Investors approaching retirement need to concentrate on capital preservation and income investing to create a steady stream of income during retirement. You can always speculate with your "play money", but make sure that you have enough funds in safer vehicles to meet your everyday expenses.

Part of the strategy for keeping your nest egg safe is keeping a portion of your portfolio in cash. Cash and cash equivalents, such as money market funds and CDs, are capital preservation tools.

Their short terms and stable values mean they generally provide smaller returns than the other major asset classes. But they have one big advantage — they're highly liquid, which means you can turn them into cash at any time without a major loss in value.

It is a myth that leaving money in the stock market is always better than cash.

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For example, investment adviser Jim Stack said that $10,000 invested in the Dow Jones in February 1966 would not have made as much money as $10,000 invested in interest-bearing cash accounts until 1986. In other words, the stock market performed worse than cash investments for almost 20 years!

Investors should always keep a cash reserve to preserve capital and maintain liquidity in the face of unexpected events. For most of us, that means keeping the equivalent of six months' worth of expenses in a money market fund, money market account, savings account or interest-bearing checking account.

Cash is a great vehicle especially in deflationary times, but it can also be a good idea to keep cash in inflationary times. Economists say that during periods of deflation, investors who hold fat savings accounts and lots of cash win out. The purchasing power of that money increases over time. Still, when the stock market slides as witnessed in the tech wreck of 2000 - 2003, those in cash look like geniuses.

You need to be realistic, however, and understand that the types of cash investments available typically pay pauper rates of interest. The interest rates they pay are often not enough to offset gradual erosion of the buying power of your money.

For example, if the best CD rate is 3 percent and inflation is running at about 3 percent, the net gain is zero. If inflation is running slightly higher than the rate of return on the CD, you're actually losing money. But, if CD rates are 5 percent and inflation is running at 3 percent, you're making money.

The real significance of building cash is not because yields are attractive. It's because when an opportunity arises, the cash will be readily available to take advantage of it. More importantly, should you be faced with a personal financial crisis, readily available cash can help you weather the storm.

Cash investments play a key role in a well-balanced portfolio — to provide liquidity to meet shorter-term goals, pay emergency expenses and make new investments when the opportunity arises, or to provide a buffer against the fluctuation in value of more volatile securities.

A couple of caveats: If you're seeking long-term growth, you'll want to limit the amount of money allocated to cash investments. And, if you're thinking you can live off the interest from a money market fund, you may be in for a rude awakening – unless, of course, you're already a multi-millionaire.

So, where should you put your cash?

Treasury Bills

U.S. Treasury securities offer some unique advantages for investors. Obviously, they are backed by the full faith and credit of the U.S. Treasury. If Uncle Sam runs out of money to pay you your interest, he can always simply print more!

Investors who hold Treasury bills until they mature have no risk.

Finally, interest from U.S. Treasuries is exempt from state and local income taxes. If you live in New York City, or any other locality with confiscatory state and local income taxes, this feature should be especially beneficial to you.

You can purchase Treasury bills directly through TreasuryDirect. This is basically the U.S. Treasury's online store at www.treasurydirect.gov. The system allows investors to participate in the Federal Reserve's regularly scheduled auctions of three- and six-month Treasury bills. The minimum investment is $1,000. Interest is paid into the investor's TreasuryDirect account, as is a security's par value at maturity. There are no sales charges or commissions when you buy Treasuries this way; you just have to have a TreasuryDirect account.

Accounts can be reviewed online or by calling the TreasuryDirect toll-free number (800-722-2678) or by requesting that a Statement of Account be mailed.

It consists of name, address, phone number, TreasuryDirect Account number, tax information and payment instructions. It also provides detailed information and payment instructions on all Treasury securities maintained in the TreasuryDirect System.

Keep in mind, though, that Treasury bills are not as liquid as a money market fund. You must wait until maturity before the interest is paid, and it can take the Treasury Department a couple of weeks to transmit your money.

Money Market Funds

Not all money market accounts or funds are created equal. The best choices for conservative, safety-conscious investors are money market funds that invest in U.S. Treasury securities. Treasury-only money funds also carry the full faith and credit of the U.S. government because they are invested 100% in U.S. Treasuries.

Beware, though, "government" money funds are not the same as Treasury money funds. That is because these funds can also invest in instruments from other government agencies, such as Fannie Mae and the Small Business Administration. Only Treasury money funds can have the word "Treasury" in their names – as regulated by the NASD. Plus, they are not tax-free.

Since all of these funds invest in U.S. Treasury funds and keep their average maturity to 3 months or under, fees are what separate them. Fees directly affect the yield of the money market fund. Look for funds with low expense ratios. Also, some money market funds feature the convenience of check writing.

The best source of money market fund information is iMoneyNet.com. The company lists the ten top government money funds on their website, which includes Treasury-only funds. The company also provides its weekly data to U.S. newspapers and wire services.

Some of the ones we like are the Vanguard Treasury Money Market Fund, the T. Rowe Price U.S. Treasury Money Fund, the Dreyfus 100% U.S. Treasury Money Market Fund, Fidelity's Spartan U.S. Treasury Money Market, and USAA's Treasury Money Market Trust.

CDs

Like money funds, not all CDs are created equal. Yield and bank safety are the two considerations when shopping for a CD. Also, keep the maturity short – around 3 – 6 months – you are using these funds for your emergency money.

You can find the highest-yielding CDs and money market accounts if you search nationwide rather than limiting yourself to a local bank. Look for the highest-yielding certificates of deposit at Bankrate.com. Bankrate.com lists the highest-paying yields nationwide on CDs.

In addition to high yield, make sure that the bank will be around longer than your CD takes to mature. Though there haven't been any recent bank defaults, it can happen.

Investors can research the safety of their banking institution. Weiss Ratings monitors the safety of more than 10,000 banks nationwide at its site, WeissRatings.com. The company offers safety ratings online or over the phone, and also provides a list of the strongest and weakest banks and thrifts free of charge.

Treasury bills, money market funds, and CDs are your best options for parking your cash and getting at least some yield. If you're looking for investments that will boost your income or sustain your current lifestyle in retirement, consider some of the vehicles we cover in our income investing section.

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