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  • Writer's pictureMark Fonville, CFP®

How To Make A Retirement Cash Flow Plan (That Actually Works)

Updated: Apr 1, 2022

How to make a retirement cash flow plan

At this stage in your life, you’re likely used to the idea of a cash flow plan, budget, spending plan, whatever your preferred term.

But what makes a retirement cash flow plan so different?

Your income sources change.

Now you have to rely on social security, a pension if you’re lucky, potential part-time work, and your retirement savings and investments instead of a traditional paycheck.

That can be a stressful feeling.

Making this transition to retirement is challenging for many people because they are afraid of running out of money. In fact, that’s been a top fear among retirees for years!

Cash flow in retirement planning is a careful science and creative art. It’s not easy because there are so many assumptions that need to be made.

But, if done right, you or your financial advisor can help you create a personalized retirement cash flow plan that helps you visualize your sources of income and clearly identify what expenses your cash flow will help cover for the rest of your life. You will also get a feel for how much money you need to withdraw from your portfolio each year.

The end result of a well-designed retirement cash flow plan is that you’ll have the clarity you need to enjoy life without stressing over the dollars and cents.

Here’s how to make a retirement cash flow plan…that actually works!

You can also download our checklist to use as a guide for getting your entire retirement in order!

1. Get A Clear Idea Of How Much You "Want" To Spend

Try to come up with an estimate of how much you want to spend per month. If you’re having trouble, take a look at your current cash flow plan—what’s coming in vs. what’s going out each month.

It’s beneficial to have a spending target to help guide your savings and investment decisions. That way, you can have a more straightforward plan to reach your goals and a benchmark to let you know if you’re on track.

Many financial planning experts say a strong retirement savings plan attempts to replace anywhere from 80-90% of your pre-retirement income to maintain your current lifestyle. That’s a good rule of thumb to keep in mind, but the reality is that the closer you get to retirement, the less you need to rely on estimates.

Now’s the time to start putting real numbers and scenarios in the mix.

For example, several people believe they will spend significantly less in retirement, but that's not always true. Most end up spending about the same in the first few years as they did before retirement. That could be the case for you, too!

One way to divide up your retirement spending needs is to divide them into three different buckets:

  • Needs

  • Wants

  • Wishes

Needs are the bare essentials that you’ll need to pay for in retirement. This includes fixed retirement living expenses including your mortgage, electricity, clothing, groceries, utilities, real estate taxes, and home maintenance.

The needs category of cash flow planning should also include sound estimates for medical expenses in retirement. If you want to plan for early retirement prior to your Medicare eligibility, then you’ll want to account for private healthcare insurance premiums and out-of-pocket expenses. A private healthcare plan can be expensive, so plan accordingly!

Wants include the items that start to make life a little more enjoyable. This category may include retirement goals, like new car purchases, travel, gifts to family and charity, home improvement projects, and hobbies.

Don’t forget that if you have a significant other, you’ll want to plan for car purchases for each of you. Also, we find that individuals tend to spend more on travel in the first 10-15 years of retirement. Travel expenses tend to decline after that so your retirement cash flow plan should reflect that.

Wishes are just that. This final bucket of expenses is focused on the quality of life expenses that you don’t need to have, but they sure would add a whole new element to your retirement lifestyle. Maybe you want a new boat in retirement. Or perhaps you have your eyes set on purchasing a vacation home or camper. Or maybe you have grand plans to move to a high-end retirement community.

Why should you divide your retirement cash flow expenses into three categories?

For the most part, the wants and wishes items can always be delayed or removed from your expenses in retirement if the economy suddenly gets hit by a recession. Cash flow buckets also allow you to easily identify how much you need to cover the essentials vs some of the finer things in life.

Other adjustments may be necessary depending on whether your overall lifestyle changes, if at all, as you transition into retirement. Ask yourself,

  • Do you plan to move? If so, what's the cost of living in the new area?

  • What are your travel goals?

  • How will you spend your time?

  • Do you still want to work?

Start listing out the non-negotiables that you’ve been dreaming about, like traveling to see your grandkids every few months, and remember, those things have a cost associated with them. If you weren’t spending on those items before, add them to your current budget to help you arrive at your retirement budget.

2. Know How Much You "Have" To Spend

Once you know what you plan to spend, compare that to what you have available to spend. Just like your spending plan now, creating a retirement cash flow plan that works is all about balancing what you have coming in versus what's going out.

The key difference is that your income sources will change. Instead of a regular paycheck, you’ll be spending your Social Security benefits and pension plan (if you have one) or taking withdrawals from an annuity, savings account, or another bank account, individual retirement account (IRA), 401(k), or other investment options. You may also have passive income sources like a rental property.

You need to know how these cash flow sources can work for you and how they interact with each other.

3. Create A Strategic Withdrawal Plan

A retirement spending plan is more than just deciding how much you can withdraw from your nest egg; you also need to think about how you will withdraw. A sure-fire way to extend the longevity of your investments is by creating a solid plan for drawing from them.

A withdrawal strategy notates which investment accounts you draw from, how much you take, and when you take them. Doing so maximizes your investments and minimizes your taxes.

Some techniques you can use may include:

  • Have a predetermined plan for when and how you will adjust your withdrawal based on fluctuations in your investments. Not all market movements will impact your withdrawals, so where will you draw the dividing line, and by how much will you reduce or increase your withdrawal when you cross it?

  • Create an income “floor" of stable investments that you can withdraw from no matter what happens to the rest of your portfolio.

  • Take a portion of your total withdrawal for the year from each account type to blend your taxes and keep the lowest average rate possible over multiple years.

4. Make The Most of Your Tax Opportunities

Retirement accounts are excellent tools for saving and deferring taxes, but too much tax deferral isn’t always the most opportune way to save.

Don’t pass up an opportunity to fill up lower brackets now while deferring income into later years when you may be in a higher tax bracket. If you are in a lower bracket now than you will be later, especially once you start taking required minimum distributions (RMDs), it could be a great time to leverage a Roth IRA and look into a Roth conversion. Tax-free Roth dollars can bring more flexibility to your spending plan.

You can also plan your regular donations tax-efficiently. Cash is the most expensive way to give from a tax perspective, so some more efficient ways to give are:

  • Appreciated assets. You can deduct the market value of your gift instead of selling it and paying capital gain taxes.

  • Qualified Charitable Distributions (QCDs). You can have your RMD sent directly to a charity, and it will bypass your taxable income altogether.

  • Donor-Advised Funds (DAF). These are especially helpful if you don’t always get to itemize your deductions. You can bunch multiple years' worth of donation into a single year and claim the deduction, then pay benefits out of the DAF over time.

Whether it’s withdrawals, charitable donations, or investments, maximizing your tax situation keeps more money working for you. That's why it's critical to work with an advisor who does tax planning. A tax advisor can help you make the most strategic decisions with your money long-term, and it just happens to be one of our specialties!

5. Use Proper Assumptions in Your Retirement Cash Flow Plan

Now that you have itemized your income and expenses, you’ll need to make sure that you integrate the right assumptions into your retirement cash flow plan.

What assumptions should you consider within your plan?

  • Investment returns. Investment rates of returns are notoriously difficult to predict in the short-term and long-term but they are paramount to a successful cash flow plan. We often use conservative assumptions between 3-5% per year depending upon a client’s risk tolerance and personal situation. While returns can be higher or lower, we think it’s prudent to be conservative.

  • Inflation rate. Inflation rates have skyrocketed but the federal reserve is targeting long-term inflation rates of between 2-2.5% for standard expenses. Other types of expenses such as healthcare may experience more volatility and see much higher inflation rates. Inflation also plays a role in interest rates. The Fed has a plan to raise interest rates to curb current high inflation levels.

  • Federal tax rates. Federal tax rates depend upon your taxable income and this can change dramatically depending on how you draw down your assets in retirement.

  • State tax rates. If you are lucky enough to live in a state without state income taxes, then this will be zero. However, for the rest of us, you’ll want to account for your respective state income tax rates.

  • Long Term Capital Gains tax rates. Long-term capital gains rates can fluctuate from 0% to 23.8% depending upon your personal circumstances.

Every situation is different, and each requires a unique plan. We would be happy to show you how to have the best retirement possible.

You can also download our free checklists to use to help you get started thinking about your path forward.

Set up some time to meet with our team of dedicated financial planners today!

Mark Fonville, CFP

About Mark Fonville, CFP®

Mark is a personal financial advisor and the President of Covenant Wealth Advisors. He manages investment portfolio and provides retirement income planning for individuals age 50 plus who have over $1 million in investments.

He has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine. Schedule a call.



Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. We provide investment advisory, financial planning, and tax planning services to individuals. Investments involve risk and does not guarantee that investments will appreciate. Past performance is not indicative of future results.

The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place.


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