Cash flow is king when planning for retirement

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Cash flow, or looking at money going in and out, may be the most important personal financial metric.

Those who can pay their bills are good to go. This is especially true for retirement planning when income sources are constrained and new sources of income are unlikely to materialize.

As advisers, we often focus on the money in side of cash flow, that is retirement income. We feel this is our value-add.

But before worrying about bond yields or even thinking about an investment strategy, clients and planners should thoroughly evaluate the target and aim of cash flow. That is expenses or the money out side of the ledger.

Don’t skip over a thorough review of a client’s estimated retirement expense flow.
Although this exercise isn’t sexy and may be tedious, it can be one of the most revealing and beneficial services an adviser can perform for clients.

Knowledge is power. To know thyself was such an important principle that this adage was inscribed on the Temple of Apollo in Ancient Greece.

Reviewing expenses empowers clients with information to make informed, realistic decisions.

Advisers need to break the emotional logjam as clients can get stuck in financial paralysis. Symptoms may include unopened bills or a refusal to even vaguely think about their retirement financial prospects. Looking squarely at realistic expenses immediately reduces some of the fear. It takes finances out of the shadows and into the light.

A known fear is less intimidating than an imagined, uninformed worry.
The expense process also helps advisers. It often provides meaningful insight into clients’ attitudes and values and can also stimulate productive discussions.

Here are some suggestions to help advisers help clients navigate this sensitive and essential exercise.

*A cash flow review isn’t budgeting. It is a process of clarity and honesty. Advisers don’t have to prod clients to spend differently. Advisers’ job is to simply help them really see all their spending. Avoid being judgmental. They aren’t paying to hear that what they are doing is wrong. Let knowledge set clients free.

*Be realistic. Health care is a huge expense, for example. Barring a more detailed health assessment, use at least $800 a month, inflation-adjusted, for a typical 65-year-old couple. This will roughly cover Medicare B payments, Medigap premiums and Medicare D (drug coverage) payments.

*Get comprehensive. Beyond the standard expenses, make sure to allot expenses for items such as continuing home repairs, occasional renovations and automobile replacement costs.

*Don’t get lost in the weeds. It is more important to capture all the large expenses than worry about recording precise numbers. It isn’t necessary for a client to record the past year’s expenses down to the penny.

This story is part of a 30-30 series on tools and strategies for retirement.

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