Cash flow, or looking at money going in and out, may be the most important personal financial metric. Those who can pay their bills are good to go. This is especially true for retirement planning when income sources are constrained and new sources of income are unlikely to materialize.
A lot of attention is focused on the money-in side of cash flow, which is retirement income. But before worrying about when to take Social Security or even thinking about an investment strategy, an individual should thoroughly evaluate the money-out side of cash flow, which is what the income is supposed to be paying for, your expenses.
Don’t skip over a thorough review of your estimated retirement expense flow. Although this exercise isn’t sexy and may be tedious, it can be one of the most revealing and helpful exercises towards your retirement security.
Knowledge is power. Reviewing expenses empowers you with information to make informed, realistic decisions. Moreover, looking squarely at realistic expenses immediately reduces some of the fear. It takes finances out of the shadows and into the light.
The expense process also helps us advisers. It often provides meaningful insight into our clients’ attitudes and values and can also stimulate productive discussions.
Here are some suggestions to help navigate this sensitive and essential exercise.
*A cash flow review isn’t budgeting. It is a process of clarity and honesty. View the review simply as a way to help you really see all your spending.
*Be realistic. Health care is a huge expense in retirement, for example. Barring a more detailed health assessment, use a realistic number to roughly cover Medicare B payments, Medigap premiums, Medicare D (drug coverage) payments and out-of-pocket expenses (dental, vision, co-payments, etc.). We use ~$500/month per person (so for a married couple that would be ~$1,000/month), inflation-adjusted.
*Get comprehensive. Beyond the standard expenses, make sure to allot expenses for items such as continuing home repairs, occasional renovations and automobile replacement costs.
*Don’t get lost in the weeds. It is more important to capture all the large expenses than worry about recording precise numbers. It isn’t necessary for you to record the past year’s expenses down to the penny.