Worried About Overspending During Retirement? Don’t Risk Running Out Of Money! Create A Retirement Paycheck!
How to Create Cash Flow In Retirement!
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(Edited for grammar and clarity)
How do I become a spender after being a net saver my entire life?
This question was posed to me by someone retiring in the next few years, but they couldn't quite wrap their mind around no longer receiving a paycheck. The absence of that security and consistency was unsettling.
In this video, we'll explore how to create something like a paycheck in retirement without actually getting one, how to be strategic about covering your retirement expenses, and make sure you stay until the very end when I'll discuss how to make the entire process easier.
But first, allow me to introduce myself.
My name is JP Geisbauer, founder of Centerpoint Financial Management. I'm a Certified Financial Planner professional (CFP®), a certified public accountant (CPA), and this channel is dedicated to helping diligent savers maximize their lives and minimize their taxes as they transition into retirement.
During your working years, you can earn more than your expenses and then default to saving the rest. However, in retirement, you'll want to start with the end in mind. This means estimating your expenses to determine your retirement cash flow needs. Once you get your arms around those monthly expenses, you can identify the cash sources to cover them.
The first sources of cash flow are from recurring income streams. These are cash flow streams that you're anticipating collecting regularly.
1. Social Security
Social security is the backbone of most retirees' income plans. This government program provides a monthly benefit to eligible retirees based on earnings history.
While it may not cover all of your expenses, it is a reliable base upon which to build. Determine if it makes sense to maximize your Social Security or claim early.
2. Pension.
Pensions are employer-sponsored retirement plans that promise a fixed monthly payment. Now, these have mostly gone the way of the dodo bird. But, if you have been in civil service, military, or government or were lucky enough to work for an employer who still had one, these can be reliable sources of income in retirement.
3. Rental Real Estate.
Rental properties can be lucrative cash flow streams in retirement. Real estate investments can also provide stable monthly income and potential appreciation.
After recurring income streams, you'll want to consider your investments and investment income.
There are three types of investment accounts.
Taxable, tax-deferred, and tax-free.
1. Taxable Accounts
Taxable accounts are your typical brokerage accounts. Because these accounts are taxable, you are taxed on the activity within these accounts as it occurs. Therefore, you can use the income generated in these accounts to offset your expenses.
2. Tax-Deferred Accounts
Tax-deferred accounts can grow tax-free, but distributions from those accounts are taxed at the ordinary income tax rates.
Make sure you get your arms around the income tax implications of taking distributions from these retirement accounts, as you will need to consider the income tax on the withdrawals and how that will affect your expenses.
For example, if you take a $50,000 distribution from a tax-deferred retirement account and incur a $10,000 tax liability, you'll need to recalculate your expenses to consider that additional amount. And this calculation can get a little circular.
3. Tax-Free and Roth Accounts.
These accounts are the holy grail of investment accounts as they grow tax-free, and distributions from the accounts are tax-free as well.
Make sure any use of these is consistent with your overall asset drawdown plan.
One potential retirement cash flow strategy for these investment accounts can be the following:
Use the investment income in the taxable accounts to offset current expenses.
Take distributions from tax-deferred accounts as required by RMD regulations or enough to keep you in the lower tax bracket.
And finally, use the Roth account to cover any deficit as you enter the higher tax brackets.
Again, be mindful of the tax consequences as you draw down from these accounts.
In addition to the type of accounts, consider the assets held within the accounts. If cash flow is a priority, you may want to focus on bonds, dividend paying stocks, REITS, or other cash flow generating investments.
If growth is your goal, equities might be a better option.
There's no one size fits all solution here, so create an asset allocation that works best for your situation. And make sure you consider the tax implications and asset locations.
Finally, if the income source is above don't cover your expenses, you may need to consider part-time work or consulting. Hopefully, you've done the planning before you retired, so this isn't something you'll have to do. But if all else fails, this is an option to help cover your expenses in retirement.
People use two other products to generate cash flow in retirement, but I don't typically recommend them. These two products are annuities and reverse mortgages. If the previously mentioned options aren't attractive, you may want to research these alternatives. But as it relates to these two products, I'll leave you with these two words: Buyer beware.
Now that we've gone through the various options, here are some tips for modeling your cash flow.
1. Revisit your expenses at least annually.
Revisit your expenses annually to ensure you create sufficient cash flow to cover these costs as they rise. Also, review expenses to make sure you're using them. That thirty-day free trial might now be charging you on an annual basis. Reviewing and canceling these subscriptions can help reduce your monthly expenses.
2. Have an emergency fund
Having an emergency fund in a savings account to address unexpected expenses as they arise.
3. Use one checking account and one credit card to cover the recurring expenses.
This will make them easier to track and monitor.
4. Automate payments
Don't get stuck with late fees because you forgot to drop a check in the mail or make the payment. Also, review the invoices to ensure they're accurate.
5. Automate cash transfers into your checking account.
Having cash automatically transferred into your checking account can provide guidance and support around how much you can spend. Combined with Social Security and any other recurring payments, these deposits into your checking account can feel like a retirement paycheck.
Any income and spending strategy should be one component of your comprehensive retirement plan. You'll want to ensure you don't outlive your investments, that your asset allocation makes sense given your cash flow needs and risk profile, and that your assets are protected and will be directed to the people and institutions you care about upon your passing.
If you'd like to learn more about comprehensive financial plans, please check out this video. Also, you can download my 8-Step Retirement Roadmap here.
Again, my name is JP Geisbauer founder of Centerpoint Financial Management.
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If you have any questions or comments, please put them in the comments section below.
Thanks again for watching, and I'll see you next time.
About the Presenter:
JP Geisbauer is a Certified Public Accountant, a Certified Financial Planner ®, and the founder of Centerpoint Financial Management, LLC, a financial planning, investment management, and income tax planning firm located in Irvine, CA. JP Geisbauer is dedicated to helping California-based business owners and executives transition into retirement. He has been quoted in many news outlets including Forbes, Newsweek, US News & World Report, MarketWatch, YahooFinance, CNN and NerdWallet.
Need help with your transition into retirement? Schedule a complimentary 30-minute call with JP here.
Disclaimer:
This article is for general information and educational purposes only. Nothing contained in this article constitutes individual financial, investment, tax, or legal advice. Before taking any action on any topic discussed in this article, consult with your own financial planner, investment advisor, tax professional, and/or attorney for advice on your specific situation.