forces a Sale
A cash bucket in retirement has one job: to remove the need to sell growth assets in a year they have fallen. That makes its correct size a number of years of net spending rather than a percentage of the portfolio, and it means the answer is different for a household with a large Age Pension than for one without.
- The answer: Hold one to three years of the spending your portfolio has to fund, after the Age Pension and any other income.
- The trap: Sizing it as a percentage of the portfolio gives the wrong answer at both ends — too little for a small portfolio and a large drag on a big one.
- The recommendation: Refill it from whatever has done well, in years when something has. That produces rebalancing without requiring a market view.
Where the AI summary above gets this wrong
"Retirees should hold about 10% of their portfolio in cash."
That's surface-true. Here's what it misses:
- A percentage does not match the job — The buffer exists to cover a number of years of withdrawals. Ten per cent of a small portfolio is a few months and of a large one is a decade.
- The Age Pension reduces the amount the portfolio has to fund — A household receiving a substantial pension needs a smaller buffer, because the portfolio is covering a smaller share of the spending.
01 What the buffer is for
Selling growth assets to fund spending in a year they have fallen converts a temporary decline into a permanent loss, because the units sold are not there for the recovery. That is the mechanism described in the sequence risk reference.
A cash buffer breaks that mechanism. Spending comes out of cash in bad years and out of asset sales in good ones, so the portfolio is never forced to sell at the worst price.
It is not an investment and it should not be judged as one. Cash earns less than growth assets over any long period, and the buffer's return is not the point — its job is to remove a specific behaviour.
02 How to size it
Start from the amount the portfolio actually has to fund: annual spending, less the Age Pension, less any other income such as rent or a defined benefit pension. That net figure is the one to multiply.
One year is the minimum that does anything. Three years covers most historical drawdown-and-recovery periods for a diversified portfolio. Beyond three the drag on long-run returns starts to outweigh the protection.
A household with a large Age Pension entitlement needs less, because the portfolio is covering a smaller share of spending and the pension is itself an indexed, guaranteed income — the point made in the withdrawal rate post.
Shows: the size of a cash buffer expressed as years of the spending your portfolio actually has to fund, after other income. Ignores: inflation over the buffer period, the return on the cash itself, and any lumpy one-off spending you should hold separately.
03 Where to hold it, and how to refill it
Inside super, a cash or short fixed-interest option within the pension account is the simplest place. Earnings are untaxed in retirement phase, and drawing the minimum from the cash portion requires no sale of anything.
Outside super, an offset account or a high-interest savings account works, with the earnings taxed at your marginal rate. The choice between the two is the drawdown-order question in the drawdown order post.
Refill it in years when something has done well, by selling the asset that has risen. That produces automatic rebalancing and sell-high behaviour without any forecast, which is the whole value of the structure.
Two years of net spending in cash is the cheapest anxiety reduction available in retirement, and it is cheap in a measurable way — a small drag on long-run return in exchange for never having to sell in a bad month. Households that hold it stop watching the market daily, and that behavioural change is worth more than the drag costs.
FAQ
How big should my cash bucket be to get through a market crash without selling shares?
One to three years of the spending your portfolio actually has to fund, after the Age Pension and any other income. Three years covers most historical drawdown-and-recovery periods; beyond that the drag outweighs the protection.
Should I use a bucket strategy to ride out market downturns?
The buffer does the useful work — removing the need to sell in a bad year. Elaborate multi-bucket structures add complexity without adding much beyond that first bucket.
Where should I hold the cash?
Inside super, a cash option within the pension account keeps the earnings untaxed. Outside super, an offset or savings account works with earnings taxed at your marginal rate.
Sources
Regulator references
- ASIC Moneysmart — Save for an emergency fund · ASIC Moneysmart · 2026How large an emergency fund should be and where to hold it.Last verified: 2026-09-07
- ASIC Moneysmart — Retirement income · ASIC Moneysmart · 2026The sources of retirement income in Australia and how they combine.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.