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Cashflow is King in Retirement

December 03, 2021

Why Cashflow Matters in Retirement

Cash flow in retirement is one of the most important financial considerations for retirees, as it determines their ability to maintain their standard of living and ensure their financial security. Without a steady cash flow, you may be forced to dip into your savings or investment accounts for day to day needs, which can have a negative impact on your portfolio and leave you with less money for the unexpected expenses or emergencies the pop up from time to time

 One of the biggest challenges for retirees is the fact that their sources of income often become more limited in retirement. Certainly a traditional retirement means that your regular paycheck has stopped. This can be replaced by a combination of Social Security benefits, pension payments, and investment income to cover expenses. However, these sources of income may not be sufficient to cover all of your expenses, especially as you age and their living expenses increase.

 So how do you plan for that? The first step is to develop an income plan that you are comfortable with. This includes understanding what your expenses are as well as what sources of guaranteed predictable income you have coming in. Should you find out that you are in an untenable situation there are only two levers that you can pull in this circumstance. You can either find a way to increase the amount of income you have coming in, or you can find a way to reduce your expenses. This can include strategies such as downsizing to a smaller home, reducing discretionary spending, or finding ways to generate additional income through part-time work or consulting.


Another important aspect of cash flow planning to consider is how to manage your investment portfolio. If you intend to regularly draw from the portfolio to meet income needs you need to be mindful of withdrawing too much money from the portfolio too soon. This can significantly reduce the overall value of these assets over time, as once a dollar is removed and spent, not only is that dollar gone, but all the future money it may have earned is also gone.

If the plan is simply to draw from the portfolio on a monthly basis to supplement retirement you may also suffer from something called Sequence of Returns risk. Without proper planning this could mean that you are forced to sell assets at a discount when the market is down, which creates an effect similar to a snowball rolling downhill. The only difference is that the snowball in this case if your portfolio value! As you draw from assets that may have depressed prices you are forced to sell more of the asset to generate the same amount of income. This removes even more assets from the portfolio as well as their future growth potential during an economic recovery, and can wreak havoc on a retirement.

Overall, a proper income plan is the basis for a good retirement strategy and it's often the first step in creating a good financial plan. In summary, cash flow in retirement is important because it directly impacts your ability to maintain your standard of living throughout all of your retirement years. Without a steady cash flow, you may be forced to dip into savings or investment accounts, which can significantly reduce your overall net worth and could even result in running out of money. A retirement income plan that maximizes income while minimizing expenses and carefully manages investments is the first step toward your goals in retirement.

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