Personal financial planning: key planning considerations for cash flow in retirement.

• Author: Williams, Jimmy J.

ASSURING SUFFICIENT CASH FLOW DURING retirement is a critical planning consideration. Without adequate cash flow, retirees could suffer more than monetary losses (i.e., depression, sleep deprivation, malnutrition, etc.). This article addresses various factors that affect cash flow for retirees in the current economic climate.

Former heavyweight boxing champion George Foreman once said, "The question isn't at what age I want to retire, it's at what income" (Rhoden, "Tuning Up for Mi," Ebony, p. 68 (March 1976)). There is much truth in Foreman's statement. Retirees have explored investment options, distribution techniques, commodity investing, real estate "flipping," and so on. Many of those individuals are seeking a strategy on which they can rely. Simply put, retirees possess one enormous fear: that they will run out of money before they die.

Risks Affecting Cash Flow During Retirement

Low-return environment: Currently, fixed-rate investments (i.e., bonds, certificates of deposit, etc.) are providing lower returns than in recent years and much lower than in previous decades. Consequently, retirees must start with substantially more principal or lower their expectations for their fixed-rate investments' return.

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Funding: An obvious risk is a lack of proper funding before retirement. Many individuals have saved less than $50,000 for retirement. Overdependence on Social Security and other government programs has left many individuals ill prepared for declining health and rising costs.

Spending policy (lifestyle): Sustainable withdrawal rates cannot remain constant in the current economy. Flexibility is the key to success in how long a portfolio supports the retiree. Many individuals have subscribed to the rule of thumb that "earning 5% and distributing 4% will ensure that I don't deplete my principal." The inherent problem with this approach is that the investment might not earn enough and expenses might not remain at their present levels.

Longevity: On average, men and women are living longer. Medical technology and better care have extended the lives of retirees. Some individuals will spend as many years in retirement as they did working. The risk of outliving retirement savings is truly a problem.

Strategies to Address the Risks

Low-return environment: Retirees may not be able to move the markets to better performance, but with a little planning, they may be able to realize additional cash flow. To address their...