Cash Flow Planning for Retirement
Where will your money come from when you retire? Social Security? Pension (if you are lucky)? Interest on savings in banks / credit union / T-bills? Rental positive cash flow? Payments from the sale of business? Payments from sale of real estate? Excess cash-value from life insurance? Interest from corporate / muni bonds? Dividends from your stock portfolio? Proceeds from the sale of stocks / stock mutual funds?
Yes. Yes. Yes. And Yes again. All of the above are options depending upon your financial plan and accumulation plan that you may have consciously or unconsciously put together prior to your decision to stop going to work for a paycheck every day.
What to do now? First of all, assess your current situation. What are your priorities? What are the goals? What are the resources?
Priorities vs Goals: Goals are the things that you want to do or wish you could do. Priorities are the items that will happen no matter the circumstances. So what are they? Write them down. Discuss with your spouse, partner, family. What do you want? Wish that could happen? Compared to the events, travel, etc items that are going to happen no matter the circumstance. As I said, write it all down. Assign a price tag and a time frame.
Now back up again and determine your needs? What happens if you do none of the goals or priorities and merely stay at home and pay the bills? How much money will it take today? I am talking about the amounts needed today for your normal living expenses, health care, groceries, utilities, rent / mortgage; taxes, etc. Plus contingencies that have be done now and not later like auto repairs, roof leaks, hot water heaters, etc.
These are all what I refer to as “Needs”. These are not optional expenses that can be skipped for now and paid later or deferred to a better time.
This is not about putting together a budget. A budget, in my mind, is the list of expenses you think you should be spending your money on each month. While a list such as this may be helpful as guidance for expenditures, it is not your reality. Your reality is what actually passes through your bank account every month and gets charged to your credit cards every month. I have learned that one of the best ways to “discover your reality” is to monitor the money that goes through your bank account monthly. This includes checks your write, automatic payments, ATM withdrawals, and payments on your credit cards (assuming you pay off the card every month). From this amount you will want to “back-out” payments for things like home improvement, vacations, etc that are part of the “wants, wishes, and priorities.” The remainder is what is actually spent every month for your basic living expenses.
Now that you have identified your needs for daily living; and wants and wishes for the fun stuff which include financial priorities (big picture important stuff); the question becomes, how do you pay for it?
First identify the “organic income.” What shows up every month with no effort on your part? Social security and pensions. These two you can count on without problems. Is this enough to cover all of your “Needs?” Probably not, so no add what is dependable but not guaranteed? Rental income, payments from the sale of a business or notes from a sale of real estate. Is this enough to cover all the needs? How about the wants and wishes? If yes, congratulations. If not, then add the interest and dividends from investment assets? How about now?
If you are cash flow solvent now, congratulations. But what about the future? Take all of you expenses and inflate them at two to three percent each year. How much will the expenses be in ten years? How about twenty years? Thirty years? FYI you may want to use a five or six percent inflator for health care as this is the recent historic inflation factor.
Now will your income sources be adequate to cover the increased expenses of the future? As an example, if your “Needs” are $4,000 per month and inflation is three percent, your cost double in twenty-four years. If your health care is $1,000 per month now and the cost inflates at 5% /yr your cost will double in fifteen years.
This is why many people cannot depend only on Social Security, pensions, and investment income to fund their retirement expenses. They must grow the value of their investments to fund the longer-term future expenses.
Investments are generally of two different kinds: 1) lenders; 2) owners.
As a “lender” you loan your money to a company, group, government and in return they pay you interest to use your money and at the end a specific time give you back the money you loaned to them. This is how a bank deposit works as do government, corporate and municipal bonds. Your investment return is the interest you earn. When the loan matures, you get the money back but no more than the money you loaned. Today in 2020, the U.S. government can borrow money for thirty years at 1.66% (1). Other less credit-worthy borrows will have to pay more. But let’s just say, the returns are low and could possibly stay this way for a while. Investing all your money as a “lender” will make funding long-term financial needs or priorities challenging.
Investing as an “owner” means things like businesses, companies, or real estate. This is accomplished by owning your own business, investing in other businesses or companies via the stock market, and / or buying real estate. As an “owner” your investment will increase in value as the goods and services produced by the company are sold and create profits for the company. When profits grow the value of the company usually grows. The same principal applies to real estate. As rents increase and the demand for real estate drives up the value, the value of the investment increases. Historically, “owners” receive a return greater than the increasing costs of goods (ie greater than inflation). Go back to your financial plan. What rate of return do you need to accomplish your goals?
While neither “lenders” or “owners” have guarantees, there are some general principles that apply. While being a lender is often perceived as less risky, returns are generally lower. In some so cases, so low that the value of the investment may decline relative to inflation. “Owners” may entail more uncertainty of returns in the shorter-term, returns relative to inflation are generally more positive in longer time-frames and in this context may actually have less risk and a greater reward.
Overall, what are your priorities? What is important to you? I mean this. Really what is important? As we approach Thanksgiving next week, make a list of things you are thankful? The year 2020 has been challenging in so many ways. What are you grateful for? What has helped you through the many challenges of this year. We have no guarantees for tomorrow. No idea of what the new day or year will bring. Celebrate the NOW!
“There is something essential about the “NOW” which is just outside the realm of science.”
-Albert Einsten-
A goal without a plan is just a wish.” -- Antoine de Saint-Exupery
Fred Wollman, CFP®, MPAS®, AIF®
144 South Grape St
Escondido, CA 92025
Phone 760.737.2246; 800.354.4568
Fax 760.745.1239 fwollman@voyafa.com
Investment Advisor Representative and Registered Representative of, and Securities and Investment advisory services offered through Voya Financial Advisors, Inc. (member SIPC)
The views and opinions expressed are those of the author, and the information should not be construed as individual investment advice, or as the opinion(s) of Voya Financial Advisors. CN1417066_1121
