Broker Check
Essentials of Retirement Income Planning - Focus on Cash Flow Not Balance Sheet and Account Values

Essentials of Retirement Income Planning - Focus on Cash Flow Not Balance Sheet and Account Values

April 14, 2023

There is a popular belief in the financial world that you have to reach a certain number to have financial security.  What some pundits say is that you have to reach a certain numerical value on your net worth say like a million dollars or two million. Additionally, as we work with clients they will focus on their balance sheet or bottom line account value. Please do not misunderstand me, I am not saying those numbers are not important. However, as we focus on retirement income planning for our clients, we feel focusing on these numbers takes people away from the numbers that are truly important to you which is your cash flow. Your retirement cash flow has two numbers that are important: your annual spending plan and your annual income. Retirement cash flow = Annual income - Annual spending plan.

Why is cash flow so important? Cash flow from a financial perspective is like the blood running through your body. It is essential money that is available when we need it. We all have lifestyles that we want to maintain and those lifestyles have varying costs. Some expenses are necessity that include: food, shelter, transportation, communication like cell phone and internet, health care, and taxes. These expenses are essential. There are others that are discretionary that we could adjust or cut back if we had to do so. I hesitate to list these here because what we have learned what is essential to one person is discretionary to another. There are not universal discretionary items for everyone. We know for some of our clients there are things they will do without before not going on vacation or being able to help their family. As we dive further and further into retirement income planning, we are talking more and more about this. You have to have a general idea and range of what your annual spending plan is. The reason is that some can live comfortably and happy on more limited resources than others. People have different expectations of the lifestyles they want to live. It is not our place to tell people what that should be. It is ours to tell them if they have the resources to support it and if not what value decisions they want to make.

On the income side, we begin with your floor. That is the guaranteed sources of income that people have. Most people have Social Security as their guaranteed income. Some folks have pensions as well. That is mostly our public sector clients. Some just have pensions. Those are public sector employees like some Federal and Municipal Workers who did not pay into Social Security. We call all these sources promise based and safety first income because these are guaranteed. Studies have found that the more guaranteed income that people have the happier they are and greater peace of mind. When we focus on income planning, we always start with this. Ideally ones safety first income lines up with your essential expenses. 

Now this is where your assets come in and danger of just focusing on the balance and account values although helpful, in our opinion does not tell the whole story. For us we want you to think of the assets that you have as potential income generating vehicles that can supplement the guaranteed income from pensions and Social Security. 

For your assets, we divide them up into 3 categories:

(1) there is your cash position that you generally hold in banks that is there for peace of mind. You generally want to maintain a certain balance. As a result we do not think of them as income generators. They are there more for contingency

(2) There are assets like income annuities that can provide guaranteed income that fits into your promise based and safety first

(3) there are stocks, bonds, mutual funds that can provide reliable income but are not guaranteed and what we call probability based income. 

We want our clients to think of their assets not purely in the form of account value but more from how much income and cash flow that you can get out of them. We feel that is more useful than what the actual value is. For instance like right now in the midst of a bear market where assets are down, one can feel bad it is below certain threshold that they had in their mind. We have had clients who have been retired over 20 and 30 year periods who have been able to maintain sustainable cash flow and withdrawal rate even as their account values fluctuate up and down.

We hope this helps better understand retirement income planning. If you would like to go through the bucket plan retirement income process or what to revisit yours, please reach out to our team.