Today the key to a financially secure retirement is having an inflow of consistent, protected or guaranteed after-tax cash. To accomplish this you will need to convert your accumulated savings, investments, 401k and pension benefits into a stream of cash flow. Think of it as you are climbing the retirement mountain (accumulating assets and benefits) to the last day of fulltime work when you reach the summit. You then begin your climb down for the rest of your life (decumulating or spending down your assets and benefits).
In retirement cash flow planning, you need to safely climb down the mountain and make sure you don’t run out of cash before you run out of life. To successfully complete your journey, you will need discipline, planning and, most importantly, an experienced guide. I believe it is best to work with a financial professional to create a cash flow plan that reflects your needs and desires.
The Impact of Taxes
Before we begin, I can’t tell you how important what you are required to pay for income, estate and real estate taxes is on your planning efforts. Taxes gnaw away at your nest egg as you begin your journey down the mountain. If you have to payout 30% to 40% of your cash income in taxes it leaves you with less to live on or pass on to beneficiaries. For example, if you have to pay estate taxes it will leave less for your heirs. Taxes are a critically important consideration.
Key Planning Considerations
Working with your financial professional guide you need to create a plan that is all encompassing. Here are some of the major areas you will need to include in your planning process:
Designing the retirement you want to have and clearly defining the financial cost. This would include when you want to retire, and the determining the cost of travel plans, volunteer work and other give-back activities.
Lifestyle including essential living costs, housing needs and travel spending
Asset management and investment strategies for all your accumulated 401k, IRA and personal investments
Determining when it is best to start taking any pension and Social Security Retirement benefits
Developing drawdown plans for each asset type to maximize income and minimize the impact of taxes
Insurance needs as you age, including life, disability, property, vehicle and liability coverages
Overall tax planning to minimize income, estate and real estate taxes
Providing for healthcare coverage including making necessary Medicare elections and determining if you should establish a Health Savings Account
Planning for potential long-term care needs
Legacy planning including what you want to leave for your heirs or charities
Summary
Retirement cash flow planning takes discipline. You must develop a plan that makes your accumulated assets work as hard for you as possible to produce the after-tax cash flow you need to sustain an acceptable post-work lifestyle. The key is to put a plan in place as soon as you can and take the actions specified. A successful retirement awaits.
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