In Retirement Cash (Flow) Is King—Part 3 of 4

Show Me the Money!

In the first part of this series I discussed the idea of shifting your mindset on your financial picture in retirement from thinking you need a certain amount of money you have saved over the years as the measure of a successful retirement, but instead to think about how that savings, along with your income from all other sources, work together for you on this journey. https://www.capegazette.com/affiliate-post/retirement-cash-flow-king-part-1-4/354975 

In the second part I discussed the components of the cash flow equation, Expenses – Income = Surplus or Deficit, and focused on the expense part of the calculation. Expenses can be fixed or variable, and variable expenses can be discretionary or non-discretionary in nature. https://www.capegazette.com/affiliate-post/retirement-cash-flow-king-part-2-4/355002 

In this third part of the series we look at the income component that helps pay for these expenses. If, as the equation indicates, the amount of monthly/annual guaranteed income is greater than your anticipated expenses, you have a surplus and do not need to draw from your retirement savings to pay your bills. But, if you do not have enough guaranteed income for your expenses you will need to use savings to generate income to cover the shortfall.

So, what are your sources of retirement income? For almost all of you some amount of Social Security benefits will be included in your guaranteed income. These benefits provide an annual cost of living adjustment in most years and have a survivor benefit feature after the death of the first spouse. A discussion of Social Security benefits and claiming strategies is beyond the scope of this article, but is something we discuss with our clients all the time.

In addition to Social Security benefits, some of our clients are fortunate to have the benefit of something known as a “pension.” A pension used to be a common benefit of a long career but has pretty much gone away over the past 40 years since employer 401k and similar plans became popular. These are known as defined contribution plans and shift the savings burden to the employees for their retirement benefits with the employer only on the hook to administer the plan and, in many cases at least, offer some amount of matching contributions to qualifying employees.

But there are still some folks with pensions from what are known as defined benefit plans. These offer lifetime income to the retiree and some offer a survivor benefit to a spouse as well. Typical pension holders these days are retired Federal, state, and municipal workers, retired military members, some educators, and the occasional corporate retiree—but they are an increasingly rare breed!

Another component of retirement income for some folks is an annuity, either as part of an employer plan, such as an educational institution, or payments from an annuity purchased by the retiree themselves for future income. An annuity is, at its basic level, a contract between the owner and an insurance company for a guaranteed stream of income for some period of time, up to their lifetime, and possibly extending to a surviving spouse or other beneficiary. The type of annuity described here is stripped of all of the bells and whistles you often hear about with annuities and brought back to its core role in your financial picture—pre-payment of some amount for guaranteed income for the contractual period.

Other sources of retirement income are not guaranteed, and certainly can be variable. This includes income from rental properties, dividend, interest, and capital gain distribution income from investments, distributions from a business or partnership interest and, once you reach your Required Beginning Date at age 73 (or 75 for those born in 1960 or later), your Required Minimum Distributions from traditional (i.e., non-Roth) retirement accounts.

You add up all of these potential income sources, both guaranteed and anticipated, fixed or variable, and compare that total amount to your anticipated expenses. If you have more income then you need for your expenses, those funds are available to you for other purposes, including investing. But if you show a gap between income and expenses, then you need to look at how best to fill that gap using your accumulated savings.

In some cases it may require you to make some choices about your spending if the available resources are insufficient to provide the needed income over the relevant period of time.

The last part of the process is the focus of the next and final part of this series, putting it all together to determine your cash flow needs and what you may need to do to ensure your personal retirement success.

While you missed us at the recent Home Show and the Seminar on retirement success held on September 23rd, you can still learn more about what retirement success means to you with a no-cost, no-obligation in-person or virtual meeting to discuss your personal financial situation. You can reach George Reilly by calling 302-313-6644, or emailing Reilly@MARPS401k.com. The Coastal Delaware office of MidAtlantic Wealth Partners is conveniently located at 2400 Coastal Highway in Dewey Beach where we have our own parking lot.

Note: This article is for educational purposes only and does not offer any investment, tax, or other planning advice, nor does it create any advisor-client relationship with a reader of this article.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. MidAtlantic Wealth Partners is not affiliated with Kestra IS or Kestra AS.

This article is published for residents of the United States only. Registered Representatives of Kestra Investment Services, LLC and Investment Advisor Representatives of Kestra Advisory Services, LLC, may only conduct business with residents of the states and jurisdictions in which they are properly registered. Neither Kestra IS or Kestra AS provides legal or tax advice. For additional information, please contact our Compliance department at 844-5-KESTRA (844-553-7872)