If you’re approaching retirement, you might be feeling apprehensive about the idea of leaving behind the consistency of a regular paycheck. This uncertainty is completely natural. However, many of us are excited about retirement because it offers the chance to have more free time to pursue our interests and passions on our own schedule. So, how do you find a balance between the freedom to manage your time as you wish and the challenge of not having a regular income? The key is effective cash flow planning.
Creating a cash flow plan has similar characteristics to budgeting, in that here is an income and expense component, called inflows and outflows. For example, your salary and other income sources would fall under inflows while debt repayment, other expenses, and taxes fall under outflows. The key difference between a budget and cash flow plan is a budget aims to balance the income whereas a cash flow plan allows for a surplus or deficit at the end of the year. Also in a cash flow plan, if your expenses are greater than your income, your plan will solve for how to create that income from your assets in the most tax-efficient manner.
Many of us have had challenging memories of budgeting, often shaped by earlier experiences during tight financial times. It’s easy to see managing the household budget as a source of stress, resembling a strict parent keeping us in check. But let’s reframe our perspective! When approached with the right mindset, a budget becomes an empowering tool that can transform our lives. By accurately tracking your monthly income and expenses, you not only regain control but also find relief, allowing you to truly enjoy life. Instead of viewing your retirement budget as a burden, embrace it as a trusted guide that keeps you confidently moving forward on your financial journey.
Creating a cash flow plan is a relatively simple process. Here are the basic steps:
- Estimate your cash inflows. Fixed income sources are steady and guaranteed payments that you can rely on. Social Security, pensions, and annuities are good examples. It’s worth noting that some fixed sources guarantee payments over a period of time or for the life of the annuitant(s).
- Estimate your cash outflows. I like to break cash outflows into three categories: Core living expenses (doesn’t change much), insurance premiums, mortgage payments, and “other expenses.” Core living expenses are the cost to run your household (utilities, transportation, lifestyle (gifts, holidays, vacation), and other expenses you plan on having forever (e.g. groceries, accountant services, gas for the car, etc.). Insurance premiums tend to stay the same each year but usuallly drop off shortly after retirement. Mortgage payments will eventually end as well. Other Expenses are preferential expenses that you can cancel or may change if you moved.
- Identify expenses that are likely to change in retirement. Some expenses may drop off like the kids’ summer camps and the mortgage. Others might be new like social clubs and healthcare. Consider any lifestyle changes that likely would impact your outflows.
- Factor in your “nest egg.” Many retirees find that their fixed income doesn’t fully cover their expenses, making it necessary to spend down their savings and investments to supplement their income. A professional fiduciary financial planner can help by estimating your portfolio’s income and determining how much more you’ll need for your desired retirement lifestyle.
Retirement is an exciting journey with changing financial needs! Initially, you may spend on travel and hobbies, but expenses could stabilize as you age. Establishing a flexible budget and reviewing that budget with your financial advisor is crucial for navigating these changes. Be mindful of significant expenses like home repairs, new cars, and family celebrations. Always have an emergency fund for unexpected costs and embrace this new chapter of your life with confidence and joy!
Effective cash flow planning in retirement is an empowering step towards securing the lifestyle you desire. It’s not just about budgeting; it’s about seizing control of your financial future. By evaluating your income, expenses, and withdrawal strategies, you can create a sustainable plan that brings you peace of mind and freedom in your retirement years. If you haven’t begun your retirement cash flow planning yet, there’s no better time than now! Whether you’re approaching retirement or enjoying it, collaborating with a financial planner can help you design a personalized plan that aligns perfectly with your unique needs and goals. Let’s take this exciting journey together!
Martin Strategic Wealth believes that retirement should be a time of satisfaction and enjoyment, not stress and worry. Our fiduciary guidance can help you make the best use of your resources. To learn more about our retirement planning services, please visit our website.
