Except for the fortunate few who don't have to worry about money,
the ultimate goal for most retirees is making sure their assets
last as long as they live. Once a person or household no longer can
rely on earned income to pay the bills and save for the future,
balancing income and expenses becomes the primary focus of
financial planning. And because of increasing longevity, managing
cash flow is more critical than ever. A typical American electing
to retire in his or her mid-60s may expect to live 20 or more years
While many variables come into play depending on each person's
mix of income, lifestyle, and health, there are a number of
planning moves that can help retirees live within their means and
make appropriate adjustments in response to changes in income and
Tools for the Task
If you are retired, or about to retire, you will need to gather
and organize key information before you can tackle the ongoing
tasks of monitoring and managing your cash flow in retirement. The
purpose is to give you a clear and complete picture of your current
financial situation, as well as of any significant changes you
expect. Two sources will provide this information:
- An up-to-date net-worth statement, which provides a snapshot of
your assets, debt, and cash reserves.
- Your monthly or annual budget, with itemized breakdowns of your
income and expenses. If you haven't retired yet, it's a good idea
to prepare a projected budget of your retirement income and
Be sure to account for all expenses, including those that occur
infrequently, such as insurance bills, college tuition, membership
fees, and investment management fees. They should be reflected in
your monthly budget on a prorated basis. If you need assistance
creating your net-worth statement and budget, you may want to
consult a financial advisor, a book on the subject, or resources
that are available online - for example, the Financial Planning
Toolkit at CCH Incorporated.
Analyzing this information will reveal any major problems that
you need to overcome, such as insufficient cash reserves for an
emergency or an income shortfall compared with current or projected
expenses. It may also point up areas for improvement. For example,
you may be able to free up cash by reducing debt or eliminating
Plans and projections are always subject to change. Even with
reasonable assumptions about investment returns, inflation, and
retirement living costs, it's likely you will encounter numerous
changes to your cash flow over time. Frequent monitoring of your
income and expenses will detect changes that you can address in a
timely fashion to prevent significant problems down the road.
Experts often recommend a monthly review of your budget, as well as
a comprehensive annual review of your financial situation and
goals. While you can keep track of your situation with paper and
pen, specialized software may make the task easier, especially if
your finances are relatively complex.
What to Look For
What should you look for as you monitor your finances? Following
are potential developments that could affect your cash flow and
require adjustments to your plan.
- Interest rate trends and market moves may result in an increase
or decrease in income from your savings and investments. For
example, if interest rates decline, you may have to reduce your
expenses if you are periodically withdrawing a fixed percentage
from your investment assets. Alternatively, you might consider
altering your investment mix to pursue other sources of income,
aside from traditional fixed-income investments - equity dividend
income investments, for instance.
- You may also encounter changes in federal, state, and local tax
rates and regulations. This factor may come into play if you
relocate after retiring. The state you move to may impose higher
income or property taxes, for example. Other factors that could
have a bearing on your retirement cash flow include changes in
Social Security and Medicare benefits or eligibility, as well as
those affecting employer-provided retiree benefits and private
- Inflation and health care costs are two other variables that
can have an impact on living costs and, hence, your retirement
- Life events - such as marriage, the death of a spouse, and the
addition or loss of a dependent - may also affect your cash flow.
Cash flow is also a matter of personal preferences and decisions,
and here you will be in control of the many small and large choices
likely to be made over the course of retirement. How much you spend
on travel, entertainment and recreation and whether you live in a
lower or higher cost locale are examples of factors that can have a
significant effect on cash flow - and how long your retirement
assets are likely to last.
That's why it's worth paying close attention to cash flow,
making sure you budget carefully, monitor income and expenses
frequently, and take action whenever you see significant changes in
income and expenses.
Points to Remember
- Due to increasing longevity, managing cash flow has become a
critical task for retirees seeking to ensure that they do not
outlive their assets.
- An up-to-date net-worth statement and monthly budget providing
itemized breakdowns of income and expenses are the basic tools used
to monitor and manage cash flow.
- Interest rate trends and market moves may result in higher or
lower income from savings and investments.
- Other factors that can alter cash flow include changes in
inflation, health care costs, tax rates and regulations, and Social
Security and Medicare benefits.
- Lifestyle choices - such as preferences for housing, travel,
and entertainment - also affect cash flow.
© 2011 McGraw-Hill Financial Communications. All rights