A cash buffer is one and a half to three years of the income your portfolio pays you, held in cash. You pay yourself from it every month, so a market fall never forces you to sell shares at low prices. Refill it after good years, leave it alone after bad ones. It costs a little growth in steady markets, which is why we keep it to two or three years: think of it as insurance for your income. Your satellites have their own protection: we only buy them in an uptrend.
The biggest risk in retirement isn’t a market fall. It’s being forced to sell after one, because you need the money to live on. A cash buffer separates your income from the share market, so your portfolio can recover on its own time. Here’s how ours works, step by step, with the parts of my videos where I explain it.
1. What a cash buffer is
Our retirement portfolios have three parts: a cash buffer that pays your pension, a core ETF for long-term growth, and satellites for parts of the market the core holds little of. The buffer is the part you spend. The core and satellites are the parts you leave invested.
Without a buffer, every pension payment comes from selling shares. In a normal year that’s fine. After a 25% fall, it means selling more units at low prices, and those units aren’t there when the market recovers. That’s sequence of returns risk, and it matters most in your first five years of retirement, when your balance is highest.
🎥 Watch me explain this
▶7:33The 3-year cash bufferHow to build a retirement portfolio with ETFs (Australia) · from 7:33 · read the post
▶7:17Sequence of returns riskHow much do you need to retire in Australia? · from 7:17 · read the post
2. How much to hold
Buffer = years × the income your portfolio pays you. Take the income you need, subtract the Age Pension and any other income, and multiply by 1.5 to 3.
- 1.5 years if you have a part Age Pension or other income covering much of your spending.
- 2 years for most retirees: it covers a typical fall and recovery.
- 3 years if your portfolio pays most of your income, or you want to wait out a longer fall.
The amount changes as you go. At 67, once a part Age Pension starts, the $1 million couple needs about $66,000 a year from super instead of $79,000, so a 2-year buffer drops from about $158,000 to $132,000.
3. Where to keep it
Many retirees use a mix: a few months in an everyday account for the monthly pension, and the rest in a high-interest account, a cash ETF or a short term-deposit ladder.
🎥 Watch me explain this
▶54:25Holding cash: the bank, or an ETF like AAA?Live ETF Q&A: Cash is king while markets shake out · from 54:25 · see the Q&A notes
▶32:58When you’re in cash, where is it and what does it earn?Live ETF Q&A: Tech breaks down as the Aussie market finds its feet · from 32:58 · see the Q&A notes
▶38:56Is AAA worthwhile given brokerage?Live ETF Q&A: China enters a bear market, gold pulls back and cash is king · from 38:56 · see the Q&A notes
4. The three rules
- Pay yourself from cash. Your monthly pension always comes from the buffer, never directly from selling shares.
- Refill after good years. When the core has had a positive year, top the buffer back up to its target by selling a little of your investments. You’re selling high.
- Leave it alone after bad years. When markets have fallen, don’t refill. Keep spending the buffer and let the core recover.
Here’s what that looks like for the $1 million couple if markets fall 25% in their first year:
The couple doesn’t sell a single share in the fall. Their income keeps coming from cash, and the buffer is refilled only once markets have recovered. Try it with your own numbers:
🧮Visualise your retirement portfolioEnter your super and the income you need: see your cash buffer, core and satellites, and whether your money lasts.
See how a cash buffer pays your pension, and whether your money lasts, in good years and bad.
Illustration only, general information. Assumes cash earns 4%, the core 7% and satellites 8% a year after fees in normal years, and income rises with inflation at 2.5% a year. “A crash in year 1” assumes the core falls 25% and satellites 35%, then recover over two years; “Two bad years” assumes two falls in a row. Each year your income is paid from the cash buffer; after a good year the buffer is topped back up from your investments, after a bad year it isn’t, so you never sell shares after a fall unless the buffer runs out. Ignores tax and super pension minimums. Age Pension is estimated each year from your balance under the assets and income tests (homeowner rates from 20 September 2026, $50,000 of other assets, limits rising 2.5% a year); your actual entitlement depends on Centrelink. Real returns will be different.
5. Is it worth it? The honest numbers
Two things stand out. First, after a fall, the buffer stops you selling $159,971 of shares at low prices, and it leaves you ahead in the years that follow: about $736,472 after five years, against $715,304 with no buffer. Second, in steady markets the buffer costs some growth ($789,026 after 30 years against $862,841), because cash earns less than shares.
That’s the trade: a buffer is insurance for your income. You pay a small premium in good years for certainty in bad ones, and the confidence to stay invested when markets fall is often worth more than the numbers show. It’s also why we keep the buffer to two or three years, not five.
🎥 Watch me explain this
- ▶8:45Protecting your portfolioHow much do you need to retire in Australia? · from 8:45 · read the post
▶3:24Have you lost anything if you don’t sell?Where Does the Money Go When the Market Crashes? · from 3:24 · read the post
6. And the satellites? Only in an uptrend
The buffer protects your income. Our trend rule protects your satellites: we only buy them as they break from a base into an uptrend, and they wait in cash when nothing is trending. The core stays invested through every stage. Why we do it, with our diagrams and videos, is on the ETF trend scanner.
7. Mistakes to avoid
- Refilling after a fall. That’s selling low, the exact thing the buffer is there to avoid.
- Too big a buffer. Five years or more in cash is a big drag on growth over a 25-year retirement.
- Spending it on one-offs. Keep a separate amount for a new car or travel, so the buffer stays intact.
- Leaving it in a low-rate account. On $150,000, the difference between 1% and 4.5% is about $5,000 a year.
- Forgetting the Age Pension. It reduces what your portfolio needs to pay, and so how big the buffer needs to be.
- Going all-in on shares after a strong run. Keep refilling to target; don’t spend the buffer on the market.
Our free retirement plan works out your buffer, tests a market fall and shows your Age Pension, year by year.
Next: how to pay yourself from ETFs in retirement. More on the full approach in the Retirement & SMSF hub, ETFs for retirement and the how to retire with $1 million example.
General information only, not personal advice. It doesn’t consider your objectives, financial situation or needs. Examples are illustrations using the assumptions shown, not predictions. ETFs named are examples, not recommendations; consider the PDS and TMD. Trend data from our ETF trend scanner as at 28 October 2026. Past performance is not a reliable indicator of future performance.
Frequently asked questions
How big should a retirement cash buffer be?
Usually one and a half to three years of the income your portfolio pays you: the income you need minus the Age Pension and other income. Two years suits most retirees.
When should I refill my cash buffer?
After a good year for markets, top it back up to its target by selling a little of your investments. After a bad year, leave it alone and keep spending the buffer.
Does a cash buffer reduce returns?
A little, in steady markets, because cash usually earns less than shares. In exchange it means you don’t have to sell shares after a fall, which protects your balance in the years after a crash and makes it easier to stay invested.
Where should I keep my cash buffer?
Common choices are a high-interest savings account, a cash ETF such as AAA, or a ladder of short term deposits. Many retirees keep a few months in an everyday account and the rest earning interest.
Why only buy satellite ETFs in an uptrend?
Downtrends are where most big losses happen, and losses need bigger gains to recover. Buying satellites only as they break from a base into an uptrend, and holding cash otherwise, keeps those losses small.