Investment strategy in retirement

Selecting The Right Investment Strategy in Retirement

In my last article, “Creating Your Retirement Plan,” I discussed how to take the first steps towards developing your retirement plan by analyzing your cash flow and tax planning strategy. We start with those areas to establish a long-term income strategy for retirement. Certainly, circumstances change and unforeseen events will force you to make adjustments, but your short-term financial decisions need to be consistent with your long-term strategy. Now that you know how much income you need to withdraw in upcoming years, the next step is to develop an investment strategy that is consistent with your needs.

When you structure your investment portfolio, the assets that will generate your income for the next 3-5 years should be invested in bonds, which have lower volatility than stocks. Since you’ll need to draw these funds out in a fairly short time frame, they need to be invested in safer asset classes. The rest of your portfolio should be comprised of stocks, which exhibit more volatility and are riskier than bonds, but typically provide higher returns in the long run. This will cover the long-term growth component of your portfolio and provide a hedge against inflation, which has averaged 2.79% from 1998 through 2018.

Asset Allocation

Portfolio diversification involves holding a variety of different types of investments with different characteristics and relationships to one another. This is accomplished through a process called asset allocation. First, you’ll select the appropriate percentage of bonds vs. stocks in your portfolio, then select the proper percentage of each asset class to invest in. The primary asset classes are:

  • Large Cap U.S. Stocks
  • Mid Cap U.S. Stocks
  • Small Cap U.S. Stocks
  • International Stocks
  • Emerging Market Stocks
  • Real Estate Stocks
  • Fixed Income (Bonds)

In addition to these primary asset classes, there are many sub-asset classes such as global bonds, international small cap and TIPS, just to name a few. Each asset class has its own unique set of characteristics and risks, which causes them to move in different directions at different rates and times. We measure the relationship between each asset class using a statistical formula called correlation by comparing the degree of simultaneous movement between two securities. Bonds have the lowest correlation with stocks, which is why the asset allocation process begins with determining the percentage of bonds and stocks in your portfolio and then to different asset classes (and sub-classes) having different correlations to each other, which leads to further diversification.

Asset allocation is the most important aspect in obtaining the best risk-adjusted return over time. If you invest all your funds in one asset class you are statistically more likely to either do really well or really poorly as the market moves up and down. By diversifying you’re more likely to have slower, but steadier growth and less risk. It’s like the old saying goes,  “Don’t put all your eggs in one basket!”

Active or Passive

The next component of establishing the proper investment strategy is to determine what types of investment vehicles you will use. This decision begins by determining whether you want to pursue an active or passive investment philosophy. Active management is predicated on the belief that a fund manager has the ability to forecast and time markets in an effort to outperform a benchmark or market index. Higher fees typically accompany these types of funds to compensate the fund manager and fund analysts, and cover higher trading costs due to higher turnover within the fund. Most of these fees are expressed as a percentage called an expense ratio. It’s extremely important to pay attention to expense ratios since they can range anywhere from .05% to 2.0%! Lower fees are typical of passive fund management, which is founded on years of academic research. This style of management is based on the belief that there is no benefit to timing markets and that it’s better to own a variety of indexed-type funds to gain market exposure. The benefit is lower fees, since a passively managed fund is attempting to track an index so there is little turnover of the portfolio, which also results in better tax-efficiency. Once you have selected your underlying investment philosophy, you will then need to determine which fund family/families you will use as the engine to your portfolio growth. There are literally thousands of fund families to choose from between mutual funds, index funds and exchange-traded funds (ETF’s).

Portfolio Management

Once your asset allocation has been established, it will need ongoing management since all the asset classes in your portfolio will constantly fluctuate, making rebalancing your portfolio extremely important. There are many types of different rebalancing strategies, but the two most commonly used methods are calendar rebalancing, which simply seeks to rebalance the portfolio at predetermined time periods such as once a year and tolerance-band rebalancing, which assigns percentage weightings for each asset class along with upper and lower limits that would trigger a rebalance of that asset class. For example, if you have determined that your ideal small cap weighting is 10%, your lower limit may be 8% with your upper limit being 12%. If the small cap asset class declines to an 8% weighting in the portfolio, that means that other asset classes would in turn be overweight, which would prompt you to sell the overweight positions and then purchase enough small cap exposure to bring you back up to your originally intended target of 10%. Another major benefit of this strategy is that you are typically buying low and selling high in the long run through a disciplined strategy that helps take emotions out of the process.

If you own taxable accounts, it’s important to ensure that you are being as tax-efficient as possible when making any transactions. In my previous article, Creating Your Retirement Plan,” I explained how capital losses in your portfolio can be used to offset capital gains. Tax loss harvesting is a strategy where you sell positions in your portfolio that are down to “harvest” the loss that you can use to offset capital gains. For example, if you buy a U.S. Large Cap Fund for $50,000 and the position declines in value to $40,000, most investors will just avoid looking at their statements with the confidence that the position will recover to positive territory in the long run. In a taxable account, those investors are completely missing out on a great opportunity to sell the position when it’s down, realize the $10,000 loss and simultaneously purchase another U.S. Large Cap Fund so they can still benefit from the recovery. You have now created your own tax shelter in a sense, since this loss can be used to offset any other capital gains in the current year. If there are no capital gains in the current year, then $3,000 of the loss can be used to offset ordinary income and the remaining balance of $7,000 will be carried forward indefinitely to be used in future years. With the ability to match losses to gains in future years, you now have an extremely effective tool to control capital gain taxes when you begin creating income in retirement.

In addition to tax loss harvesting, another strategy that plays a big role in tax-efficient investing is asset location. I’ve written about why it’s so important to consider the tax treatment of the accounts you withdraw from in retirement. Asset location involves placing asset classes in the accounts to optimize tax-efficient growth. As an example, let’s assume you have monies in taxable, tax-deferred and tax-free accounts and have decided on a 50/50 stock and bond allocation. Your tax-free accounts should hold the asset classes that have the highest risk and the highest expected return since you want to maximize growth that is exempt from taxes. Taxable accounts should seek to utilize capital gains tax rates by avoiding short-term taxable gains and any type of security that pays taxable interest to avoid generating ordinary income. Long-term capital gains and dividends from stocks are taxed at a maximum rate of 20%, but 15% for most investors. Lastly, your tax-deferred accounts should hold any securities that pay taxable interest and that can have lower expected long-term returns, such as bonds. This is because distributions from tax-deferred accounts are treated as ordinary income and taxed at your marginal tax rate.  While the implementation and maintenance of this strategy can prove difficult for most investors, it is certainly an important aspect of tax optimization within your investment portfolio.

Hopefully, you can see by now that the best investment strategy is the one that is consistent with your income and tax circumstances. However, most investors and financial advisors do not perform enough analysis around these areas of planning and typically start the retirement planning process by finding an investment product to meet their needs. This typically leads to investments in vehicles that may have higher expenses and aren’t consistent your retirement needs. There aren’t really any shortcuts with investing in the markets. It’s all about obtaining diversification by establishing the proper asset allocation for your investment strategy. Choosing the right low-cost investment vehicles and implementing the proper portfolio management techniques like tax-loss harvesting will provide you with the returns you need throughout retirement. To ensure you are following every step in the proper sequence, download your Free Retirement Checklist.

Creating your retirement plan

Creating Your Retirement Plan

Everyone has heard the old adage, “Failing to plan is planning to fail,” and when it comes to your retirement plan, this statement couldn’t be truer. Without having a properly formulated and well thought out retirement plan in place, you can lose thousands of dollars by selecting the wrong social security strategy, paying unnecessary taxes or having the wrong investment strategy as common examples. When assessing your retirement plan needs and your current action plan to get you there, you will quickly realize that all of these financial areas are interrelated and that one decision affects another. For example, if you decide to take your social security while working or before your full retirement age, your benefit can be reduced or be subject to taxation. If you don’t address large balances in retirement accounts, you will be forced to take large Required Minimum Distributions at age 70 1/2. When coupled with Social Security or pension benefits, many retirees today are experiencing paying the same or even higher taxes in retirement. These are just some examples of why you need to look at all these areas of your financial picture together. Your ultimate goal when for your retirement plan is to control taxes and unnecessary fees while maximizing your income to ensure you can spend as much as you would like during your lifetime and/or maximize your wealth transfer to your heirs. In this article, we discuss the first steps of our analysis – determining the proper cash flow and tax planning strategies to maximize your retirement plan income.

Cash Flow Planning

The first step towards analyzing your financial picture for your retirement plan will be a review of your personal balance sheet and income statement to start determining the best way to begin creating income. Starting with your personal income statement, you are going to add up your total annual inflows, which would be all your current sources of income. You will then subtract your total inflows from your outflows, which includes your living expenses, liabilities and taxes. If the difference is a positive number, then that means you have a surplus for the year. If you have a shortfall, you’ll want to take that number and divide it by your investable assets (cash + investment assets) to arrive at your withdrawal rate, expressed as a percentage. A generally accepted rule of thumb amongst financial planners is that this rate shouldn’t exceed 4%, but the truth is that looking at shorter time frames isn’t quite enough analysis. For example, your withdrawal rate could be higher earlier in your retirement plan if it’s a lower percentage later in retirement. This leads to the next step of our retirement plan, using cash flow projections from the current year through the end of retirement to determine strategies that will improve the overall picture.

Time to retire

By running multi-year cash flow projections like the example pictured above, you gain a much better understanding of what your income needs are throughout your retirement plan. One fixed income source that is relied upon by most Americans is Social Security. When reviewing your Social Security Benefit Statement, you’ll see your monthly benefit next to your full retirement age (FRA), which is age 67 for most retirees today. The earliest age you can take social security is age 62 and the latest you can delay it is age 70. It’s important to know that for every year you take it prior to your full retirement age, it gets permanently reduced after a grace period of one year. Conversely, your benefit increases by roughly 7-8% for every year you delay it to age 70, so if your FRA is 66, delaying your benefit will increase it by roughly 25% during your lifetime! Another Social Security strategy called the spousal benefit, entitles one to 50% of their spouse’s benefit upon their full retirement age. In addition to knowing the different types of social security withdrawal strategies, it’s also important to understand that Social Security income can also be subject to income taxation.

In addition to Social Security, pensions are still available to some retirees today and are more common in the public sector amongst federal and state employees, but are still used today by some employers in the private sector. In 1978, a group of high-earning income employees from Kodak approached Congress to allow part of their salaries to be invested in the stock market and be exempt from taxes. From that point on, the employer-sponsored retirement landscape changed with employers favoring defined contribution plans like 401k’s over defined benefit plans like pensions, which place more accountability and risk on the employer. For those employees that have paid into both social security and a federal or state pension, you will need to determine whether your social security benefit will be reduced by the social security pension offset. One often-overlooked factor regarding pensions is whether they provide a Cost of Living Adjustment (COLA). Most federal and state pension programs such as FERS or PERS typically offer a COLA, which means that your pension benefit is indexed to inflation and your income stream will continue to increase over time.  In the absence of a COLA benefit, your pension payments will lose purchasing power over time to inflation. This means that you better plan to compensate for the reduced purchasing power down the road. For example, the US Dollar has lost more than 50% of its purchasing power based on inflation rates over the last 20 years!

One of the most important factors to consider when making pension decisions for your retirement plan is selecting the proper payout option. There are 3 primary income payout options with defined benefit plans:

1. Life-Only

A life only option means that your pension will provide you with an income stream on your life only. If you pass away one month after initiating this option, your income will cease and nothing will go to your heirs. If you live to age 120, the pension will continue to pay income until that age. This option will typically pay out the highest monthly benefit vs. your other options.

2. Joint Survivor

If you are married, it’s important to consider income needs for your spouse in your retirement plan should something happen to you. For example, if you select a 50% Joint Survivor Option, that means that half of the monthly benefit you will receive during your lifetime will go to your spouse in the event you were to pass away. The tradeoff is that your benefit during your lifetime will be lower than the Life Only option. The reason, of course, is that the insurer is taking on the increased risk of paying out income on two lives instead of one… Thus, the benefit during your lifetime is reduced to offset the risk to the insurer. Many pension plans will offer survivorship options of 50%, 75%, and 100%, however, these options will vary considerably from one employer to another. This is important to consider in your retirement plan.

3. Lump-Sum

Not all pension plans will offer a lump sum benefit, but when it is offered, it pays to determine whether taking a lump sum and rolling it over into an IRA is better than the income options offered. The reason for this is that a dollar you receive 10 years from now is not worth the same as a dollar today. You must factor in the opportunity cost that you pay by not having the money in your hand today to spend or invest. Additionally, inflation is constantly reducing our purchasing power over time, so you must run some present value calculations of the income payouts options to compare apples to apples.

In addition to Social Security and pension benefits, other sources of retirement plan income can be rental real estate income, part-time employment or income gifting from family members. As with your fixed-income streams in your retirement plan, it’s important to understand the nature and characteristics of these other types of income streams. There are a myriad of factors to consider with rental real estate (too many to list for the length of this article), but understanding how employment income can impact the taxation of social security benefits or that gifts of cash from family members are not considered taxable income are just some examples that will help you as you continue to construct your retirement plan.

What is your retirement plan?

Tax Planning

Maybe the most neglected aspect of maximizing retirement income for retirees is incorporating a proper tax planning strategy in your retirement plan. As I’ve mentioned before, since income fluctuates so much in retirement, your tax circumstances will constantly change. By running multi-year tax projections, you can see which years you’ll be paying higher taxes and start pursuing strategies to reduce income in those years. As we’ve just covered, a big part of this is to determine how your income in retirement will be structured, and one key variable to account for is your Federal Marginal Tax Bracket (FMTB). We have a progressive federal tax system, which taxes your first range of income at 10%, then 12%, then 22% all the way up to the highest federal rate of 37% as you can see in our table below.

2019 Federal Tax Brackets
Tax Bracket/Rate Single Married Filing Jointly Head of Household
10% $0 – $9,700 $0 – $19,400 $0 – $13,850
12% $9,701 – $39,475 $19,401 – $78,950 $13,851 – $52,850
22% $39,476 – $84,200 $78,951 – $168,400 $52,851 – $84,200
24% $84,201 – $160,725 $168,401 – $321,450 $84,201 – $160,700
32% $160,726 – $204,100 $321,451 – $408,200 $160,701 – $204,100
35% $204,101 – $510,300 $408,201 – $612,350 $204,101 – $510,300
37% $510,301+ $612,351+ $510,301+

Your FMTB is the tax rate you pay on each additional dollar of income, so when you are in a 22% marginal tax rate, 22 cents of every extra dollar you earn will go to federal taxes. Also, depending on what state you live in, you will also be on the hook for additional state taxes – in California, state taxes can be as high as 13.3%! So when looking at cash flow and tax projections, your goal is to identify opportunities to begin equalizing your income throughout retirement in an attempt to pay the least amount of taxes possible throughout retirement.

In the context of tax planning, one big factor in maximizing your income is the sequence of withdrawals from your investment accounts. What truly differentiates your investment accounts from one another is how they are taxed upon distribution (tax-free, ordinary income, capital gains rates), which means that you need to evaluate your income and tax situation each year to determine the best strategy for you. Now you can see the importance of creating financial statements and running cash flow and tax projections. Although there isn’t a cookie-cutter solution to the correct sequence of withdrawals because an investor’s investment strategy will be primarily determined by age and tax circumstances, generally speaking, your retirement assets will be maximized by following this order:

Taxable Accounts

Your taxable accounts are subject to capital gain tax rates. What this essentially means is that you have to be careful when liquidating positions because you can trigger tax liability from any positions that have a gain. If you hold a position for less than a year, then the gain will be taxed at your Federal Marginal Tax Rate. If held for longer than 1 year, the gain gets special tax treatment – 15% for most investors, but this is contingent upon the total of all your income. So what happens when there is a loss in a position? Well in a taxable account, you get to use this loss to offset any other capital gains in the current tax year. If you don’t have gains to offset losses, then you get to use up to $3,000 of that loss as a deduction against ordinary income and the IRS allows you to carry forward any unused loss into future years to be used against gains at a later point in time. Every year you are able to use up to $3,000 of your capital loss to offset ordinary income. The ability to use losses to offset gains makes a taxable account very favorable since investors can use strategies such as tax-loss harvesting to control taxes.

Tax-Deferred Accounts

Most of us have tax-deferred accounts through our employers where all the contributions made were pre-tax. Since you never paid any tax on those contributions, the IRS assesses ordinary income tax on those contributions along with any growth that occurred in the account over time. So EVERYTHING that is distributed from a tax-deferred account is going to be taxed to you as ordinary income, whether you take a distribution or your heirs withdraw funds from these accounts. At age 70 ½, you have to start taking Required Minimum Distributions (RMD’s) from these accounts starting at a rate of just under 4%, which increases every year you grow older. While retirees may not like paying taxes on these withdrawals, keep in mind that the entire purpose of these accounts is to fund your retirement plan needs, much like you were receiving a pension.

Tax-Free Accounts

When you make a contribution to a Roth IRA or Roth 401k, you don’t receive a deduction, so you are contributing after-tax money. The IRS rewards you by allowing all of your growth within the account to be tax-free upon withdrawal, provided certain guidelines are met. Having a tax-free pool to draw from in retirement provides a lot of flexibility with tax-efficient income creation. With a Roth, there is no RMD’s and they are also great assets to pass down to heirs, providing them a tax-free pool that can continue to grow throughout their lifetimes as well. A Roth is great for tax planning purposes when you need income, but are trying to avoid jumping into a higher tax bracket.

Another valuable tool available today for retirees are Roth conversions. A Roth conversion is a strategy to convert an IRA to a Roth IRA or even a 401k to a Roth 401k (employer plan permitting). When this strategy is implemented, the amount that is converted is added to ordinary income, increasing tax liability. So this strategy can make a lot of sense for years where income is low and the account owner anticipates being in a higher tax bracket in the future. By paying some taxes now at lower rates, you are effectively equalizing your tax liability throughout retirement, allowing for more tax-free growth and reducing your future RMD’s.

Hopefully, you are starting to gain some clarity on what putting a financial retirement plan together looks like. As you can see, there are many pieces to the puzzle when it comes to coordinating your cash flow and tax planning strategy, since a decision in one area directly impacts the other. For example, one strategy that incorporates many of these concepts would be to live off of taxable income, delay Social Security and pursue Roth conversions at low tax rates in lower-income years. Unfortunately, many retirees are more focused on their investment performance and neglect these other areas, missing out on valuable opportunities to maximize their income in retirement. Once our cash flow and tax planning strategy are in place, the next step in formulating your retirement plan is to select the right investment strategy that is aligned with your cash flow needs and address your wealth protection needs. Follow along by downloading our Free Retirement Checklist to ensure you don’t forget anything.

Personal financial statements

Creating Your Personal Financial Statements

When constructing your financial plan for retirement, there are some key personal financial statements that you will want to draft prior to performing an analysis of your situation. Most of us are familiar with a personal balance sheet and income statement, which track your net worth and monthly or annual cash flows. From small businesses to global corporations, these statements are used in measuring the financial health and in conducting financial analysis and can be just as useful for individuals seeking to develop their own financial plan. In addition to these two primary financial statements, some others that come in handy are tax and cash flow projections. In this article, I’ll explain why these personal financial statements are important and how to use them as a starting point for creating your financial plan.

Balance Sheet

Calculating your net worth is the best way to find your starting point for any financial plan. The balance sheet is essentially a picture of what you own and what you owe. Two ways to increase your net worth are to increase your assets or decrease your liabilities. You can increase net worth by increasing your cash or increasing the value of any asset you own or you can decrease liabilities by paying down debt. A personal balance sheet will look something like this:

Assets on the balance sheet can be sorted into 3 main categories:

  • Short-Term Assets: Cash, CDs, Money Markets, T-Bills: These are assets that are typically earmarked for short-term spending purposes such as the remodel of a new home, purchase of a new car or to keep an adequate emergency fund. They typically offer the stability of principle and are very accessible with little to no penalty to liquidate proceeds. As with most investments, the lower risk will result in a lower return, so these are not good vehicles for longer-term investment horizons.
  • Long-Term Assets: IRAs, Roth IRAs, SEPs, SIMPLE IRAs, 401ks, 457, 403B, Defined Benefit Plans, Annuities, Brokerage Accounts, Life Insurance Cash Values: These assets represent the primary source of retirement income for most Americans and are typically held with longer time frames in mind. Any income needs in retirement that aren’t covered by fixed income sources such as Social Security and Pensions tend to be met through these financial resources.  Earmarked for a longer time horizon, these accounts will typically hold your higher risk and higher return types of assets.
  • Property: Primary Residence, Vacation Homes, Rental Properties, Other Use Assets: Other assets on the personal balance sheet include property such as your primary residence, vacation home, and rental properties. Personal use assets are other types of tangible property used for personal consumption such as cars, jewelry or antique collection. While real estate and personal use assets are classified as capital assets, they are treated differently for tax purposes upon liquidation.

After totaling up your assets, the next step is to list all of your liabilities. Generally speaking, you can sort your liabilities into two main categories: Short-term and long-term debt.

  • Short-term debt is generally classified as debt that is held for one year or less. Some common examples of short-term debt are credit cards, personal notes, and bridge loans. When used wisely, short-term debt can be useful when cash positions may be low and you want to avoid tax liabilities from liquidating capital assets such as stocks or mutual funds.
  • Long-term debt is debt used to finance longer-term goals such as a mortgage, home equity loans, business loans, student loans, and commercial real estate loans. These types of debt are mostly associated with the goal of accumulating wealth or in the case of student loans, to attain a degree with the goal of securing higher career income. As with all debt, it’s important to understand how your liabilities fit within the context of your goals, asset, and income picture.

Income Statement

Your personal income statement is a snapshot of all of your inflows and outflows and nets these two items together to determine whether you are operating at a surplus or a deficit. This is the most important financial statement when you retire since it gives you a clear depiction of how much you can spend and whether your withdrawal rate is too high, increasing the risk of outliving assets. Your income statement is directly related to your balance sheet since surplus cash flows increase your assets and cash flow deficits reduce them. In retirement, it’s important to not only run an income statement for the current year to determine income needs but also in future years since income sources and spending needs constantly fluctuate in retirement primarily due to the difference in ages between spouses. The three main categories on your income statement are inflows, outflows and net flows.

1. Inflows

Includes: Salaries, interest/dividends, social security, pensions, real estate income

One of the most dramatic shifts upon retirement is the challenge of replacing employment income through a combination of retirement income sources and withdrawals from savings. Due to age gaps, these sources of income typically begin at different times for most spouses. For most folks retiring today, age 67 is the full retirement age (FRA) for Social Security. Drawing your Social Security benefit before your FRA means that your benefit will be permanently reduced. Conversely, a delay of your benefit causes the benefit to increase. Therefore, deciding when to take Social Security is one of the most important decisions in retirement. There are also a number of other strategies that you should be aware of such as spousal benefits.  Of course, when to draw Social Security should be coordinated with other income decisions such as initiating a pension or even working part-time. Don’t forget about interest and dividends from your taxable accounts and don’t forget to account for any other sources of income such as rental real estate. A primary consideration when making these decisions is doing so in a tax-efficient manner. Understanding what your inflows are every year will allow you to determine how much you’ll need to withdraw from savings to fulfill your spending needs. Anticipating changes to your income from year-to-year allows you to anticipate your income shortfalls and be better prepared to plan for your income needs.

2. Outflows

Includes: Expenses, liability payments, taxes, savings

The other side of your cash flow statement that will offset your income are your outflows. Some outflows are fixed, such as mortgage payments, while other outflows will constantly change such as taxes and living expenses. Since spending needs can change dramatically in retirement, it’s important to create a budget and tally up what your fixed and discretionary expenses will be. Next, you need to list all of your liability payments. If there is still one spouse working, another outflow could be contributions to accounts like 401ks, IRAs and other retirement accounts. Lastly, you need to have an understanding of what your anticipated tax liability will be every year. This is certainly the most complex piece of putting together your cash flow statement since all of your decisions around initiating your fixed income sources and selecting which accounts to take withdrawals from will have a direct impact on your tax liability. For example, if you determine that you will have a net shortfall between income and expenses of $20,000 and this amount is withdrawn from a tax-deferred account, then you have to anticipate paying additional tax since the entire amount is added to income in the eyes of the IRS. Don’t forget that you HAVE to take distributions from all qualified tax-deferred accounts beginning at age 70 ½.

3. Net Flows

Includes: Determine shortfall/surplus, relationship with balance sheet, planning opportunities

Probably the most important metric to monitor throughout your retirement is your yearly net flows. In other words, what is the amount you can withdraw from savings without the risk of outliving your assets? The most common rule of thumb amongst financial planning professionals is 3-4%, but the truth is that this amount can fluctuate and be higher or lower at times. For example, early on in your retirement, it may be okay for your withdrawal rate to be 5%. Maybe you delay taking social security and you need to draw more from savings early on, but in later years when you start taking your benefits your withdrawal rate is only 2-3%. Again, since inflows and outflows fluctuate every year, you must run your cash flow statement at least annually so you can make good, informed decisions to create tax-efficient income in retirement.

As you can see, gathering all of your personal financial statements so you can construct a personal balance sheet and cash flow statement are important steps in determining where you currently stand in relation to your retirement goals. In addition to these two personal financial statements, you will want to start running some cash flow and tax projections. Looking at a cash flow statement every year for the next 20-30 years will give you a big-picture view of how your income, expenses, and shortfall will change over time. Understanding the long-term picture will allow you to make better decisions in the short-term. A multi-year tax projection will also allow you to see what your tax liability looks like long-term to enable you to formulate a good tax-efficient withdrawal strategy. You will also want to run a tax projection every year to help determine what your end-of-year taxable income looks like so you can determine which accounts to withdraw income from and what the appropriate tax strategy is for the current year. Now you have the requisite information to start coordinating your retirement plan. Don’t forget to download your Free Retirement Checklist to ensure you don’t miss any of these important steps as you prepare for retirement. Your next steps will be to coordinate all of your strategies together around cash flows, taxes, investments & wealth protection/transfer.