Streamlining Your Cash Flow can make Retirement Easier


Streamlining Your Cash Flow can make Retirement Easier

Ensure the bills get paid, income is maximized and you always know where you stand.

November 19, 2014

Many things change in retirement, among them your cash flow. In a general sense, you’ve transitioned from a long period of building wealth to a new phase where you begin to use your accumulated assets in addition to other sources of income to maintain your desired lifestyle. As part of that, your expense and income profile will shift, necessitating new ways of tracking your cash flow.

One implication of this new chapter in your life is a tight focus on expenses, with needs and wants carefully considered and separated. Retirement requires a sustainable spending policy, one that you can live with for a long time and one that takes into account the inevitable ups and downs in the market as well as changes in your personal situation. Along with this is the reality that your sources of income are likely to shift, making cash management an important priority. For example, once you leave the workforce, your regular paycheck is likely to be replaced by multiple sources of income that might include Social Security benefits, pension plan distributions, withdrawals from an IRA, 401(k) or other retirement plan, dividends, rental property income, annuity payouts, asset sales, notes receivable, part-time work – the list goes on.

While your specific picture will be unique, the key point is that managing your sources of income and cash on hand probably will be more complicated than when you were working. Not only is your income arriving from different sources, it’s arriving at different intervals and in different amounts. At the same time, you need to be sure that regular and unusual expenses are being paid, that you have an emergency reserve set aside, and that anything left over is being invested for maximum yield consistent with reasonable liquidity. As you might imagine, you can’t approach this casually – you need a well-thought out approach you can follow for the long term.

Consider consolidation
Since retirement is generally supposed to be about making life less complicated, the approach you take to managing your cash flow should be one that simplifies and streamlines your financial affairs. For this reason, many people who have accounts with a number of financial institutions consolidate them with one or two when the retirement phase of their lives arrives. In deciding where to concentrate your assets, be sure that you’re comfortable with the institution or institutions you choose and that they offer a wide range of options in terms of accessing, transferring and investing your funds. Since Social Security now requires direct deposit for new applicants, as do some pension plans, you’ll want that capability. Accounts that automatically pay recurring bills like a mortgage can be useful. Your primary provider also should make it easy for you to move money from an IRA or other investment account into the accounts you use to pay your bills. You may want the option of setting up regularly scheduled withdrawals from an investment account so you transfer only what you need to pay bills, leaving the remaining assets to earn interest. The reverse should also be available: If you have excess funds in your immediate cash account, you should be able to “sweep” them into a higher-yielding account automatically.

The ability to borrow against your investment holdings can be useful, even if you do so only rarely, as can a credit and/or debit card, along with no-fee ATM capability. You also will probably want online access to your accounts, as well as the ability to pay bills electronically. All this should tie together seamlessly. Naturally, you don’t want to be paying a lot of fees for these services, and you want to be sure that customer service is a priority for the firm you select. Last but certainly not least, be sure the financial institution you choose is a member of the FDIC and provides FDIC insurance for your accounts.

A key component of managing your cash flow in retirement is creating a robust emergency fund that, to the extent possible, ensures you won’t have to sell assets in a market downturn for unexpected expenses. Selling securities to meet short-term cash needs in a down market can be devastating to your overall retirement plan. Opinions differ on how much you should set aside, and your overall financial picture and cash flow profile are important considerations. Some experts believe six months of living expenses is an appropriate amount for an emergency fund, while others advocate having two years’ worth of expenses tucked away. Whatever amount you settle on, your investment holdings in this account should be highly liquid – by definition, you need to be able to access emergency funds quickly.

The ability to borrow against your investment holdings can be useful

Seeing the whole picture
Since you can’t manage what you don’t know, it’s important that you be able to monitor your cash flow and overall financial picture quickly and easily. Of course, monitoring is meaningless unless you also respond promptly if and when your spending gets out of hand. Whether you choose one primary provider or link accounts among several, you need to be able to see where you stand and easily generate up-to-date reports on your account balances, transaction history, upcoming disbursements, and anything else required to be certain that your bills get paid and any excess cash is invested appropriately. The latter is especially important with interest rates at historic lows.

In considering how best to manage your cash flow and where to concentrate your funds, be sure to ask yourself some “what if” questions and to give some thought to the future. Bear in mind that your spouse or other loved ones may have to take over the management of your cash flow in the future, and be certain they know how to do so. This usually will require completing the appropriate documents with your financial provider. Take your time, be sure your approach to managing cash flow is integrated with your overall retirement plan, and then – relax. You know where your money is coming from, where it’s going, and that it’s working for you in between.

Retirement is like a long vacation in Las Vegas. The goal is to enjoy it to the fullest, but not so fully that you run out of money. –Jonathan Clements, personal finance writer

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