Assessing Your Retirement Cash Flow
Before getting to this point you should have done some serious thinking and reflecting on what you want your retirement to look like. You have a good estimate of how much money you will need for both your fixed expenses and the fun things you want to do and figured out approximately how much money you will receive from pensions and government benefits.
How do you stand?
1. Your guaranteed income will cover both your fixed and variable expenses.
This is certainly the ideal scenario. If this is you, you’re in very good shape. Congratulations, your retirement planning is largely done.
You now have the option of using your savings to:
• Increase your lifestyle spending – go on that round-the-world cruise.
• Help your family – contribute to university education costs or a down payment on a new home, fund start-up business costs.
• Give to charity or participate in a volunteer abroad program.
• Leave a legacy – leaving an inheritance may be important to you, or bequests to causes and institutions you’d like to support.
2. Your guaranteed income will cover at least your fixed expenses.
This is a good situation to be in.
Your investments will finance nice-to-have luxuries or provide a buffer against inflation.
It’s a good idea to plan to use a bigger portion of your money for travel, active hobbies, etc. in the early years of retirement when you will be the most active and healthy enough to enjoy them.
3. Your guaranteed income plus variable income from your investments will cover your fixed and variable expenses.
Try to figure out ways to cut costs as much as possible and leave some savings for emergencies. You can apply different scenarios and see how a bit of tweaking will change the situation.
You might want to consider using a portion of your investments to purchase an annuity to increase your guaranteed income and protect your future by ensuring your must-have needs will be well covered.
You can vary your nice-to-have expenses based on how your investments perform.
4. Your guaranteed and variable income will only cover your fixed expenses.
Eliminate any non-essential items and cut costs as much as possible, but you don’t want your retirement years to be all Brussels sprouts and no dessert.
You don’t have to completely give up your fun activities. See if you can modify your basics so you’ll have more to spend on travel, hobbies, or other entertainment.
If this is your situation you have several options available to you:
• Find new ways to cut your expenses both now and after you’re retired.
• Make a concerted effort to eliminate your debts.
• Delay your retirement by working a bit longer to help you increase both your retirement savings and pension benefits.
• Reconsider your bucket list.
• You might also consider working part-time in retirement to supplement your income.
The bottom line
Don’t underestimate your income needs during retirement, but don’t be too conservative in your spending projections. You want to ensure you have enough to live on without feeling deprived of anything important to you.
Do consider that, for most people, their spending tends to naturally decline as they age. The important exception to this trend is health-care costs, which often increase with age. Be sure to balance the present and the future.
The amount you need may be a lot lower than you think – especially as a couple.