How Diligent Cash Flow Management Can Help You Save For A Better Retirement

Many pre-retirees fear they could run out of wealth during their lifetime. But rather than focusing on how long your nest egg can last, it's far more productive to focus on managing your monthly cash flow in the present and actually writing down and reviewing what your expenses will be when it comes time to take the leap into retirement.

Getting your cash flow squared away can help manage peace of mind and has the potential to drastically increase your retirement income because it makes long-term goals more feasible through strategic savings plans.

Although it’s easier said than done, if you can manage your income and expenses to stay in the black every year, there is no need to fear going broke or not having enough savings for a comfortable retirement. By planning for the necessary financial adjustments needed to meet your short-term, intermediate and long-term goals, you can have full confidence in your ability to remain financially secure.

Cash flow and retirement income

Simply put, cash flow is the amount of tangible money you have coming in and going out each month. When this figure falls into the red, meaning you have spent more money than what you have brought in for the month, adjustments must be made to prevent a destructive drawdown of assets or over-indebtedness. When cash flow is adequately planned for, wealth can continue to grow while emergencies and unexpected expenses become far less problematic.

For the best cash flow management, we tell our clients it is wise to start planning a couple of years in advance of their retirement to ensure their saved assets support their desired retirement income. This is because once in retirement, your cash flow significantly changes and typically income from an employer comes to a halt.

Former employees are used to regular paychecks, and self-employed individuals must adjust to a fixed income. In any retirement plan, having several sources of income provides security, although it takes more time and planning to manage.

It is beneficial to start planning your cash flow management in increments of short-term, intermediate and long-term goals so that you are able to keep yourself better on track through monthly, quarterly or yearly checkpoints. This way, you can realistically see if the cash flow planning path you are on is effective for you and one that will benefit you in the long run.

Additionally, there are various technology and software available to help you track expenses just as well as simple spreadsheets to take first steps in realizing what you are actually spending your money on.

Managing retirement income

Other common retirement income sources include pensions, Social Security, real estate investments, retirement plan distributions and part-time employment. With such a variety of income sources, it is important to keep your cash flow management as organized as possible.

Many pre-retirees and retirees have found that setting up direct deposit services make money management much easier. For those who are technically inclined or willing to learn, extensive budgeting and investment apps can simplify tracking spending, income and investments by allowing all aspects of your household's financial picture to be stored in one place.

Further, there are financial programs and apps that can be integrated into your ongoing financial plans that are created. These apps make it possible to engage in short to especially long-range planning with useful and sometimes eye-opening reports.

Something to also consider is that spending habits tend to change after retirement. As a result, many retirees choose to downsize their homes, freeing up cash flow for other things, such as travel.

Under current IRS rules, a single taxpayer can keep $250,000 of equity from a home sale tax-free, while a couple can keep $500,000. Living in primary residence for two out of three years can also deduct tax costs. These types of nuances in tax rules should absolutely be considered in cash flow planning, because they can make a massive difference in the amount of money you have available.

Planning a retirement budget with cash flow management may seem intimidating at first because there are many financial factors to consider. However, by taking the time to create a detailed and realistic plan for your golden years, you’re setting your future self up to feel less anxious about retirement. You’ll be able to focus on the aspects of life more precious than money, such as your spouse, grandkids, charities and other things you’d like to accomplish on your bucket list.

Essential cash flow management practices

• Reinvest excess cash. Through careful budgeting, you are likely to have spare cash at the end of the month. Consider setting up a sweep system, which automatically reinvests extra money.
• Check-ins are key. In order to ensure your cash flow management practices are working for you, check-in on your savings plan every so often. If you realize you need to make adjustments to your plan, it will save you money in the long run.
• Seek trusted financial advice. Financial planning professionals can help with a wide variety of important life decisions, helping create the right balance in your investment portfolio, attain the most cost-effective insurance solutions and generate the cash flow you need for a secure retirement.

Be prepared for anything

Knowing none of us can predict the future, we can plan for it in such a way that we are prepared for the inevitable changes in life.

Generating positive cash flow should always be a top priority when living today and planning for retirement. Knowing exactly what you can afford and seeing a surplus of cash each month helps make life a little more predictable, assured and can take away the stress of worrying about your finances.

Retirement can and should be a very fulfilling time of life. By being proactive and planning for positive cash flow, you can keep focused on the precious aspects of life money can't buy.

(Michael Lackwood is the managing director of NYC-based Spring Delta Asset Management.)