When one retires, the focus should shift to cash flow and not just the income from the assets. Experts share their views.
Retirees think: “How can I earn income with my assets?”
How they should think: “How can I fund my cash flows with the assets I have?”
There's a mindset, even in retirement, to invest in assets that have a yield. Stocks that pay a dividend, for example. But thinking of income detracts from the concept of retirement. You've spent your entire working life building up a volume of assets that you can then use to retire on. So, why wouldn't you draw down on some of that capital? Why are you only living off the money that your money makes?
In the accumulation phase, almost all individuals have the same goal: accumulate as much wealth as possible, keeping with the risk level that I can cope with.
In deaccumulation or in retirement, we all become individuals. Different lifestyle aspirations. Different ideas about retirement. Different spending patterns. Different bequest motives. Different life expectancies. Different timings of cash flows. You don't know when you're going to need cash flows for major events like healthcare related events.
- Jody Fitzgerald, Morningstar Investment Management
Before being a financial adviser, I saw a lot of marketing for financial advice focused on growing investments. But when I got to a firm, I realized that the primary job was not really growth and accumulation, it was actually preservation.
Specially in retirement planning, where one of your primary jobs is not just to help people manage their investments, but also to encourage them to spend all that money they’ve saved for decades.
Flipping the switch from accumulation to distribution is such a huge significant mental hurdle. It’s not even really financial.
It surprised me that the financial-services industry was really focused on growing assets at a time where you should actually be looking at ways to support additional spending—assuming that the clients’ financial ecosystem aligns with that objective.
- Cody Garrett, U.S.-based certified financial planner who provides advice to do-it-yourself investors (DIYs)
As you shift from your working years into retirement, think about the changes and the expenses related to them.
What expenses are going away? Hopefully, all your debt would be cleared by the time you retire, so no more EMIs. The costs of commuting, lunches out, and work wardrobes will shrink drastically.
What expenses potentially are going to be added? This will largely depend upon what you want to do in retirement. For instance, if you do want to travel or you do have more discretionary type expenses because you have more free time.
That is why it helps to think about discretionary versus nondiscretionary. Nondiscretionary are things like rent, monthly society outgoing, insurance premiums, groceries, electricity bill, gas bill, wi-fi bill - things that keep the lights on, so to speak.
Taxes too. Generally speaking, you can expect your taxes to go down. But please do not assume that you will no longer be paying taxes. It all depends upon your income sources and how those income sources are taxed.
Discretionary-type expenses are the things that might be more leisure-type expenses, where you might have more flexibility depending upon what your goals are.
While it is important to determine what your spending rates are before retirement, your allocation for spending should be flexible. So should you find yourself in a financially tight spot, your plan of action can be to surgically cut back on discretionary-type expenses.
Have a spending target and then, flex around that.
- Maria Bruno, retirement specialist at Vanguard