Build Your Retirement Safety Net: Why Every Retiree Needs a Cash Wedge

When most people think about investing for retirement, they picture their portfolios, stocks, bonds, TFSAs, RRSPs, all working together to grow their wealth. But when retirement actually begins, the question changes. It’s no longer how much can I earn? It’s how do I make sure my income is stable, even when markets aren’t?

That’s where a cash wedge comes in, a simple but powerful strategy that helps retirees smooth out volatility, reduce risk, and sleep better at night knowing their income needs are covered, no matter what the market is doing.

What Is a Cash Wedge?

A cash wedge (sometimes called a “cash reserve” or “cash bucket”) is a portion of your portfolio that’s set aside in low-risk, highly liquid investments, typically cash, high-interest savings, or short-term GICs.

Think of it as your retirement safety net. Instead of being fully invested and forced to sell stocks in a down year, the cash wedge provides a buffer, allowing you to fund your lifestyle from cash rather than dipping into your portfolio when it’s temporarily down.

A typical cash wedge might represent one to three years of planned expenses, enough to comfortably weather most market downturns while keeping the rest of your portfolio invested for long-term growth.

Why a Cash Wedge Matters

The concept of a cash wedge becomes especially critical in retirement because of something called sequence of returns risk, the danger of experiencing negative returns early in retirement when you’ve already begun withdrawing from your portfolio.

If you’re forced to sell investments during a down year, you’re not just locking in losses, you’re also losing the future growth potential of that money. The math is simple but devastating: even if the market recovers, you now have less capital left to participate in that recovery.

A cash wedge helps protect against this risk by giving you an alternative source of income during those years. It’s a built-in cushion that allows your investments time to rebound before you draw from them again.

How a Cash Wedge Works in Practice

Let’s take a simple example: You plan to spend $60,000 a year in retirement.

• $120,000 in cash or short-term GICs, enough to cover two years of expenses.
• The rest of your portfolio stays invested for growth.

Here’s how you might use the wedge:

• In normal years, when markets perform well, you replenish your cash wedge by withdrawing from your investments.
• In down years, you live off the cash wedge instead, avoiding the need to sell at a loss.

This approach balances safety and growth, allowing your long-term investments to compound while giving you short-term security.

How Much Cash Should You Hold?

There’s no one-size-fits-all answer, but most financial planners suggest 1–3 years of expenses depending on your comfort level, spending needs, and portfolio mix.

• 1 year: For investors comfortable with volatility and flexible spending.
• 2 years: A moderate approach, protection without being overly conservative.
• 3+ years: Ideal for risk-averse retirees who prefer peace of mind over maximizing growth.

Holding too much cash can drag down long-term returns, but holding too little can create unnecessary stress, especially when the next market correction hits.

When (and When Not) to Use a Cash Wedge

A cash wedge works best in the decumulation phase, when you’re regularly withdrawing from your portfolio. It’s less relevant for those still in accumulation mode, as the opportunity cost of holding large cash balances can reduce your compounding growth.

That said, even during accumulation, some investors prefer to maintain a small wedge for large near-term purchases (like a down payment or upcoming renovation).

Use it when:

• You rely on portfolio withdrawals for income.
• You want a buffer to manage market downturns.
• You prefer predictable income over maximizing returns.

Avoid it when:

• You’re still working and contributing regularly.
• You have a strong pension or other fixed income stream covering most expenses.
• You can handle market volatility without stress or liquidity concerns.

Behavioral Benefits: More Than Just Numbers

The financial logic behind a cash wedge is solid, but the psychological comfort it brings may be just as valuable.

Retirees often struggle with seeing their portfolios fluctuate, especially when they’re drawing income from them for the first time. A cash wedge acts as a permission slip to spend confidently, knowing that your short-term needs are already covered.

It reduces anxiety, curbs impulsive selling, and helps investors stick to their long-term strategy, all essential ingredients for financial success.

How Optiml Helps You Plan Your Cash Wedge

With Optiml’s new Cash Wedge feature, you can now model and manage this exact strategy directly in your financial plan.

• Choose to build up your cash wedge over a set number of years.
• Decide how large your wedge should be, one, two, or three years of expenses.
• See how holding a cash wedge impacts your after-tax income, withdrawals, and estate value over time.
• Automatically treat any interest earned above your wedge as income in your plan.

This gives you the control to balance safety and performance, while seeing in real numbers how it affects your long-term retirement outlook.

It’s not an optimization strategy; it’s a stability strategy, one that helps you feel confident no matter what the markets throw your way.

Final Thoughts

Markets will always be unpredictable. But your retirement income doesn’t have to be.

A cash wedge gives you flexibility, stability, and peace of mind, the freedom to enjoy retirement without worrying about when the next downturn will hit.

Whether you’re just entering retirement or already living it, building your wedge now can help ensure that when markets get rough, your lifestyle doesn’t have to.

And now, with Optiml, it’s easier than ever to plan for it, because the best time to build your cash wedge isn’t when markets crash. It’s before they do.