Cash Flow in Retirement

Written by Marcy Ages, Senior Consultant & Certified Professional Consultant on Aging, B.A, CIM, CFP, CPCA, CLU
June 4, 2013

Do you know how you’re going to manage your cash flow in retirement? Will you use the 4 percent rule to dictate how much income you should take from your portfolio? If you haven’t heard about it already, the 4 percent rule states that in retirement if you withdraw 4.5 percent from your portfolio every year, adjusted for inflation, your assets will be depleted after 30 years. Recently, there have been many articles disputing this fact as rates of return are much lower now than the 8 percent that was used in the original calculation.

Many retired investors have chosen to build portfolios that consist of “good quality” dividend paying stocks and they plan to live off the dividends. Although this plan has merit you would need a large amount of capital to produce enough income to cover your expenses. In addition, your capital will not be protected in the event of a market downturn. After all, dividend paying stocks were not immune to the crash of 2008.

Regardless of which income producing method you choose to use you should first take a look at the components and details of your retirement income and expenses. Here are some questions you might want to ask yourself. Will you receive a company pension? Is it indexed and if it is by how much? Will your Old Age Security be clawed back? Should you take your CPP sooner or later? Do you have more money in registered assets than non registered assets? What are the tax implications for you? Will you have eligible pension income that can be split with a spouse who has less income?

And then there are your expenses in retirement. Have you been keeping track of your expenses prior to retirement? Do you know where you spend the majority of your money? Do you know which expenses will disappear after you retire and which ones will increase? Will you want to travel more? Will you need to spend more money on health care at a later date? And will you want to replace your car with a new one every five years?

If you want to leave an estate for your children or a legacy to a charity then you will not be able to spend all of your capital. This will affect your withdrawal rate quite a bit and you will have to adjust your spending to match the income from your portfolio.

So as you approach retirement make sure to cover all of your bases when it comes to your income and expenses. Determine the optimal amount of income to cover your expenses and monitor your cash flow and portfolio on a regular basis.

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These articles are for general informational purposes only. Please obtain professional advice before taking any action based on this information. No endorsement or approval of any third parties or their advice, information, products or services should be implied by any references to third parties contained in any article. Trademarks cited in these articles are the respective properties of their owners.

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