The Sleep Well at Night Number

It is Labor Day, so I hope you are reading this from a porch or a parade instead of a desk. A holiday built around work feels like the right day to talk about the thing work is supposed to buy you: the ability to stop worrying. So this week is about a number that comes up in nearly every planning conversation I have, whether the person across from me is 40 or 70. The amount of cash that lets you sleep well at night.

WHERE THE NUMBER STARTS

The standard answer is three to six months of expenses in cash, and it is a fine place to start. Just understand what it is: a floor, not a finish line. For households with variable income, commissions, big annual bonuses, your own business, I often promote a full twelve months in reserves, because when income shows up in lumps, the reserves have to smooth what the paycheck will not. But here is what the rulebooks skip. The number varies for everyone, and the only honest way to find yours is planning first. Not a formula pulled off the internet. A plan, run with your actual spending, your actual income pattern, and your actual goals. The plan produces the number. The number does not produce the plan.

WHERE THE RULE OF THUMB STOPS

Now the part where I split from a decent chunk of my industry. I am more than comfortable with a client holding what looks like far too much cash, in money markets, in CDs, wherever it sleeps best, if their goals can be accomplished without taking more risk. You read that right. The industry tends to treat extra cash like a character flaw. It has a scolding phrase for it and everything: cash drag. But drag toward what? If the plan says everything you actually want is funded using conservative growth assumptions, then taking more risk buys you nothing you need and costs you the comfort. Comfort is allowed to win when the plan says it can.

THE QUESTION EVERY DOLLAR HAS TO ANSWER

That comfort comes with one discipline attached. I always have the conversation about the purpose of every dollar above the sleep well at night number, not to talk anyone out of their cash, but to make sure each dollar lines up with a true goal. Some of those dollars are the roof fund. Some are next summer with the grandkids. Some are a gift you intend to make with warm hands. And some are simply comfort, which is a perfectly acceptable answer, as long as it gets said out loud. The dollars that concern me are never the ones with a purpose. They are the ones with no job and no story, sitting there by default instead of by decision.

THE FINE PRINT ON ALL THAT INTEREST

One side dish before the example. Cash pays interest now, and every dollar of that interest is taxable in the year it arrives, whether you spend it or let it roll. Most years, no big deal. Where it earns a real conversation is in years when we are deliberately filling the lower tax brackets with Roth conversion dollars. The interest counts first. It takes up room in those small brackets before a single conversion dollar gets in, so the conversion number shrinks by exactly that amount. To be plain about the size of this: it is a small issue relative to being confident in your income reserves. But it still needs to be discussed, because it moves real numbers in the plan.

A SIMPLE EXAMPLE

Ted retired from a city job with an OPERS pension. Karen spent her career at a hospital system and left with a healthy 403(b). They live in Westerville, their life costs about $9,000 a month, and between the pension and Social Security, $7,500 of that shows up automatically. The real gap is $1,500 a month, $18,000 a year. They hold about $300,000 in CDs and money markets. By the rulebook, that is wildly too much, better than sixteen years of the gap. We ran the plan at conservative growth anyway, and every goal funds, including the lake week with the grandkids and the kitchen Karen has been circling for two years. So the cash stays. Nobody sold a CD and nobody apologized. The one adjustment came from the side dish: that much cash throws off roughly $12,000 of interest a year, and these are exactly the years we are filling the 22 percent bracket with Roth conversions. The interest occupies $12,000 of that bracket before we convert a dollar, so the conversion target came down by the same amount. A line item, not an alarm.

THE WHOLE IDEA

The sleep well at night number varies for everyone, and that is the point of it. Start at three to six months of spending. Stretch toward twelve if your income arrives in lumps. Then let the plan, not a rulebook and not a scold, decide whether everything above the number gets to stay. It usually can. Just make sure every dollar up there can answer one question: what are you for? Comfort counts as an answer. Silence does not.

STILL WORKING? FILE THIS AWAY

The sleep well at night number is not a retirement concept, it is an everybody concept. If your income is steady, build toward three to six months of spending. If it is variable, commissions, bonuses, a business of your own, aim closer to twelve. Keep it somewhere that pays you, a money market or short CDs rather than a checking account, and keep it out of the market, because reserve money has one job and it is not growth. Then revisit the number when life changes: a bigger mortgage, a new kid, two incomes becoming one. And the purpose question applies at 35 exactly the way it does at 65. Know what each dollar is for, and let comfort be one of the answers.

WORTH A READ

An essential guide to building an emergency fund (Consumer Financial Protection Bureau)

Topic 403: Interest Received (IRS.gov)

EDIE, the FDIC deposit insurance estimator (FDIC)

What is the number that lets you sleep? If you have never put a figure on it, or you have one and wonder what every dollar above it is actually doing, reply anytime. Happy to think it through with you.

Curious what working together looks like? There is more at jcsretirementtaxadvisors.com, and if a conversation sounds easier, you can grab 30 minutes on my calendar whenever it suits you. No pressure, just a conversation.

Know someone who should be reading this? Forward it along, that is how most people find me. And if this was forwarded to you, one subscription at buckeyeretirementbrief.beehiiv.com gets you both briefs: retirement on Mondays, equity comp on Thursdays.

Jesse Stacy MTAX, CFP®, EA

JCS Retirement Tax Advisors

This newsletter is for education only and is not tax, legal, or investment advice for your situation. The example household and interest figures are illustrative, not a quote of current rates. Whether large cash reserves fit your plan depends on your goals, and Roth conversion math depends on your full tax picture.