The future is now when it comes to having income in retirement that you can’t outlive. After all, individuals retiring at age 65 can expect to live another 30 years or more in retirement.
Since your retirement income will partially depend on proper cash management, even small adjustments made to your spending habits today can pay big, income-bearing dividends two or three decades down the road
That’s why a retirement cash flow analysis is a game-changer for Americans planning for a stable retirement.
What is Retirement Cash Flow?
Financial advisors define cash flow as the movement of cash entering and leaving your financial accounts on an ongoing basis. The income component of cash flow can include salaries, pensions, social security income, rent from real estate, and income from your portfolio.
The expense component of cash flow is the hardest to identify, but is paramount to understand to avoid running out of money in retirement. Expenses may include fixed and discretionary expenses, taxes, and anything else that may impact outflows of money.
A positive cash flow means that a retiree’s income is stable, or better, while a negative cash flow means a retiree’s income could be thinning out, and is at risk.
Retirement Cash Flow Analysis Provides Many Benefits
It’s a snapshot into your financial future.
A thorough retirement income analysis reveals how your short-term and long-term cash flows are impacted by present financial habits. Better yet, it provides a useful, real world glimpse of what your retirement years will look like if you stick to your current financial habits.
It buys you time if your cash flow is a problem.
An effective cash flow analysis can act as an “early warning system” for retirement savers whose cash flow picture is at risk. Given an accurate assessment of your cash flow situation, you can take the necessary steps to change the behavioral factors that contributed to a negative cash flow scenario.
For example, in the chart below, we illustrate the cash flow for a hypothetical client. As you can see, if the client continues on the same course, they end up running out of money.
Test different retirement cash flow planning strategies to improve your projections
A good financial plan can run multiple “what if” scenarios so you can visualize the impact of your decisions on your cash flow.
For example, let's take a look at the same hypothetical client as above. The difference is that we now include a few simple planning strategies. In the chart below, the hypothetical client makes only 2 adjustments to their retirement plan:
1. Retire 3 years later
2. Sell vacation home in the future
As outlined in the chart below, these simple adjustments substantially improve the client's cash flow in retirement!
Changes in sources of income can impact your taxable income
A cash flow analysis can reveal potential cash surpluses down the road that can be applied toward more retirement savings, giving to charities, or helping the kids or grand kids.
For many retirees, there is a drop in taxable income at retirement. Identifying this window of opportunity may be an opportune time to implement Roth IRA conversions. Strategically placing more of your money in a Roth IRA may give you greater control over taxes when you turn 70 1/2.
Cash flow analysis can help you identify tax opportunities, ensure that personal cash flows meets expenses, and project portfolio balances for estate planning purposes.
It can also better prepare retirement savers for major purchases down the road like healthcare, new cars, vacation homes, and travel, among other retirement planning “big ticket” items.
What Covenant Wealth Advisors Can Do for You
At Covenant, we recognize that personal cash flow can mean the difference between a comfortable retirement and the fear of running out of money.
We’ll conduct a retirement income analysis that will not only let you know if you’re living within your means now, it will also indicate your potential cash flow opportunities or roadblocks years from now, while you’re in retirement.
In detailing your personal financial situation, Covenant Wealth Advisors can help you determine if you’re on the right path for retirement, giving you peace of mind as you plan for your long-term financial needs. If the personal cash flow analysis reveals any personal financial issues that need to be addressed, we can provide a detail financial blueprint that improves your financial situation, and steer you toward a more comfortable retirement.
More specifically, Covenant Wealth Advisors will take the following steps in conducting a retirement cash flow analysis that meets your unique long-term personal financial needs:
We’ll work with you to clarify your income and expenses now and in retirement.
We’ll provide you with a cash flow projection so you have confidence about your retirement income. Additionally, you’ll receive an annual spending plan, including a review of any personal financial decisions that need to be made, that’s specifically designed to improve your current and long-term cash flow situation.
We’ll design strategies to maximize your cash flow in retirement from guaranteed sources like social security benefits and employer pensions. You’ll also receive insights on how to create income from your brokerage accounts, mutual funds, traditional IRAs, Roth IRAs, and other retirement accounts.
No doubt, personal cash flow can be a delicate, but important component, in your long-term financial plan. Let Covenant Wealth Advisors shine a light on your present and future personal economy, with a plan that works for you - and you alone.