Thoughts on Retirement Cash Flow
By Alan Silverstein, Fort Collins, Colorado.
Email me at firstname.lastname@example.org.
Last update: March 22, 2018
This webpage offers some considerations and suggestions about generating
cash flow (spending money) in retirement, at least in the United States.
It can be useful for deciding when to retire, and how to optimize
resources in retirement.
I'm not selling anything and I have no formal financial credentials.
This webpage exists to share possibly useful information based on my
own reading and experiences.
This page is fairly short and focused, avoiding temptations to expand
in related directions. If something below interests you but you don't
know the details, copy/paste keywords into your favorite web search
engine to learn a lot more that I won't replicate here.
The Main Question:
"How can I generate cash flow (spending money) during retirement,
from my investments and assets, and how much is 'enough'?"
(Couples, substitute "we" for "I", and "our" for "my", throughout this
Note that people measure "wealth" ambiguously as income, assets, or some
combination of each. Some high-income people are "rich" despite having
a negative net worth, while some zero-income people are "rich" because
of having high assets.
Anyway this main question expands into a series of more detailed
- How much do I need annually to live on, at least today?
- What sources of perennial income do I have?
- What's my current net worth?
- What's the ratio? (annual net spending divided by net worth)
- How should I tap into my assets?
footnotes in a
How much do I need annually to live on, at least today?
How much am I spending now?
This means dollars leaving your hands, not just shuffling money
between accounts or assets. Of course it doesn't include income, only
It's good to have a realistic number, but a pain to budget or to track
receipts to get that number (unless maybe you're already using
something like Quicken anyway). I found a very simple way to do it,
which works for me at least;
How much margin should I leave for rare big expenses?
Such as: Medical events, new car, major housing repairs, or unusual
travel. But at this point focus on just the next few years; that is,
adjustments to improve your estimate of short-term cash flow needs.
But even after you get your retirement cash flow "flying on
autopilot," of course be ready to take "manual control" at any time if
you have large unexpected expenses or downturns in your portfolio.
How much margin should I add for income taxes?
Such as: 10% US federal + 5% Colorado state = 15%. (Might actually
be lower overall "effective rate", even if you are in the 10%
marginal bracket, but this is a good question to consider.)
What sources of perennial income do I have?
(By "perennial" I mean ongoing indefinitely, perhaps for life.)
These income streams reduce your net cash flow (spending) needs:
Consider pensions, annuities, and traditional IRA RMDs (1099-R
types of accounts, including required minimum distributions starting
at 70.5), plus Social Security (SSA-1099, kind of like a
pension) options, along with when they become available to you.
Note: Rules and decisions around Social Security are surprisingly
complex and worth your time to study, at least when the time comes.
For more on this,
Consider royalties of various kinds (lucky you), rental
property income streams, etc (that is, Schedule E types of
Consider trusts, mortgage payments you receive, or other
unusual sources of income (1099-MISC).
Consider taking interest and dividends directly from
investments; that is, getting paid directly (such as monthly or
quarterly) rather than reinvesting the proceeds into the fund or
account (as is often the case).
For a little more about this option,
Deduct your expected income streams from your annual spending
needs. If income exceeds spending and the situation looks stable,
game over! You shouldn't have to touch your assets at all, unless you
spend more for some reason (either fun or necessity).
However if like most retired people you must dip into your investments
to generate cash flow, you can use any perennial income streams to
modify (reduce) the ratio described below, from
what it would be without the extra income.
What's my current net worth?
There are many ways to track this, ranging from trivial to
impossibly complex. Simpler is better (grin). (Again if you're
already using something like Quicken anyway, you might find this
For how I do it,
Should you include the equity in, that is, the net sale value, of your
primary home? "You have to live somewhere." It's debatable, you
could always downsize, or borrow against the equity.
What portion of my net worth is pre-tax (still due) versus
post-tax? -- Not a critical question at this point, but a good sanity
check later when deciding which resources to tap for current cash
What's the ratio? (annual net spending divided by net worth)
Suppose you find you are actually spending $30K per year, and you bump
that up to $40K to allow for taxes and rare big-ticket items, like a
new car (remember this is an annual average number) that you haven't
bought since you started tracking your actual spending. Also suppose
you have no perennial income streams (or have already adjusted your
net spending downwards for them), and that your net worth is $1M.
(I'm using round numbers, but do it more precisely for yourself.)
This means you're currently living (net of new income) on 4%/year of
And 4% means that in the simplest analysis your money (savings
not including perennial income) should last 25 years, without
any additional sources of income. If your ratio is 3%, then you are
good for approximately 33 years. (Deciding whether or not to even
take a guess at your remaining lifetime, is left as an exercise for
This simple model assumes you can get investment returns at least
matching inflation on average: Stocks or bonds, yes; CDs,
probably not; real estate, probably, but it's very dependent on where
and when, and hard to diversify.
If your investments don't at least pace inflation, your buying
power can shrink greatly over the years. For example,
fixed-dollar-amount pensions and annuities effectively lose purchasing
power over time.
If you can beat inflation on average, great. But beware
downside risks of aiming for that. Don't gamble what you can't afford
to lose -- at least for some years before hopefully the market
"corrects." Keep your investments diversified, your costs low, and
avoid chasing "hot" sectors. Enough said; you can find a lot more
good advice out there about common investing errors and how to avoid
for more thoughts on the long-term decrease/increase of your
nominal/real net worth.
This model also assumes you'll have no big changes in your average
spending needs. You might want to add in estimated increases due
to age-related issues. Or you might want to subtract estimated
savings you'll enjoy after you no longer must go to work every day.
Just don't go crazy trying to predict the future, worrying too much
about what I call "the five horsemen of retirement:" Higher
costs, lower returns, higher inflation, higher
taxes, and/or increased longevity. Build in some margin
for unknowns if you like, but remember they are unknowable unknowns.
"Whatever happens, I'll be there then to deal with it."
Yes this is a simplistic model, but it's a great starting point
and baseline "touchstone" before adding complicated adjustments, doing
Monte Carlo simulations, etc. I found it very useful, as described
How should I tap into my assets?
First some general thoughts about living off your savings:
So the fuller question here is: What's the best way to spend
down my assets, periodically over the rest of my life, to cover my
spending needs remaining after all new income?
(This question is the meat of the matter, and it was my motivation for
creating this webpage as I figure out the answer for myself.)
Lots of articles are available online about retirement spending
models, such as:
Fixed-amount (a dollar number increased annually for
straight-percentage (such as take 4% every year), versus
hybrids (like take $X/year, but no lower than 3% nor more
However you decide each year, "I need $X to spend this year," consider
A common, simple narrative is to always defer taxation, such as
by first spending your unavoidable taxable income, then withdrawing
additional money from your portfolio in this order:
Tax-free assets (like savings accounts, maturing CDs, or Roth IRAs
when eligible), then
partially-taxable (like capital assets with cost bases), especially if
the result is preferential income like long-term capital gains (lower
tax rates) rather than ordinary income (higher tax rates), then
fully-taxable assets (like fully pre-deducted traditional IRAs),
especially if they're tax-deferred, leaving them to continue growing.
But this can be dangerous! For example, what if tax rates or
your annual spending increase in the future? You might wish you'd
withdrawn from taxable accounts earlier, leaving Roth IRAs in
particular to grow longer.
You might want to withdraw some mix of money from various types of
accounts to optimize each year's taxable income (according to your own
circumstances). More on that below.
Bob Adams also suggested: "Avoid triggering other increased taxes or
fees such as alternative minimum taxes (AMT), Medicare Part B co-pay,
and other similar taxes."
Consider multi-year income tax leveling, such as:
At least enough AGI (adjusted gross income) every year to
take advantage of exemptions and standard deductions, meaning
"free money" in your pocket with no taxes due -- at least US
federal, but also pay attention to state income taxes if applicable.
This means even if you have sufficient other post-taxed resources,
still doing some taxable withdrawals from accounts although you
"don't need the money." In fact you might even bump your taxable
income beyond the 0% bracket and choose to pay 10% on some income.
And you might use the proceeds to buy new investments that rebalance
about differences in categories of income.
Whether to use or defer preferential income this year,
meaning long-term capital gains (or distributions) and/or
For more about this surprisingly tricky topic,
Enough pension/annuity income (such as IRA
withdrawals/distributions), including perhaps Roth conversions, to
take advantage of state exclusions, such as first-$20K in Colorado.
(Yes there's added incentive to make Roth conversions! Even if you
aren't 59.5 yet, and even if you have no earned income for
additional contributions, if you're 55 or over.)
Traditional-to-Roth IRA conversions ahead of age 70.5, if you
can afford to pay any related income taxes without using converted
funds, to reduce RMD (required minimum distribution) taxation after
RMDs start. (Good for both you and your heirs.) Here's a case
where paying taxes earlier, instead of deferring them, can save you
a lot of money in the long run. (Aiming for multi-year income tax
leveling, roughly the same average due annually.)
for more thoughts about IRA distributions versus conversions.
In addition to tax efficiency, also consider:
Asset (re)allocations (rebalancing) -- essentially a way to
sell winners before losers (and if you don't spend the money now, buy
potential future winners), unless you're purposely harvesting capital
losses to offset gains.
for more thoughts on this topic.
Overall portfolio (resources) available to draw upon, organized
by value, type and liquidity, taxability, etc; and portfolio
rebalancing effects of liquidating various assets.
For an example of how I "dashboard" our own resources,
Also for thoughts about changes in your net worth over time,
Asset liquidity versus when cash is needed. In particular,
real estate is dicey if you need money in a hurry or must get "top
Any money set aside for short-term needs must be safe and
liquid, but not necessarily just in a zero-yield checking
account, perhaps also some in a short-term bond fund, CDs (but they
have withdrawal penalties), etc. Also consider separating "operating
funds" from an "emergency account" for unexpected expenses.
Timing: Keep enough (post-tax) spending money to cover some
amount of time (like 6-24 months) in very liquid form
(checking, saving, money markets), for flexibility (such as
controlling when to liquidate taxable assets) and patience while
drawing from other assets. Suze Orman says, "keep it in something you
don't have to sell." (Or consider keeping lines of credit open, but
use them cautiously.) Some sources refer to these funds as your
"short-term spending buckets."
for more on this topic.
Some decisions, like Roth conversions, can and should be deferred
until late in the tax year when you have a good handle on your
expected taxable income for the year. Then you can model the results
of additional optional income or conversions before taking action.
Beyond that I have little to suggest about when or how often you
liquidate retirement assets to refill short-term accounts (like
checking, savings, or money markets) used for daily expenses. It's a
matter of personal preference.
Black swan events: As mentioned earlier, while it's good to
start with knowing how much you're actually spending on average, it's
also good to allow for large expenses that are rare month-to-month,
but likely over many years.
for more thoughts on this topic.
Future income or deductions -- for example if you expect to
receive Social Security payments starting in a few years large enough
to boost your taxable income, you might accelerate liquidating taxable
assets now. Conversely if you expect large enough medical expenses in
a few years to take advantage of them in itemized deductions (Schedule
A), you might defer cashing in some taxable assets now, waiting until
you have offsetting deductions.
Estate benefits -- leaving capital assets with large gains
untouched to pass to heirs tax-free due to the step-up of cost basis
upon the owner's death. However if your estate's large enough to
trigger estate ("death") taxes, you might accelerate your spending
and/or gifting now (up to the annual tax-free limit to each
Minimize transaction costs. Unnecessary expenses or "churning"
can cut into your net returns a lot, which is an inherent disadvantage
for actively-managed mutual funds versus index funds.
Minimize complexity and stress.
for some links to websites and books on related topics.