Where To Keep Your Retirement Cash Reserve: Bank, Money Market, Or Treasuries?

The reserve has one job: pay your withdrawals while stocks are down, so you do not sell them at low prices. That addresses sequence-of-returns risk, where poor returns early in retirement do more damage than the same returns later. The reserve is not meant to earn a high return. It is meant to be boring and available.

Size it from your own numbers, not from a percentage of the portfolio. Take your annual spending, subtract the income that arrives regardless of markets (Social Security, a pension, annuity payments), and multiply what is left by the number of years you want covered. The range of one to three years is a rule of thumb used in the planning community, not a figure published by an agency, and it has no single authoritative source. Households with large guaranteed income need fewer years. Households that fund most spending from the portfolio, or that would find it hard to cut spending, often choose more. The cost of a bigger reserve is real. Cash has historically trailed stocks over long periods, and after inflation it can lose purchasing power. The right size is a trade between sleeping well and giving up growth.

The vehicle comes next. Bank deposits (savings accounts and certificates of deposit) are insured by the FDIC. As of 2026, the FDIC standard limit is $250,000 per depositor, per insured bank, per ownership category, and trust accounts follow separate rules that took effect April 1, 2024. Money market funds are different. A money market fund is an investment, not a deposit, so it is not FDIC insured and its value can fall. Bank money market deposit accounts, by contrast, are FDIC insured up to the limits. Treasury bills, notes, and TIPS are obligations of the U.S. government. Their interest is subject to federal tax but exempt from state and local income tax, according to TreasuryDirect.

For an Arizona resident, that state exemption has a specific mechanism. Arizona Revised Statutes section 43-1022 allows a subtraction for interest on U.S. obligations, and the Arizona Department of Revenue's Individual Income Tax Ruling ITR 06-1 says interest on obligations of the United States qualifies for the subtraction. Interest from repurchase agreements involving government securities does not qualify, so a fund that holds repos may not give you the same subtraction. At Arizona's 2.5% flat rate for 2026, the saving is small on a reserve this size, so it should break a tie, not drive the decision.

Two other points affect the choice. First, location. Cash inside an IRA or 401(k) gets no state-exempt treatment, because the Arizona Department of Revenue has ruled that distributions from an IRA or pension plan are not interest on U.S. obligations and do not qualify for the subtraction. Arizona's retirement-income rules can change, so confirm the current rules. Interest earned in a taxable account is taxed in the year earned, so tax-exempt status matters mostly there. Holding the reserve in a tax-deferred account does keep the dollars available without an extra taxable event until you withdraw them, but each withdrawal is ordinary income. Second, reinvestment risk. A 6-month bill that matures into a lower-rate environment gives you less income next year. A longer Treasury or a CD locks a rate but may carry a market-price swing or an early-withdrawal penalty. Matching maturities to the dates you will actually need the cash is one common approach.

Start with the withdrawal number, not the portfolio size. In the illustrative household below, spending is $120,000 a year and $50,000 of income arrives no matter what markets do, so the portfolio funds $70,000 a year before taxes. One year of that is $70,000, two is $140,000, and three is $210,000. On a $2,000,000 portfolio, that is 3.5%, 7.0%, and 10.5%. This is a simplification, because it ignores taxes and inflation, and it assumes round numbers chosen only to show the arithmetic.

A written refill rule matters as much as the size. A reserve that is spent in a downturn and never refilled is just a delay. Many households set a rule in advance, for example spend from the reserve when the invested portion is below its prior high, and refill when it recovers. Those rules are a framework, not a guarantee, and the right thresholds depend on your spending flexibility. A multi-year projection can show how different reserve sizes and refill rules would have affected a plan under the same assumed returns, which is more useful than a single static percentage.

Keep the insurance limits in mind when the reserve is large. If the reserve spans several banks, the $250,000 limit applies per bank and ownership category, not per account. If it sits in Treasury bills held at a brokerage, FDIC insurance does not apply, and the credit risk is that of the U.S. government. These are different kinds of safety, not better or worse ones.

• Sizing the reserve as a percentage of the portfolio instead of years of net withdrawals after Social Security and pension income.
• Assuming a money market fund carries FDIC insurance. A bank money market deposit account can be insured, but a money market fund is a different product.
• Building the reserve and never writing a refill rule, so it is drained in a downturn and nobody decides when to rebuild it.
• Letting the reserve sit too long at an interest rate below inflation, then being surprised by the loss of purchasing power over a decade.
• Counting on the Arizona Treasury interest exemption from a fund without checking whether the fund holds repurchase agreements, which Arizona treats as taxable.