New Year, New Plan.
It's that time of year again - time to think about what's on your financial bucket list and work on putting a plan in place. Have you thought about your IRA contributions? Did you know that you have until April to make tax deductible contributions to your IRA? What other financial tips could impact your 2020 planning?
Whether your retirement is just around the corner or years away, ensuring your preparations are in order can be the centerpiece of an effective retirement strategy.
It’s important to first understand the principle of cash flow. Cash flow is the net amount of cash moving into and out of your accounts at any given time. The key word here is “time.” Cash flow can be best understood through the lens of a given time frame.
Keeping a close eye on your cash flow may provide you with a better understanding of your financial flexibility. The biggest balancing act retirees face is “money in” versus “money out.” Knowing this metric is central to building a strong retirement strategy.
There are 4 main types of cash flow to consider when creating a retirement strategy: the interest your accounts accrue, the dividends you may receive, the capital gains you may receive from the sale of an investment or property, and finally your original investment.
Step 1: Identify Your Retirement Vehicles
If you’ve been saving and contributing to your retirement funds over the years, way to go! You may find it a helpful first step to identify and evaluate the strength of your savings from those years. Gathering this information can take a bit of effort, but it’s an important undertaking. The list below is a good place to start.
There are 4 general sources of retirement income in retirement: Social Security, Personal Savings and Investments, Retirement Accounts, & Continued Employment.
Step 2: Estimate Your Costs
With your income sources in mind, it’s time to think about expenses. Knowing how much you expect to spend in retirement is crucial to establishing a strategy that works for you.
First, take a look at your current annual income. In general, retirees spend about 80% of their current income per year in retirement, so if your estimated pre-retirement income is a hypothetical $100,000 a year, you can plan on spending about $80,000 annually in retirement1.
Next, consider the factors that will come into play once you retire. Things like changes in your lifestyle. Will you travel more? Take up new hobbies that require extra funds? Remember to factor in your anticipated medical care costs.
Step 3: Time for Some Math
Now, you’re going to compare your estimated costs against your scheduled retirement disbursements. At this point, you may come to the realization that your cash flow is less than your anticipated retirement costs. While it can be unsettling, this is valuable information that you can use to modify your strategy, with the help of your adviser. As always, we are available to help or answer any questions you may have.
Together, we can work toward a cash flow strategy that can last well into retirement and beyond.
Contact Skylight today by calling 216.592.7315 or emailing CFCUteam@skylightfg.com.
Adapted from Platinum Advisor Strategies
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Century Federal Credit Union is not a subsidiary or affiliate of MML Investors Services, or its affiliated companies.
1Fidelity.com, 2019 https://www.fidelity.com/viewpoints/retirement/spending-in-retirement