Revisiting Your Cash Flow Before You Retire
Reviewing and understanding your cash flow, income streams versus expenses, is an important part of retirement planning that is frequently overlooked. The lifestyle you have created based on your income during employment may require some modification when you leave your current position.
Let’s start with understanding income; I define income as a consistent, scheduled, reliable stream of payment, for a determined amount of time. Social Security is an example of income; you receive your check at the same time each month, for the same amount, for life. If you have a Defined Benefit Pension with your employer, you can choose an option that will provide income to you based on your life expectancy or one that will continue to provide an amount to your surviving spouse.
Bond and CD interest fit the definition of income however; an issue may present itself at maturity. These products have a shelf life and at maturity and renewal, there is no guarantee the same opportunities will exist. Annuities can also provide a lifetime stream of income.
The key to these sources is in the definition, consistent, scheduled, and reliable for a determined period. If you receive a check on January 2 and you run out of money on February 1 you know there is another check coming on the third. Your income sources will not run out, they may stop after a pre-determined date, but not run out.
Drawing down on savings to supplement your income is a strategy to offset a shortfall but does not provide income. One reason is that savings can run out; if you spend it too quickly, it will be gone. Unless you are able to add to savings or, receive a high enough return to replace your withdrawal, you will eventually run out. As a strategy this requires careful consideration, drawing down on savings too early can have a negative impact in later years.
Once you have determined your income flow the next step is to list your outflow, expenses. Expenses fall into one of two categories, necessary or lifestyle.
Necessary expenses are those you need to survive, shelter, food, medical, insurance utilities, transportation. These are bills that if not paid will have a direct negative effect on your ability to live, or function day-to-day.
Lifestyle expenses are not necessary for us to live but, they are the ones that we like best, these expenses are fun and make us feel good. They can be impulse or emotional purchases, planned or unplanned, practical or not, but expenses that are not needed for survival. They include your daily out-of-pocket expenses that add up each time you swipe your debit or credit card.
Tracking lifestyle expenses on a daily basis can be key factor in understanding where your money goes and where spending habits need to be changed.
Understanding your income and expenses will become critical when you decide to leave your current job and paycheck. You no longer will have the regular paycheck you have grown accustomed to, and your lifestyle may require some modifications. Reviewing your situation and preparing for these changes will make the adjustments easier when the time comes.
About Mike Bonacorsi, CFP®
Mike Bonacorsi is a CERTIFIED FINANCIAL PLANNER™ professional, public speaker and award-winning author of Retirement Readiness: A Guide to Creating Your Vision, Knowing Your Position, and Preparing for Your Future. You can listen to his radio show, The Mike Bonacorsi Show, at WSMN, 1590AM or on your computer at http://wsmnradio.com on Tuesdays from noon – 1:00 PM. For additional information, visit http://mikebonacorsi.com/. Reprinted with permission of the author. 2009© Mike Bonacorsi CFP® All Rights Reserved.
