How to Develop a Retirement Cash Flow Strategy

After years of saving and strategizing for retirement, drawing down your nest egg can be challenging. You’ll need to learn how to balance longevity and preservation with your immediate, recurring financial obligations and goals.

Let’s take a look at the fundamental elements of retirement cash flow planning, and what you should start considering now.

What Is Retirement Cash Flow?

Retirement cash flow refers to the money that flows in and out of your accounts based on your income and expenses. It’s one of the most important financial factors to consider during your retirement years, as a positive cash flow will ensure you’re able to enjoy your desired lifestyle, cover your living expenses, and maintain a sense of financial security.   

The factors that impact your retirement cash flow include:

  • Expenses
  • Retirement income sources
  • Inflation and cost-of-living adjustments
  • Taxes
  • Investment returns

First, Assess Your Financial Situation

Your financial life is multifaceted, and each piece will play a role in determining and optimizing your retirement cash flow. 

These include:

  • Assets (property, investments, savings, collectibles, etc.)
  • Liabilities (mortgage, personal loans, and other debts)
  • Income (savings, investments, dividends, etc.)
  • Expenses (utilities, insurance, memberships, groceries, etc.)
  • Taxes

Work together with your financial advisor to assess your entire financial picture and build a strategy for achieving your retirement lifestyle goals. You may want to focus on paying down debt before quitting your job, for example. Or, perhaps you plan on moving to a new city with a higher cost of living. Then, you’ll need to accommodate higher expenses in your anticipated retirement budget. 

Determining Your Income Sources in Retirement

Cash flow planning includes two primary components: your income and your expenses. 

Before anything else, figure out what sources of income you’ll be able to pull from in retirement. Common sources include:

  • Social Security
  • Brokerage accounts
  • Saving accounts
  • Retirement accounts (401(k), 403(b), IRA, Roth accounts)
  • Alternative investments (REITs, investment properties, commodities, etc.)
  • Annuities
  • Part-time work
  • Health savings accounts (HSA)
  • Pension plans

Not all sources of income are created equal. They have varying tax treatments, age restrictions (namely retirement accounts), levels of involvement (active vs. passive income), estate planning advantages, and more.

Consider the Tax Treatment of Your Retirement Income

As we mentioned above, the tax treatment of your various retirement income sources will vary. To optimize both your annual and lifetime tax obligations, you and your advisor should work together to build a diversified, tax-efficient withdrawal strategy. 

Potential tax treatments include:

Tax-deferred: Certain accounts, like 401(k)s, IRAs, and HSAs, are considered tax-deferred. Contributions to these accounts will reduce your taxable income for the year they’re made, and any earnings within the account will grow tax-free as well. You are only responsible for paying income tax when you withdraw from the account. Tax-deferred accounts are especially advantageous because they do not require you to pay taxes annually on growth or earnings. Rather, you can leave more money in the account to compound over time.

Taxable: Brokerage account, interest, and rental income is considered taxable. While these income types may not provide a true tax advantage, they are the most flexible sources of retirement income. Most tax-deferred accounts, by comparison, have restrictions and age limits on making penalty-free withdrawals. If you choose to retire earlier than the “traditional” retirement age, you’ll likely need to rely heavily on taxable income for at least the first few years of retirement.

Tax-free: Some sources will provide tax-free income in retirement, including Roth accounts and municipal bonds. Keep in mind the trade-off, however. Contributions to a Roth account cannot be deducted from your tax return. In addition, municipal bonds may provide tax-free returns, but they tend to be a relatively conservative investment option.

Managing Expenses

The other half of the retirement cash flow equation is, of course, managing expenses. 

As you’re planning, it may help to create expense categories including:

  • Essentials (utilities, gas, groceries, etc.)
  • Discretionary (club memberships, entertainment, subscriptions, eating out, etc.)
  • Insurance (healthcare, auto, home, life, long-term care, etc.)
  • Unexpected (emergency home repairs, car repairs, new furniture, etc.)
  • Travel and lifestyle (Flights, vacations, hobbies, etc.) 

With an understanding of what category each of your expenses falls into, you can better determine if there are opportunities to save or cut back. Without tracking your expenses, it can be hard to get a realistic picture of your cash flow and make adjustments as needed.

Investment and Portfolio Management

As you approach and transition into retirement, it’ll be crucial to work with your advisor to align investments with your retirement goals and risk tolerance. You can do this by incorporating more diversification into your portfolio and reassessing your asset allocation.

Generally speaking, the closer you get to retirement, the more conservative your portfolio will be. Typically those in or near retirement will transition a greater percentage of their portfolio into fixed income and cash equivalents, like bonds and CDs. Doing so can help mitigate risks, like market volatility while still growing their nest egg enough to account for factors like longevity and inflation. 

Risk Management

In retirement, you become more vulnerable to certain risks like inflation, medical and long-term care costs, and outlasting your savings.

Work with your advisor to find the right insurance policies to address these risks. Policies can include:

  • Medicare and supplemental healthcare insurance
  • Annuities
  • Long-term care insurance
  • Life insurance

Estate Planning Considerations

As you continue thinking about your cash flow in retirement, keep in mind you’ll want to start building a comprehensive estate plan as well (if you haven’t already). By proactively planning your transfer strategy, you can develop the most tax-efficient, meaningful ways to pass down your estate to your children, grandchildren, and loved ones.

In addition, estate planning can help you develop safeguards in the event you become incapacitated or unable to make important decisions on your own. Your estate attorney can help you establish financial and medical powers of attorney, as well as create a healthcare directive.

Developing Your Own Retirement Cash Flow Strategy

Your cash flow strategy will likely evolve throughout retirement as your expenses and income change. Review your plan regularly, and make updates accordingly to help ensure you don’t outlast your savings.

If you’d like help solidifying your current retirement savings plan and cash flow strategy, don’t hesitate to reach out to our team today.

The information in this newsletter is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the ­purpose of ­avoiding any ­federal tax penalties. You are encouraged to seek guidance from an independent tax or legal professional. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the ­purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2024 Broadridge Financial Solutions, Inc.