Cash Flow Considerations

We had our quarterly call with our financial advisor this week, and the main topic of discussion was cash flow planning.  Obviously, the stock market has had its issues the last two years, so our earnings from investments have not been as good as hoped.  Some of our future retirement income will come from my Hilton pension and Social Security – but we are too young to draw from either of those yet.  Our immediately available cash is running low, and we need a strategy for replenishment.

This is an interesting planning challenge. Where will your retirement income come from, and will the source change over time? Since we stopped working before the normal retirement age, our income sources will definitely change at several stages and age points. Some sources will run dry, and others will kick in.

For the first two and a half years, we have used cash for our living expenses. Ron had the foresight not to tie up all our cash in long-term investments. Until now, any profit from investments has been reinvested and absolutely no principle has been converted to cash. Our financial advisor’s goal is for us not to touch principle until we are in our 70’s. For our needs in 2011, we are going to take some earnings from our tax-free municipal bond fund, and we’ll suspend reinvesting profit in that fund for now (starting in January).

One thing we discussed with our advisor was the optimum age for us to start claiming my Hilton pension and our Social Security. The earlier you start, the lower your monthly payout. But the longer you wait, the greater the risk that you won’t live long enough to collect what you paid into the system all those working years! Guessing your own life expectancy (based on your personal health, your lifestyle, and family history) is a weird exercise, but necessary for planning purposes.

There are tax implications to decisions about investing and retirement income. If you are not a scholar of the tax code, consider consulting with a tax planning professional. In some cases, the wrong decision can have big impact on your tax liability (e.g. cashing in an IRA before you are 59 and ½). You will also want to keep track of what changes politicians are considering, as they could adversely affect the health of your retirement fund. When/if the rules change, you may need to make adjustments in your money management plan.

Are you working on your retirement strategy? Planning for your retirement involves a lot more than building up your savings account. Lay the groundwork now with some solid analysis and decision-making to support your needs at all of the later stages of your life.