What is the right balance of cash and investments in retirement?

Q. What is the accepted balance between holding cash and investments, especially for retirees in their mid-seventies?

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A. You’ve put your finger on a very common conundrum. Unfortunately, there is no ‘one-size-fits all’ when it comes to asset allocation - but there are some general rules of thumb to bear in mind.

During your working life, it is sensible to keep three to six months' worth of essential spending in an easy-access savings account. This means you have a cushion if you lose your job or face an unexpected bill.

In retirement, many people choose to hold a larger cash reserve. This is because they won’t have a monthly salary coming in, so cash can help fund spending during periods when markets are falling. This reduces the risk of having to sell investments when they’re down.

• Read: How much cash to hold in retirement

Retirees tend to hold anything between one and five years of expenditure in cash. This is obviously a big range, and where you fall within it will depend heavily on your individual circumstances.

Someone with a generous defined benefit pension or an annuity covering their essential bills may opt for a relatively modest cash buffer. By contrast, if you rely heavily on investment withdrawals you may prefer to hold more cash. Your personality matters too. If you’re kept up at night by your portfolio, you might want to play it safer than average.

Another commonly quoted rule is ‘100 minus your age’. This is very rough and ready, but reflects the idea that younger investors have more time to ride out volatility, while older investors may prioritise preserving wealth over growing it. Under this approach, a 70-year-old would hold around 30% of their portfolio in shares with the remainder in lower-risk assets such as cash and bonds.

It is important to remember, though, that retirement can last a very long time. A 70-year-old man has an average life expectancy of 86 and a roughly one-in-three chance of reaching 90. For a 70-year-old woman, the average life expectancy is around 88, with an almost one-in-two chance of reaching 90. That means your savings may need to support you for another 20 years or more.

• Read: Why de-risking your pension is riskier than you think

As such, many retirees still need a meaningful allocation to growth assets such as shares. While the overall level of investment risk may be lower than during your working years, keeping too much in cash can leave savings struggling to keep pace with inflation.

Ultimately, you have to weigh up two competing risks: running out of money because your savings don't grow enough and being forced to sell investments after a market fall to meet day-to-day spending. The right answer will depend on your income needs, sources of guaranteed income, attitude to risk and overall financial circumstances.

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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.