Key Planning Considerations for Cash Flow in Retirement

By Jimmy J. Williams, CPA/PFS, CFP

Editor: Theodore J. Sarenski, CPA/PFS, CFP, AEP

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 column 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 Ali,” 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.

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 concern of market volatility, most retirees move their portfolios into fixed-income investments. They think they have beaten the volatility game, but their statements reflect a much smaller return, and they have less money to spend on necessities.

A practitioner must evaluate clients’ risk tolerance to determine whether they can withstand market volatility in exchange for the possibility of a higher rate of return (including total return) on their portfolios. Nonfinancial factors play a larger role in clients’ allocation of their portfolio during retirement than when they were working full time. Clients may have to adjust their thinking about risk as they realize that they have no other means of income during retirement. The current market environment has required retirees to accept greater risk to achieve baseline returns.

Also, many individuals are countering the low-return environment by working longer. Many retirees have discovered second careers in retirement. However, this may not be an option for individuals who are in poor health.

Funding: Financial education is the key to a successful retirement plan. Too many individuals wait until it is far too late to save for retirement. Financial planning is about the journey, not the destination. Many employers provide pretax retirement plan deferrals. Benefits are accumulated over a long career and spent during retirement. Too many retirees lament that they failed to start saving for retirement much earlier.

Consistent contributions to a retirement account during a 40-year career may yield a much greater retirement “nest egg” than periodic lump-sum contributions. This is because the savings will compound longer during the accumulation years, during which one can take advantage of dollar-cost averaging and other long-term strategies.

One strategy used by married couples who both work is saving one spouse’s salary and paying for living expenses with the other’s salary. Its success depends upon many factors: lifestyle, job security, potential for increase in salary during the career, etc. If clients can tame the desire for instant gratification, they will have greater success in saving for retirement. Discipline is the key.

Spending policy (lifestyle): Many individuals retire with the mindset that their spending will continue in the same manner as before retirement. To accomplish this goal, a retiree must work diligently to accumulate income-generating assets (i.e., real estate, oil and gas mineral interests, dividend-paying stocks, preferred stocks, etc.).

A budget is a must during retirement. The costs of medical care, pharmaceuticals, transportation, housing, and food will not stop rising just because investments are no longer yielding a 6% return. Retirees must always be cognizant of the cost of living.

Most retirees approach retirement with two goals: to accumulate enough money for a comfortable retirement and to leave some assets to the next generation or a favorite charity. However, unforeseen obstacles often arise. Too often, retired parents must assist adult children who experience economic dislocation due to unemployment and/or high costs of housing and other living expenses. Home foreclosures have forced many individuals into the uncomfortable position of asking parents for assistance. Depending upon the availability of room within the home, some retirees have even had children and grandchildren move in with them. A retiree’s lifestyle would definitely experience some spending adjustments in this case.

Longevity: This risk is defined as living longer than one planned. The longer a client anticipates living, the more aggressively he or she needs to save for retirement.

Americans are living longer now, on average, than at any time in our nation’s history. This is both a blessing and a curse. For many, the cost of nursing home care, extended home-health care, and medical needs will be substantial drains on retirement income and assets. Individuals whose planning fails to give due consideration to longevity may significantly underfund their retirement.

When developing a model to analyze the distribution range for retirement, it is a good idea to estimate a much greater age than anticipated. Many individuals forecast through age 85 and believe they are in good shape with their finances. However, as medical care improves, longevity will also increase. A longer life, coupled with increased costs of living, spells the need for a much larger portfolio than most will have accumulated.

Crucial Questions

Practitioners should ask clients the following questions (in addition to their standard questionnaire) when helping them plan for retirement:

  • At what age did your ancestors die?
  • What industry did you spend the majority of your career in?
  • What would be a typical year in retirement for you?
  • How well are your children saving for retirement or emergencies?
  • How is your current health?
  • What is your philosophy on retirement?
  • What do you own, other than your portfolio, that creates cash flow?

There are far more qualitative factors to consider about an individual for retirement planning. Financial planning professionals should think outside the box of the account statements and balance sheets to fully inform, educate, and assist clients in experiencing a successful retirement.


Registered principal securities offered through Cambridge Investment Research, Inc., a broker/dealer, member FINRA/SIPC. Investment adviser representative Compass Capital Management, LLC, a Registered Investment Advisor. Cambridge and Compass Capital Management, LLC, are not affiliated.




Theodore J. Sarenski is president and CEO of Blue Ocean Strategic Capital LLC in Syracuse, N.Y. Jimmy J. Williams is president and CEO of Compass Capital Management LLC in McAlester, Okla. For more information about this column, contact Mr. Williams at

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