How Much You Need to Retire

Many people think in terms of how much they need to retire. I suggest that the amount you have is not as important as the cash flow you will have in retirement.

I’ve said it a million times. You do not spend assets; you spend cash flow. Actually, you can also spend assets, but if you spend too many, you won’t have them anymore, leading to a reduced cash flow.

When you plan for retirement, you need to plan to have adequate cash flow. The assets hopefully will be sufficient to provide you with the cash flow you need. From this point of view, there can be two situations that need consideration:

The situation with sufficient cash flow doesn’t need to be discussed now. So, let’s explore the situation where you will not have sufficient cash flow.

Cash flow is needed to spend on what you need to live on. It comes from numerous sources, depending on your situation. Some sources are Social Security, pensions and annuities. Your spending will cover your living expenses, vacations, entertainment and whatever else you need to do. For starters, some of your spending is discretionary and can be controlled. For example, if you find your cash flow will be short, you can probably reduce some of your spending for all or part of that. It is OK not to reduce your spending, but then do not fret that you have to cut into your assets.

Let’s look at how you invest your money. Generally, fixed-income investments provide higher cash flow than stock market investments. Sometimes a shift in some of these investments could provide the added cash flow you need. The shift comes at a change in your investment risk and growth potential. But, if cash flow is your major concern, you need to do what is necessary to get it balanced with your needs. Another way to increase cash flow is to put some money into an immediate annuity that will guarantee you a fixed cash flow for the rest of your life. Again, there is a tradeoff for this. You will lose the assets you put into the annuity. And another thing is a reverse mortgage. This will let you borrow against the value of your house, with the loan being repaid when the house is sold, either by you or your heirs. I can give you dozens of reasons for or against each of these, but when the main thing is sufficient cash flow, that needs to be made the main thing.

Another way to increase cash flow is to draw down assets. You would withdraw the amount needed to cover the shortfall. This reduces your assets which in turn will reduce your future cash flow. Depending on your situation and age, you might be better off buying an immediate annuity or a second mortgage. An example of how your age matters is that if you were 92 and had a ten-year life expectancy, you could start a withdrawal regime without much danger of running out of money before you die. However, if you are 72 and have a 30-year life expectancy, the drawdown could cause you to run out of money. This can be projected mathematically with assumptions for all the elements, but 30 years is a long time to hope that the expectations from the projections will keep you safe.

When planning for your financial security during retirement, always keep in mind that it’s not how much you have but how much your cash flow is.