How to Pay Yourself

Many retired people try to live on their “cash flow.” That usually means Social Security, pension plan payments, IRA required minimum distributions and perhaps annuity distributions. That is usually not everything.

Many retired people have savings in some form, i.e. bank or money market accounts, and possibly bonds and stock market investments. Many retired people, for some reason, do not want to or like to withdraw the income from their investments. They should. And possibly many should also withdraw some principal. Here is a plan to consider.

• If you are retired and your cash flow from present sources is sufficient to allow you to comfortably maintain your lifestyle permitting you to do everything you want to do without worrying if you will “go broke” or run out of money and without holding back on added expenditures that would make your life a little more comfortable, then good for. However, if you are not in that enviable position, then continue reading.
• Start by looking at your expenses and would be expenses and would-like-to-spend expenses. Be generous and dream a little. Add it up and get an annual total. Do not forget to include your income taxes.
• Add up all of your present cash flow and get an annual total.
• Next, add up all of your annual interest and dividend income that is basically remaining in your accounts and not being touched. BTW you can look at your Form 1099 interest and dividend statements for that total income. Alternatively, you can look on page one of your tax return for those amounts.
• Total your cash flow and investment income that remains in your accounts.
• Subtract your total expenses and want-to-spend amounts.
• If your income is greater than the expense items but less than your present cash flow then I suggest you increase your cash flow by making monthly withdrawals of up to about 80 percent of your investment interest and dividends. Pay yourself your earnings. To make it easy, arrange with the bank and/or broker to make automatic monthly deposits to your checking account. Pay yourself!
• If the increased cash flow is less than the expenses, then you need to review your expenses, and also consider making withdrawals of all of your interest and dividend and if necessary some principal.
• Withdrawing principal is a serious matter and depends on myriad factors. Further, it is closely aligned to your age. It might not be prudent for someone age 60 to start principal withdrawals and it might be equally imprudent for someone age 90 to hold off making needed withdrawals. This is something that needs careful analysis and should be considered with a financial advisor.
• Cash flow sources for those with inadequate cash flow could be immediate annuities or reverse mortgages. These should not be first or second choices, but should definitely be considered for those that are cash flow short.

Many retired people hold off withdrawing from principal and also the interest and dividends because they want to leave something for their kids or grandchildren. Well, what they accumulated should be for their financial security in their later years, not for bequests. If they were so concerned about leaving money to their heirs, then they should have purchased life insurance early on…and not forgoing a comfortable life for themselves now.

Your cash flow needs to consider your investment income and possibly some reduction of principal. Work it out! But, make sure you pay yourself.

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