Managing Cash Flow in Retirement
Managing cash flow in retirement is a crucial aspect of financial planning that can feel daunting after decades of receiving regular paychecks. Here are some strategies to consider:
1. Comprehensive Income Assessment: Start by compiling a list of all potential sources of retirement income, including pensions, annuities, deferred compensation, Social Security, net rental income, dividends, and part-time or consulting work.
2. Expense Evaluation: Next, list all outgoing expenses, accounting for both fixed and variable costs. Consider new expenses like healthcare before Medicare coverage begins and subtract any expenses that will no longer apply in retirement, such as commuting or work-related clothing. If you are filing for Medicare, and were in a high-income tax bracket, Part B and Part D premiums will include an additional charge based on your modified adjusted gross income. This income-related monthly adjusted amount (IRMAA) will kick in 2 years post retirement.
3. Cash Flow Analysis: Compare your retirement income to your expenses to determine if there will be a surplus or deficit. If there’s a shortfall, plan to draw from savings or investment portfolios to cover expenses.
4. Retirement Income Preparation: Ideally, have a reserve equivalent to 2-3 years of the expected cash flow deficit, plus an emergency fund, in a high-yield savings account, CD or brokerage account (at MainStreet we call this Bucket 1 Savings). Cease reinvesting interest and dividends in your brokerage account a few years before retirement to accumulate this reserve.
5. Tailored Strategies: Every retiree’s situation is unique, considering factors like net worth, tax brackets pre- and post- retirement, and savings location. For example, those in a lower tax bracket post-retirement might benefit from withdrawing from pre-tax retirement accounts before claiming Social Security or taking Required Minimum Distributions. This allows them to fill up their low tax brackets and pay less taxes on funds they must take out later.
6. Professional Assistance: Consider seeking professional guidance, especially if nearing retirement or if you prefer a comprehensive review of your retirement income plan.
By following these steps and possibly seeking assistance from financial professionals like MainStreet, you can better manage your cash flow in retirement and enjoy peace of mind in your golden years.
Visit the MainStreet Money Library for more tips about planning for retirement.
