Income Planning

If Cash Is King, Cash-Flow Is Downright Regal

Retirees need to determine what they will actually spend in retirement

By Gregory J. McLaughlin, MS, CFP®

Mr. McLaughlin is a financial consultant with Centinel Financial Group, LLC with offices in Needham Heights, Marshfield and Bourne. He can be reached at 781.446.5016 or by email at Registered Representative/Securities and Investment Advisory Services offered through Signator Investors, Inc., Member FINRA, SIPC, a Registered Investment Advisor. 160 Gould Street, Needham Heights, MA 02494. 781.446.5000. Centinel Financial Group, LLC is independent of Signator Investors, Inc. and any affiliated companies.

When asked to think about the one driving factor to a successful retirement plan many clients focus on the amount of money they believe they need to accumulate. While this is certainly a key factor, it is important to first step back and focus on cash flow needs.

This includes calculating your estimated expenses during your retirement years, realizing your plan is unique, and researching commonly overlooked items such as healthcare. By focusing on these three simple strategies, you will feel more confident and in control of your retirement plan.

The origination of this thought came from a discussion I had with a client a few months back. My client was interested in learning about common questions baby boomers often ask as they are gearing up for retirement. It is common for people to read an article or hear from a friend that they need a certain amount of money to retire – for example: one million, two million, or 12 times their salary.

How much do you expect to spend in retirement?

At this point I ask clients to take a step back and start by focusing on cash flow.

More specifically, pre-retirees need to have a solid understanding of how much they expect to spend in retirement. In simple terms, this can be broken down into essential living expenses and discretionary expenses. Essential expenses are the necessary month to month items that need to be covered to ensure you can live a retirement with dignity. Discretionary expenses include travel, hobbies and entertainment expenses.

When a client is struggling to calculate these expenses, I start by asking them “How much is currently deposited into your checking account every two weeks?” Most people have that answer on the tip of their tongue and then we use that as a baseline of conversation to begin discussing a plan for retirement. Irrespective of the method a client prefers, the key here is to find a strategy that will allow you to estimate your cash flow needs as accurately as possible.

When estimating your clients’ expenses in retirement, it is important to remember that every situation is unique and that there are many factors that go into creating your plan. For example, do they have a second home, do they want a second home in the future, and how long do plan plan to keep your homes? Are they taking care of an aging parent (or is it a possibility in the future) or are ythey financially supporting adult children? Do they have a mortgage, credit card debt or student loan debt? What level of risk are they taking with your investments and what are their returns? Do they have adequate insurance in place?

Although this process may seem overwhelming and it is not possible to completely predict the future, the more thought and research they put into their plan the more personalized it will be to their situation and the higher their probability of success will be.

No ‘Average’ Plan

An important key at this step in the process is to remember there is no average plan. In Fact, Todd Rose wrote an excellent book called The End of Average. In his book he cites many examples of how people look at and build many things off an average, which can result in a flawed way of thinking.

people look at and build many things off an average, which can result in a flawed way of thinking

Whether we are referring to government programs, schools, health care or personal finances there is always an average. The question we need to ask is who is really average and does that plan really pertain to anyone in particular? For example, after World War II American pilots from the Air Force were experiencing higher than normal crash rates and it was a mystery why this was happening. Pilots were doing well in simulation runs, engineers assured the planes were sound, however the problems were persisting.

The solution came from an unlikely slender lieutenant with glasses by the name of Gilbert S. Daniels. Daniels wondered whether the size of the average pilot had changed over the last 20 years. If so, the current planes might need to be redesigned to fit the new average. What happened next was truly surprising and eye opening. In 1950 at Wright Air Force Base in Ohio, Daniels and his team measured 10 key measurement of over 4,000 pilots and calculated the average for each pilot. The results were based on the middle 30 percent range for each of the 10 dimensions and even with that range, not one pilot was average in all 10 measurements.

This showed us there was no such thing as an average pilot and if the planes were being designed for the average, they were being designed for no one. This reinforces the fact that each client’s financial plan, investment philosophy, risk tolerance and other financial measurements are all truly unique to the individual client and we need to stop building everything to the average.

Cost of Health Care

Through my experience I have found the one expense that clients underestimate the most in retirement is the cost of health care. According to the 2016 Fidelity Study on Retirement, a 65-year-old couple will spend $260,000 in health care costs in retirement.1 Most questions I receive on this topic revolve around Medicare enrollment and all the health insurance options that come along with that decision. There are many valuable resources in the local community such as elder care organizations and councils on aging that can help provide clarity on the topic. For example, the SHINE Program in Massachusetts provides free health insurance information, counseling and assistance to residents with Medicare. These resources help simplify the options while providing guidance to help ensure you are making an informed and educated decision.

It is easy to become overwhelmed at the thought of planning for your retirement. However, by focusing on a few simple strategies you will be able to put yourself in a strong position and feel confident in your plan. First, be sure to track and estimate your expenses. Be careful what you measure and monitor, and stay away from comparing your plan to a news story or a friend’s plan. Second, remember your plan is unique and it is important to include all the factors that are pertinent to your personal situation. Lastly, be careful to not overlook or underestimate expenses in retirement. Do your research on commonly overlooked items such as health care.

In the words of the great Mike Tyson, “everyone has a plan until they get punched in the face.” Your retirement is too important. Don’t leave it to chance. Focusing on these simple strategies will help you feel in control and will set you on the right course to achieve the retirement you have always dreamed about.




Registered Representative/Securities and Investment Advisory services offered through Signator Investors, Inc., Member FINRA, SIPC, a registered investment advisor. 160 Gould Street, Suite 212, Needham Heights, MA 02494. 781.446.5000. Centinel Financial Group, LLC is not affiliated with Signator Investors, Inc. 501-20171006-404478