Years ago I saw a poster that said, “Happiness is a positive cash flow.” I believe that’s true, especially when it comes to your retirement. And I believe that one of the best ways to find that particular form of financial happiness is to use cash flow analysis in your retirement planning.
It’s a simple exercise. To begin with, gather information for all the sources of income you’ll have during retirement. Since this analysis will help you determine what you’ll need to earn from your liquid assets (stocks, bonds, 401(k)s, etc.) to meet your income needs, leave them out of the equation for now. Instead, list income from pensions, real estate, Social Security or part-time employment. Then figure out how the timing of each of those income sources will affect your finances year by year. In other words, when will you receive that money? For example, will you receive Social Security benefits at beginning at age 66, or do you plan to wait?
Carefully Consider Your Expenses
Next, add up your projected expenses year by year. The amount you use in your analysis needs to include everything. Many times clients say something like, "That’s easy. Our expenses are $3,000 a month." So I ask, “Do you play golf? Do you give money to your church? To your children or grandchildren?” Almost everyone I question has overlooked one or more expenses.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Look at the timing of your expenses, i.e. when exactly will you spend that money? Have you planned a big vacation to Europe right after you retire? Add the cost of the trip to that year’s expenses. Will you need a new car? Figure out when you’ll make that purchase, and put the cost in the appropriate year’s expenses. Want to refurbish your house? Ditto. Many people want to do all the things they didn't have time to do when they were working, and many of those things cost money. Don’t forget those costs when it comes time to plan your cash flow analysis.
Do Your Best, But Be Ready for Updates
By this point in the process, you’ll realize that financial planning is an art, not a science. You can’t predict your exact income or expenses. You may not get that part-time job. You may incur unexpected medical expenses. You may receive an inheritance. Start with your best guess, with the idea that you will review your plan annually, if not two to three times a year.
Once you have your best guesstimates laid out year by year, you’ll probably find that your planned cash flow is not consistent. The money you’ll spend on that long-awaited European vacation the year you retire will take your cash flow down a notch, while the proceeds from the lake house you plan to sell when you’re 70 will bump up the flow.
As you can see, at its core, cash flow analysis is a simple exercise. It’s also an incredibly important one that helps you recognize your cash flow needs and their timing. Once you know what costs you’ll need to cover when, you can plan to set money aside or use money from your investments to carry you through any lean times.
Planning can help you achieve a positive cash flow, which can help you attain happiness in retirement.
-
The Mulligan Rule of Retirement — Seven Mistakes You Can FixUse the Mulligan Rule to undo these seven costly retirement errors. While you can’t go back in time, some retirement choices allow for a “correction shot.”
-
My First $1 Million: Retired Educator/Administrator, 67Ever wonder how someone who's made a million dollars or more did it? Kiplinger's My First $1 Million series uncovers the answers.
-
From Pets to Paintings: The Little Things That Can Cause Big Estate TroubleSentimental items might have little monetary value, but their disposition can cause hurt feelings. Talking about who wants what and labeling items can help.
-
The Clock Is Ticking: Take Advantage of These Retirement Tax Benefits While They LastRecent tax changes, including an extra $6,000 deduction for those 65 and older, present a golden opportunity for retirees to reduce their tax bills.
-
I'm a Financial Adviser: This Is Why Unmarried Same-Sex Couples Need an Estate PlanWhen illness or death occurs within an unmarried same-sex partnership, family members can step in and push the surviving partner out. An estate plan is vital.
-
A Financial Planner's Guide to a Stress-Free Adventure AbroadStart by looking at flight/accommodation costs, have a flexible schedule, seek out credit card rewards, prep for health issues and plan to cook your own food.
-
I'm a Financial Planner: This Is How Smart Women Can Plan for Financial Freedom Despite Life's CurveballsProactive planning and professional guidance can help to build your confidence and give you clarity when you're navigating major life transitions.
-
Parents and Caregivers: Don't Miss Your Roth Conversion WindowCaring for a child or parent can mean a drop in income and a lower tax bracket. Why not take advantage by moving money into a Roth account? Here's how it works.
-
Testing the Retirement Waters in Florida? A Partial Plunge May Negate Tax BreaksMost folks know Florida is a tax-friendly state, but they might not know that part-time residents may not qualify, as our cautionary tale shows.
-
Catch-Up Contributions for Higher Earners in 457(b) Plans: What You Need to KnowGovernment 457(b) plans are about to get more complex as new Roth catch-up requirements come into force. Here's how to prepare for the changes.
