Once the paycheck stops, most retirees wonder how to best meet their cash flow needs. Unless you have saved a tremendous amount of money, living on just dividends and interest could mean a lower life style than you desire, especially in this low interest rate environment. But even if interest rates eventually return to more “normal” levels, the days of “clipping coupons” is not likely to return. Part of the reason is because retirees are living so much longer, and need their portfolio to grow in excess of the inflation rate. And that means having some portion of their portfolio in equity-based investments, which generally don’t produce high levels of income.
So what is the best way to meet cash flow needs without sacrificing growth that you will need for the future? Typically, we set up a “safe” withdrawal rate based on in-depth projections and the client’s goals and needs. Then once we determine what and when the cash flow is needed, we set up a systematic withdrawal plan of the portfolio.
Sometimes it makes sense to tap into pensions and Social Security earlier in the retirement, and sometimes it makes sense to defer collecting these benefits. Answers can vary depending on expectations regarding health and longevity, current and future tax rates, the amount of cash flow needed now and in the future and the amount of deferral credits. But the answer is highly dependent on the individual’s unique needs and circumstances.
Later, when income is needed from the portfolio to augment these other cash flow sources, we decide whether they should come from taxable accounts first, or tax deferred or tax qualified accounts such as IRAs.
The “recipe” for each client’s retirement income plan is unique and customized, but in every case, it takes careful planning and consideration.