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Planning your cash flow in retirement

One of the most important issues to think through as you enter retirement is your monthly cash flow.  Thinking through all of the details of your income and expenses may be tedious, but it is essential to having a retirement income plan that works.  Below is a step-by-step process to guide you in planning your cash flow in retirement.

Step 1:  What are your current monthly expenses?

There is an old saying…”Begin at the Beginning.”  As simple as this may sound, it is vital to your success in retirement cash flow planning.  You must have a firm knowledge of your current expenses.  If you haven’t been tracking this, a good place to begin is to categorize the expenses on last month’s bank statement.  Once you have them categorized, add up each category and list it all on one sheet of paper.  This will give you an overview of how much you spend and what you spend it on.  For an even better analysis of your spending, use the above exercise over the last three months.    You can use a software program to help like Quicken, Excel, or Mint.  

Step 2:  What expenses will go away in retirement?

Once you have knowledge of your current expenses, you can go down the list to see if any of these will be eliminated or reduced upon retirement.  Your 401k contributions, commuting expenses, and other professional expenses will go away.  This could mean a sizable reduction in expenses if you spent a good amount on work clothes and had a long commute.   For many retirees housing becomes their largest expenses.  So you must think through where you will live in retirement; will your housing situation change?  If so, will you be able to pay cash for the next house thus eliminating the expense of the mortgage?  If your plan is to stay where you’re at, will the mortgage be paid off?  Answers to these questions will have a major impact on your cash flow in retirement.

Step 3:  Will there be any new expenses?


It was once believed that people incurred on average only 70% of their pre-retirement expenses after retirement.  However, for most people this is no longer the case.  Health care and health insurance expenses will likely increase because retirees may pay for all their own health care insurance until they are 65 and then buy insurance to supplement Medicare gaps after 65. Costs for leisure and entertainment are also likely to increase since retirees have more leisure time. And if you want to travel, these expenses will take a bigger share of your budget.  Remember, whereas before you may have had only 2 or 3 weeks of vacation during the year, now you have much more time!  After asking this last question, you should end up with a list of forecasted expenses for retirement.

Step 4:  Define Income Sources

After going through the first three steps you will know the income you need per month in retirement.  Now, you need to take a look at income sources.  The first one to take a look at is social security.  If you are eligible (62 or older), then write down the number that is projected on your statement.  Next, take a look at your 401k, your pension, and other investment accounts.  You will then want to take a conservative estimate of a percentage that you can withdraw off of these assets per year and make them last the rest of your life.  This is the most complicated part of income planning and we recommend you meet with a financial advisor to help you determine the right strategies.  Don’t forget to account for the impact of inflation.  Once you do come up with this number, you can add it to your other sources of income to come up with the total.

Step 5:  Putting it all together

By going through this exercise you have done most of the thinking to properly forecast expenses for retirement.  Once you have thought through the first three questions, you will have a list of expenses and a forecasted amount for each.  In step 4 you can determine if you have enough income to meet those expenses over a long period of time.  This will be the indicator of when you can comfortably retire.  If you don’t have enough income, you will have to reduce your expense, increase your income, or shorten your expected retirement by working longer.  


When you do enter retirement, you will need a system to track your expenses, if you don’t have one already.  Quicken does a fine job of electronically tracking your spending each month.  Every week you will want to spend 10 minutes downloading your transactions from your bank into your check register then categorizing those expenses based on your spending forecast.  At the end of each month, you will be able to see how your actual spending is stacking up against your forecast.  

Developing for retirement income can be complicated.  They are not a one size fits all type of decision.  Taking your 401k, IRA, and investments and developing an income plan for your retirement years brings you the peace of mind of knowing you have a plan for retirement which will help you worry less and enjoy life more.

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