Managing Cash Flow in Retirement – Critical to Portfolio Planning

Cash Flow Key Aspect of Portfolio Management

One of the more critical aspects of Financial Planning and Portfolio Management, for both the client and the advisor, is to understand the client’s household Cash Flow. It is important to routinely track income and expenses to get a reliable base when doing Financial Planning, and especially important for Retirement Planning.  Because this information can and does change, sometimes dramatically, it needs to be kept up to date so that Planning and Portfolio Management can be adjusted to meet the client’s needs.

We recommend that clients use the miracle of technology and online banking to help them with the day-to-day tracking.  Quicken has proven to be a popular as well as powerful tool for keeping the information current.  Mint is another popular choice and it’s free, but in my opinion, not as robust. These and other products at first glance might seem complicated, but once set up, they are easy to use and definitely worth the initial effort.  These programs will track income and expenses, and then produce reports that consolidate the information in an understandable format.

Tracking Income & Expenses

Keeping track of Income & Expenses will tell us several things that help with Financial Planning and Portfolio Management.

  1. First of all, it helps us decide how much to maintain in emergency reserve accounts to cover the unexpected events of life:  things like water heaters leaking and ruining the flooring, or a new roof, or a major car repair.
  2. Second, it helps us answer the question “Where does all the money go?”  A lot of people have no clue how much they are spending or what they are spending it on. It really is beneficial to know, so that we can determine if these expenses will be on-going and will need to be taken into account for retirement planning.
  3. Third, it helps us to figure out how much can comfortably be directed to savings and investments every month while still working.  This is crucial to building a healthy Portfolio that will help support the client’s lifestyle during retirement.
  4. Fourth, understanding current cash flow needs will indicate how much is going to be needed in retirement and determines how much should be in savings and investments to cover these needs.  It also makes it easier to figure out when the client will be in a position to retire comfortably.

Lastly,  getting a good handle on cash flow is important to figure out if there is any discretionary cash available to take advantage of strategies to help lower taxes.

To summarize, the Importance of Cash Flow should never be ignored when planning for retirement.  Maintaining a regular accounting of income, taxes, and expenses allows the client to take these all-important steps:

  1. Clear debt
  2. Determine where the cash goes
  3. Identify disposable income
  4. Establish basis for unplanned situations
  5. Determine criteria for insurance decisions
  6. Plan for retirement
  7. Build a foundation for wealth creation

Financial Planning, Retirement Planning and Portfolio Management all rely on a good understanding of the current financial situation.  Planning for the future takes some work, but it will be worth it in the end to have a comfortable, stress-free lifestyle in retirement.