Financial Perspectives: Retirement cash flow planning


Beginning to plan for retirement should begin when you are in your 20s, as many academic studies have shown that the earlier you start, the more likely you are to achieve your savings goal.

Those on the other end of the spectrum (in the mid 50s to early 60s) need to begin thinking about how they will manage their cash flow (amount of money coming in and out) once they are in retirement. One of the biggest drags on the average household’s cash flow is debt – mortgage, credit cards, car payments, etc.  Those approaching retirement must address their debt effectively to make sure they do not wind up cash poor in retirement.

Credit card debt is the worst type of debt that one can have.  High interest rates and a slew of potential fees can amount to paying 25 percent to 30 percent more on things you are purchasing on your cards (assuming you are not paying them off right away). Retirees with credit card debt are worse off since their incomes are less flexible than working folks who may be able to work some overtime or work an extra shift to help pay down the debt. I always recommend to clients that this type of debt be paid as quickly as possible.

Car payments are another thorn in your financial side. Many often feel the need to drive new cars, but the reality is that many of our existing cars can fixed at a fraction of the monthly payment of a new car. Cars are depreciating assets – meaning they begin lose value the minute you drive it off the lot.  If your car is truly on its last leg, consider purchasing a used car rather than buying a new one. There are many companies, such as CarSense and AutoLenders, where you can find a late model car at a price much less than you would pay for a new one. In other instances, you can find cars being sold privately that are even cheaper.

Going into retirement without this type of debt can be very important for prospective retirees. I cannot tell you how many folks I talk with who want to run out and buy a new car just as they are retiring. In many cases they have gone five to 10 years without a car payment and just as they are about to see a permanent reduction to their income, they decide to commit to a large monthly payment and higher car insurance rates (something that is often overlooked).

Mortgage debt is often classified as “good debt” since the asset that you are paying on – your home – will likely increase in value over time. In evaluating this debt you need to be cognizant of the remaining term on your mortgage and the current interest rate you are paying. If your rate is well above (1 percent to 2 percent) the current rate for a comparable 15- or 30-year loan, it could make sense to refinance the loan to help your cash flow position – especially if your balance is high.  If you balance is low, you have a couple options to consider.

First, you could take some of your savings and pay off the mortgage, which will free up your cash flow. Second, you could consider making a large payment against your mortgage and then re-amortize the mortgage over the remaining years, which will lower your payment and not chew up all your savings. One method here is not necessarily better than the other, as there are a number of factors you need to be thinking about. For example, if you are a high income earner, the mortgage interest deduction could actually help to lower your tax bracket.  Another consideration is what impact will the depletion of your savings have on the other aspects of your life?  Was this money going to be needed for other reasons?

There are many other items that play into the retirement cash flow equation, but debt management is probably the most important.  Hopefully we have given you some food for thought as you consider your own personal situation.  As always, there are numerous tools available on the web to help in the evaluation process, or if you prefer, you can engage the help of a qualified professional to help you.

Jim Heisler is a Certified Financial Planner with Family Wealth Services in Holmesburg. You can read all his Financial Perspective columns here.

Registered Representative, Securities offered through Cambridge Investment Research, Inc., A Broker/Dealer, Member FINRA/SIPC and Investment Advisor Representative, Cambridge Investment Research Advisors, Inc. a Registered Investment Advisor.  Family Wealth Services, LLC and Cambridge are not affiliated.

Jim Heisler, CFP®, CDFA™, CASL™ Family Wealth Services, LLC is located at 8275 Frankford Ave. (215-332-4968)

The views expressed are not necessarily those of Cambridge and should not be construed as an offer to buy or sell any security. These situations are hypothetical in nature and do not represent a specific client.

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