Retirement – 3 Sources of Cash Flow

About that 3^rd rule – Cash Flow Allocation…

Most people, indeed most financial advisors, put a lot of emphasis on “Asset Allocation”; that is, where do your assets sit on your Balance Sheet?  Are they invested in stocks or bonds?  Are they based here in the US, or do you hold foreign investments?  All of these questions, and many others about asset allocation are important.  They just are not as important as cash flow allocation.  After all, if you’ve been reading our newsletters, commentaries, and blogs for any length of time, you know that we believe cash flow is the more important financial resource that you will ever have.  How you manage it, therefore, is your biggest financial responsibility.

Ideally, you could create a balance three sources of cash flow:

1. Guaranteed income – there are basically 3 sources of guaranteed income (ie income that you can count on, guaranteed, for your entire life).  These are:
   1. Social Security
   2. Pensions
   3. Annuities
2. Variable income – this category would include all of the investment income that we mentioned earlier.  While some folks may use real estate and business interests to generate variable income, most others will generate this from:
   1. Distributions from retirement accounts
   2. Withdrawals from non-retirement investments
   3. Interest, dividends, and capital gains income from those same non-retirement investments
      1. Use variable income sources to fill the gap between your expenses and your guaranteed income; do this only after positive years in the financial markets.
3. True liquidity – this would include accounts that are not correlated to the performance of your variable income sources, and which are guaranteed to never decline due to market conditions; this category would include:
   1. Savings/checking accounts
   2. Money markets
   3. CDs
   4. Cash value of certain types of guaranteed life insurance
      1. Use your true liquidity to cover the gap between your expenses and your guaranteed income when the financial markets are not cooperating and your variable accounts have lost value; having sufficient true liquidity available will allow you to avoid the “double whammy” of taking withdrawals from accounts that have lost value.

There’s a lot to think about here, and creating this structure isn’t something that should be done the moment you retire.  Ideally, you’ll start allocating your financial resources far enough in advance so this structure is ready to go for you, allowing for a smooth financial transition from your career to your retirement.

Not sure if your headed in the direction on these items?  Reach out to us…we can help you gauge your Retirement Readiness.

Annuity guarantees are backed exclusively by the strength and claims paying ability of the issuing insurance company. 

The primary feature of whole life insurance is the death benefit.  All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.