How to Manage Cash Flow During Retirement

For many Americans, retirement is coming. The US Census estimates that 10,000 people a day turn 65, and in seven years, all baby boomers will have turned 65. The normal retirement age is between 66 and 67 for this generation, and so we’ll see a lot of people getting ready or going into retirement in 2023. One question that we often get asked at Marshall Financial Group is “How do I know if I have enough money for retirement?” Although this question is complex, one way to look at it is by managing cash flow during retirement. This allows you to think about how much you expect to spend during retirement, how much you need to save, and when you can retire. Here are six things to consider when managing cash flow during retirement.

Estimate what your expenses will be during retirement.
An easy first step is to review your current expenses and identify the expenses that will continue in retirement. There are the essential costs that we all deal with: housing, utilities, food, taxes, transportation, insurance, health insurance. Then, you should consider the non-essential expenses you have, and which are most important to you. Do you like to travel? Do you want to make your home more careful? Is going to the movies or seeing live music important? Are there other family members you want to support?

Another expense that people don’t like to think about is their debt. Pay down debt during your earning years and work on retiring with as little debt as possible. Debt interest on mortgages, car loans, and credit cards can be very detrimental to your nest egg.

Know that your income will change once you retire.
It sounds obvious, but it is important to reiterate. Biweekly paychecks will end and your income will come from different sources and different times. You may get social security checks, pension income, annuity payments, or required minimum distributions (RMDs) from qualified accounts (if you are over 72). Hopefully you receive a combination of those payments. It is important to understand when those payments will come in, and when expenses are due.

List all of your income sources.
Once you have figured out your expenses and estimated your income, you should be realistic of what you will need to save in order to retire comfortably. We say that an income goal during retirement typically falls between 60-80% of earned income. Some of your income will be guaranteed, including social security, annuities, pensions, and part-time employment income. However, things like rental income and investment income are not always guaranteed.

Be mindful of liquidity.
A large downturn in the market could put cash flow at risk for assets in stocks, bonds, mutual funds, and ETFs. Investment accounts are typically considered liquid with access to funds within a day or two. Savings and checking accounts will be the most liquid and should include your emergency fund. Money market, CDs, and treasury bills are secure ways of gaining some investment gains while not risking principal. Finally, real estate holdings, income producing annuities/ pensions, cash value from life insurance, or art collections could take longer to access

Utilize a realistic and responsible withdrawal rate.
While your accounts can be liquidated all at once, retirement can last 30 or more years. Regardless of how big your nest egg is, withdrawing too much on a monthly basis can leave you without necessary funds in the future. Being conservative in your planning with regards to the duration of your retirement can help in the long run. You can consider your family history, pre-existing health issues, and your current lifestyle. Try to stick to a withdrawal rate around 4% knowing some years it will be higher and some will be lower.

Be mindful of taxes, health insurance costs, and inflation (especially recently) to manage cash flow during retirement.
Like income, taxes will typically change once you retire. Tax payments may not include withholdings, so you may need to file quarterly estimated taxes. Health care will typically be paid directly to the insurance carrier, not through your paycheck. Long term care is a big unknown when it comes to retirement planning and may require a separate “just in case” bucket. Finally, don’t forget toInclude an inflation factor (average over the coming years). Previously, 2.5% inflation was the norm to consider. However recently, we have seen inflation go up considerably. While that is not normal, it is something to keep in mind when outlining a retirement plan or proposal.

If you have any questions about your retirement or investments, don’t hesitate to reach out to your financial advisor.

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