Regardless of the size of your nest egg, retirement will bring in a lot of changes in your financial life. Just as the sources of your income can shift, your expenses can shift too. Your financial priorities also change when you transition from saving for retirement to generating income from your retirement savings.
In this article, we’ll talk about how to manage your cash flow post-retirement.
1. Create a budget and a wish list.
This will help you determine how much monthly income you’ll need to live the retirement life you’d always dreamt of.
2. Categorize your retirement resources.
Create a list of all your retirement income resources into 3 broad categories: retirement accounts, non-retirement accounts, and cash reserves.
- Create sub-categories for each of the above categories with regard to their taxation and withdrawal rules. For example, the cash reserves category may include quickly accessible, non-taxable accounts, such as money market funds, savings, checking, etc.
The non-retirement accounts category may include personally owned, non-retirement investment accounts such as mutual funds, stocks, bonds CDs, ETFs, etc. which may or may not have tax liabilities when you sell them.
The retirement account category may include retirement savings plans such as 401(k) , 403(b), IRA, and Roth IRAs. These accounts are taxable, with the exception of Roth IRA. 401k and IRA also comes with an option of opting for a Self Directed IRA and Self Directed 401k. You need to choose one that suits your needs the best.
- You can further categorize your retirement resources based on the account types as required minimum distribution (RMD) rules apply differently to different types of retirement accounts.
Most retirement saving plans require you to begin taking distributions when you turn 70 ½, but there are exceptions. An example of an exception: You can take a total RMD for your IRAs from just one IRA.
However, other types of retirement plans make it compulsory for you to take RMD from each individual plan. That said, the RMD rules do not apply to your Roth IRA; however, an Inherited Roth IRA is subject to RMD rules.
3. Leverage technology.
Learn to manage your retirement income by taking advantage of smartphone and web-based technology. You can effectively manage your day-to-day financial transactions from anywhere without worrying about paying your bills, no matter where you are.
4. Consider a bucket approach to managing cash.
There could be a time in your retirement when you may be generating more income than you are actually spending. This can create an excess cash flow, which you can consider investing to meet your short-term liquidity needs as well as long-term income and growth. Before you invest the excess cash, ensure that you make liquidity (how quickly you can access funds) a central consideration.
You can consider a bucket cash approach to ensure your shorter-term and longer-term needs are met. Categorize your cash into 3 buckets: living expenses, short-term goals, and emergencies.
- Living expense: Keep your cash or its equivalent in high liquid, low-risk investments, such as short-term Treasury bills or money market funds.
- Short-term savings goals: Invest in low-risk vehicles, such as FDIC-insured CDs and/or Treasury bonds that mature on a date when you need the money.
- Emergencies: Consider saving at least 3 to 6 months of living expenses for emergencies. Don’t keep a large amount of liquid cash lying in your bank accounts. Invest in a mix of liquid (money market funds) and less liquid accounts (CDs and bonds).
5. Generate an inflation-adjusted income.
Inflation is going to impact your income and wealth. The income that would have been enough to take care of lifestyle and your food today will not be able to cover the same expenses next year. So, have a plan to beat inflation so that you can live your life comfortably in your retirement. Consider adjusting your income against inflation of 7-8%.
It’s worth paying close attention to your cash flow. The tips mentioned above can help. Make sure you budget carefully, keep track of income and expenses, and tweak your retirement strategy as and when required to accommodate changes in income and expenses.
Author Bio: Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He regularly writes for his own blog of Self Directed Retirement Plans and as a guest blogger to many sites in the niche of finance. If you need help and guidance with traditional or alternative investments, email him at firstname.lastname@example.org or visit www.sdretirementplans.com.