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Life Isn’t a Straight Line: Cash Flow Planning for Retirement

Life Isn’t a Straight Line: Cash Flow Planning for Retirement

Averages often don’t illustrate the whole story, perhaps smoothing over many of the bumps that occur in life. Consider, for instance, your income: Some years you make more and some years less. You leave a high-paying job to start your own company, receive a major promotion, or see your income reduced by a furlough or layoff. Because the average is the trend – not the details – building a strong foundation allows you to survive the down years and thrive in the good ones.

No great tale starts with a discussion on financial stability, but plenty of horror stories begin with the failure to design, build and ultimately protect a long-term financial life plan. Strong income planning and a buttoned-up strategy for cash flow going into retirement will help give you flexibility when the inevitable surprise pops up, allowing you to weather incoming storms and enjoy a successful retirement.

Answering the Question: Do I Have Enough?

Making the change from saver to spender is a financial and mental hurdle, especially after 30 or 40 years of working hard and choosing to pay yourself first. There is no magic switch to flip to make this transition easy. However, creating a spend-down plan and paycheck replacement strategy will help you map out your path.

The spend-down plan is a piece of your overall financial plan designed to help you spend your assets in retirement and leave a legacy as tax efficiently as possible. Spend-down is the equivalent of the two-minute drill in football – where you have the lead and the ball. It outlines how you keep the ball in your possession, not run out of money while running out the clock, and win the game. Your paycheck replacement strategy is more like the plays you decide to call – that is, which source of income you use to cover your expenses in retirement.

The first question to answer before officially jumping into retirement is whether you have enough. What does your lifestyle cost? What are your sources of income? An unbiased financial advisor with an emphasis on planning can help run the numbers and discuss outcomes. If your probability of success is below your comfort level, you can reduce planned spending in retirement, work a few more years, or take on a passion project. Time is your friend in investing. The more you can delay taking money out of your portfolio, the more time it has to grow.

While more time in the workforce might not exactly line up with your initial retirement dreams, setting yourself up for a secure retirement you can enjoy remains a more than worthy goal. If, on the other hand, your probability of a successful retirement is high enough, you could look at your stretch goals and see if adding one or two of those is in the cards.

Once you are comfortable with your overall plan, the next step is to maximize your outcomes by minimizing taxes over your lifetime.

Paycheck Replacement Strategy: Cash Flow Planning

Accumulating assets is like building a ship in a bottle. Spending those assets is getting the ship out of the bottle without breaking it. Just as when you were building up your net worth, spending in retirement ebbs and flows, and tapping various income sources comes with different tax consequences. As a result, planning ahead to coordinate your income becomes vital.

While you may no longer receive a paycheck every two weeks, you still have sources of income that create taxes, like capital gains, IRA distributions, and Social Security to name a few. Social Security, required minimum distributions (RMDs), and pensions (if you are luckily enough to have one) are forced income. If you need additional dollars after those income buckets, look at lower-tax sources and weigh them against taking additional dollars from IRAs. While taking funds from a source like an IRA may result in higher income in the current year, it could also work to reduce the amount of wealth lost over a lifetime.

Often, the first few years of retirement come with increased spending on travel and leisure; maybe this accompanies a newfound sense of freedom. There may also be a big purchase or two, like a second home or an all-family vacation. Later in retirement, spending usually increases again, this time because of medical expenses. Given that spending is not consistent each year, having a plan for cash flow is important, especially if your income sources do not cover the full cost of retirement. For higher-spending years when your retirement income does not cover your expenses, the following income planning items may help you maximize the odds of good outcomes.

Determine lowest-tax-cost options for funding your lifestyle. RMDs are forced income at age 72. Take this money first. Review your taxable accounts for assets with the lowest appreciation and that are long term. Perhaps strategically withdrawing money from your Roth IRA will allow you to stay in a certain tax bracket. If you retire before age 72, looking to withdraw money from your traditional IRAs when income is low can reduce future RMDs and help you avoid a potentially higher tax bracket later in life.

Timing is critical. Planning for the big expenses by saving cash flow allows you to have money on hand when needed. If you are planning a big purchase a few years out, not reinvesting dividends or interest payments, reducing spending, or selling some appreciated assets to fill up a tax bracket can offer you more flexibly when making the purchase. Without planning ahead, you could lose more wealth to taxes if additional income generated to fund the purchase drives you into a higher tax bracket.

Look to utilize lower tax brackets in years where income is down. For example, if your income will decrease enough to take you below your normal tax bracket this year or for the next few years, consider taking out as much money as you can at that lower tax bracket without actually going over it. This allows you to withdraw funds now for future use at a lower tax bracket than you would be in later years. This could be a great time for Roth conversions, resetting basis on positions in taxable accounts, or taking additional IRA distributions.

Look to pay off high-interest-rate debt, and potentially your mortgage, before you retire. Each dollar used to pay off debt is a guaranteed return at the rate of the interest. Think of it this way: If you have debt with an interest rate of 10%, every additional dollar that pays down the balance earns a 10% return. Also, because debt is an obligation, lowering or paying off debt permits you more freedom in determining your monthly cash flows.

Cash is the most expensive way to give money. Creating a plan to donate money to charity in a tax-efficient manner helps reduce taxes without penalizing the receiving organization. If you are selling a business or will have higher taxes for a few years prior to retiring, look to pre-fund a donor advised fund (DAF) to cover your giving while in retirement. Consider donating enough to meet your charitable goals through age 72, when RMDs start.

At 72, you can use a qualified charitable deduction (QCD) to gift directly to charities, reducing your taxable income and providing funding to the cause of your choice. This route reduces income whereas a gift to a DAF is a below-the-line deduction.

Running the numbers and looking at more than just this year are the keys to success when planning a cash flow and tax minimization strategy for retirement. Doing so will help you build for future goals off a strong foundation and keep your financial plan from easily breaking at the first sign of stress.

This article originally appeared February 3 on

The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Partners®. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice. Individuals should speak with qualified professionals based upon their individual circumstances. The analysis contained in this article may be based upon third-party information and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed.

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© 2021 Buckingham Strategic Partners®

March 5, 2021


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