Cash flow planning may sound complicated, but what it boils down to is comparing your assets to your expenses over time and identifying periods when you may fall short and when you may come out ahead.
Using a simple cash flow analysis in your retirement planning is a simple exercise that can help enormously. To begin with, gather information for all the sources of income you’ll have during retirement. Since this analysis will help you determine what you’ll need to earn from your liquid assets (stocks, bonds, 401(k)s, etc.) to meet your income needs, leave them out of the equation for now. Instead, list income from pensions, real estate, Social Security or part-time employment. Then figure out how the timing of each of those income sources will affect your finances year by year. In other words, when will you receive that money? For example, will you receive Social Security benefits at beginning at age 66, or do you plan to wait?
Next, add up your projected expenses year by year. The amount you use in your analysis needs to include everything. Many times clients say something like, “That’s easy. Our expenses are $3,000 a month.” So I ask, “Do you play golf? Do you give money to your church? To your children or grandchildren?” Almost everyone I question has overlooked one or more expenses.
Look at the timing of your expenses, i.e. when exactly will you spend that money? Have you planned a big vacation to Europe right after you retire? Add the cost of the trip to that year’s expenses. Will you need a new car? Figure out when you’ll make that purchase and put the cost in the appropriate year’s expenses. Want to refurbish your house? Ditto. Many people want to do all the things they didn’t have time to do when they were working, and many of those things cost money.
By this point in the process, you’ll realize that financial planning is an art, not a science. You can’t predict your exact income or expenses. You may not get that part-time job. You may incur unexpected medical expenses. You may receive an inheritance. Start with your best guess, with the idea that you will review your plan annually, if not two to three times a year.
Once you have your best guesstimates laid out year by year, you’ll probably find that your planned cash flow is not consistent. The money you’ll spend on that long-awaited European vacation the year you retire will take your cash flow down a notch, while the proceeds from the sale of a vacation home will increase that cash flow.
Once you know what costs you’ll need to cover and when, you can plan to set money aside or use money from your investments to carry you through any lean times. The most important thing, though, is to DO this exercise and be realistic. Remember, you’re planning, and by developing those plans, you’ll know where you need to make changes in the years before you retire or challenges you’ll need to address now, while you still have your nest egg unallocated.
If you or your clients have any tax issues or problems with the IRS/State or other federal tax problems, please feel free to contact me directly at (909) 570-1103 or by email at Carlos@HealthcareTaxadvisor.com
Carlos Samaniego, EA
Enrolled Agent
Licensed by The Department of Treasury to represent taxpayers
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Redlands, CA 92374
Ph. (909)570-1103
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