Dear Carrie: Everyone advises the newly retired person to keep a cash reserve on hand for emergencies. Makes sense! I have a home equity line of credit, which I have often used to get quick cash for unexpected bills. Should I continue after retirement to rely on this “cash reserve” arrangement rather than set aside money in a bank account that has very little growth potential? — A Reader

Dear Reader: For retirees, the well-known phrase “cash is king” takes on a special meaning. Without a regular paycheck, creating your own cash flow is up to you. And how well you handle that cash can mean the difference between a financially comfortable retirement and a stressful retirement.

So I join the chorus of financial advisers who recommend that a retired person have cash on hand — but not only for emergencies. Smart retirement planning requires that you create a few different buckets for your cash. A home equity line of credit can certainly be an extra resource to cover unexpected expenses, but that’s as far as it goes. It’s not a cash reserve when it comes to creating your own retirement paycheck and managing your cash flow. There are a couple of good reasons.

First, when you draw on a HELOC, it has to be paid back — with interest. So though it can help with an emergency in the short term, using a HELOC could become a long-term expense that actually adds to your monthly cash needs. Second, a HELOC typically has a life of 10 years, after which it becomes a regular home equity loan with amortized payments unless you renew it. Renewing means you have to qualify all over again, which isn’t so easy to do once you are retired and don’t have a regular paycheck.

However, I understand your reluctance to just park your cash somewhere, especially in a low-interest rate environment. The key is to keep a balance of easy accessibility and growth so that you can cover spending needs while generating enough income to keep filling your cash buckets. Here are some ideas on how to do that.

Keep a 12-Month Cash Cushion for Current Spending

Your first cash bucket should hold enough to supplement a year’s worth of expenses. By this, I mean that once you add up all your reliable sources of income — i.e., money that comes from sources other than your portfolio, such as Social Security, pensions and real estate — decide how much more you need to cover your annual costs.

So if you generally spend $50,000 a year and receive $30,000 of non-portfolio income, you’d want to have $20,000 set aside someplace safe and relatively liquid. This might include money market funds, short-term certificates of deposit or a simple interest-bearing checking account. Granted, you won’t be earning much on that $20,000, but that’s not the point. The purpose of this cash is to allow you to pay the bills without stressing or having to sell investments at the wrong time.

Try to Set Aside an Additional 2 to 4 Years’ Worth of Spending

I know that sounds like a lot, but think of it this way. When you’re retired, it may be wise to start moving toward a more conservative asset allocation.

You might consider longer-term CDs or high-quality short-term bonds or bond funds. And you’ll want to construct a ladder with these investments, staggering maturity dates. An investment ladder allows you to draw on the funds at regular intervals to replenish your annual spending cash as necessary or reinvest them as interest rates rise.

This money isn’t sitting idle. It may not be earning double digits, but it’s still working for you. And more importantly, having access to it will help make sure you don’t have to sell stocks in a down market — especially an extended bear market — just to cover your living expenses.

Use the Rest of Your Portfolio to Your Advantage

As you head into retirement, you’ll want to keep on top of the rest of your portfolio to make certain it matches your feelings about risk and where you are in life. Whereas you may have been comfortable with as much as 60 percent in stocks in pre-retirement, you might consider bringing that down to about 40 percent. Later on, you may well want to reduce this even more, although it is generally wise to have at least 15 percent of your portfolio in stocks.

Ideally, you should rebalance your portfolio annually and use this as an opportunity to pare back asset classes that have grown beyond your plan. Rebalancing can also be a good time to sell assets to generate cash.

Stay Flexible

There are no hard-and-fast rules about how much cash to keep on hand in retirement. Your needs are bound to change as time goes on. The main thing is to plan ahead and try not to be caught short. Keeping that in mind, a HELOC can be a great extra source of security (and be sure to apply for one before you retire). But use it as a backup, not as a primary source of retirement cash.

Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER ™ is president of the Charles Schwab Foundation and author of “It Pays to Talk.” You can e-mail Carrie at