Addressing the challenges of retirement cash flow

Robert A. Valente, CEO and Managing Member, RAV Financial Services

For those of you diligent baby boomers who have filed your income tax returns on time, you can redirect your attention to your readiness for eventual retirement. Yes, on Jan. 1, 2011, the very first baby boomers turned age 65. For almost the next 20 years, more than 10,000 baby boomers will be considering retirement or retiring every single day. But just because you’re eligible does not make you necessarily prepared to enter this new phase of your life.

Today, let’s address some challenges to retirement cash flow. What amount of income do you really need in your golden years? What will be your expenses? Traditionally, previous retirees looked forward to living on the certainty of a fixed income and fewer expenses in the retirement years.

The first thing to do is some homework. Create a current personal income and expense sheet. Uncover what you are spending today and every day. Once that is completed, consider the potential financial obligations that you will face in the future once you retire and are without an employment income. The foundation for a solid retirement plan is built on managing your expectations and life-plan goals relative to your income sources, assets, liabilities and your overall net worth. Let’s explore some what-ifs that may impact you.

Writers have stated that boomers consider retirement as a time to reinvent themselves. The economic and financial events since 2007 have taken that reinvention definition to a new level. Let us be reminded that we boomers are still considered the “sandwich generation.” We still have an obligation to our children and heirs, but we also have the eventuality of dealing with aging parents and other relatives.

How are you preparing for these phenomena?

  • When will you really retire? The economic downturn includes the virtual disappearance of any “standard” retirement age. According to a recent report from the C.D. Howe Institute the new trend among baby boomers is to prolong retirement by at least five years because of economic and social pressures.
  • Employers are bracing for major changes in health care policy come 2014, and for better or worse, you’ll be affected. If you or your dependents have health issues, update your financial contingency plan around potentially higher costs for care.
  • Are you taking advantage of voluntary benefits? Voluntary benefits, which can include additional disability coverage, long-term care insurance and/or life insurance, are worth revisiting at different stages in your life.

How are college and/or post-grad education expenses impacting your future cash flow?

  • Americans now owe more than $875 billion on student loans, which is more than the total amount owed on their credit cards.
  • Since 1982, the cost of medical care in the U.S. has gone up more than 200 percent, but that is nothing compared to the cost of tuition, which has gone up by more than 400 percent.
  • Approximately two-thirds of all college students graduate with student loans. Student loan money is out there; however, high school students are never told that not even bankruptcy can get you out of student loan debt. It stays with you forever until it is paid in full.

So, what if you have co-signed and/or guaranteed those college loans or you have taken on other debt to help your children’s education? How will that impact your cash flow during your retirement years? What if your children become dependent for an extended period of time?

Parents’ and children’s delayed creation of a strategic and tactical strategy to deal with educational costs has created this huge burden on the graduate and the parents/custodians. The unfortunate result of this educational quandary is financial distress because not all college graduates are guaranteed a well-paying career to offset the costs of the financial debt incurred to achieve their diploma. In addition, many of those children don’t launch into independence but return home once again as a dependent.  These children are lovingly referred to as “boomerangers.” (By dissecting the word, you may also interpret that child(ren)’s return home has changed boomer’s frustration to boomer’s anger).

If you are a business owner, have you really addressed the issue of a successful continuation and succession plan? In theory, business succession planning focuses on contracts, numbers and documents. Taking the “you” out of the equation is a critical factor in business succession planning. What can you do to plan the best success for your own financial future, the business and potential inheritors?

Start by securing the services of a credible and unbiased business valuator, and understand clearly the basis for the valuation. Not only will accurate business valuations allow you to strategize your income potential, it will also provide the buyer with financial metrics to accurately price the current market value of the enterprise. The business valuation should also address the disposition of and/or the impact of existing liabilities on the future business performance and on your cash flow from the sale of the entity.

Focus on the business players. “It’s not personal, it’s business” is relevant in succession planning, too. Put aside personal feelings and expectations about tradition and keep succession planning about finances and business. Identify family members’ interest in being involved in the future business and accordingly incorporate their roles (or their lack of them) in the succession plan.

Recognize how much of your personal worth is the business. Work with your financial advisor and estate planner now to determine strategies that can strategically integrate your business plan into your personal financial plan and retirement income scenario.

As a fee-only wealth manager and life-planning company, we are ready to make your retirement reinvention a success.

Robert A. Valente, CFP®, AEP®, is CEO and Managing Member of RAV Financial Services LLC.  He can be reached at [email protected]