Last week we focused on the importance of having an income bucket. Planning for your short term cash flow needs are very important. As history has shown us, and has recently reminded us, markets can be very volatile in any one year time frame. Please see the chart below for an illustration for market volatility in a 1, 5, 10 and 20 year time frame for reference. Therefore, protecting your income needs for the near term is imperative.

What does your next 5 years look like?

As you can see in the above chart, a 1 year period can be very volatile. This is why we focus on the income bucket so heavily. The next piece we focus on is the following years, especially for those in or nearing retirement. We call this your “Retirement Paycheck”. We look at your income needs in five year increments to ensure we are planning on covering any expected goals or expenses.

Will you be retiring in the next 5 years?

Do you have kids in college and education expenses to plan for?

Will you be relocating?

Are you planning on purchasing a second home or building a new one?

What is important to you, is important to us and we want to make sure you are thinking ahead and planning appropriately so that the funds are there when you need them.

As a reference, here is a sample “Retirement Paycheck” for a client. Most, if not all of you, are familiar with this with your own income, expenses and goals:

What’s your “Gap”?

At the end of every year, you will either have a cash surplus or deficit. As you can see from the example above, Mr and Mrs Client have a small surplus at the end of this year, but then, starting next year when they retire, they have deficit we need to plan for. The rule of thumb in financial planning is to focus on a 4% withdrawal rate. The reason for this is historically you can live in any 30 year retirement period on a 4% withdrawal rate without running out of money. In reality, if you live on a 4% withdrawal rate, you can expect to have money left over for your heirs. This is a topic of conversation for another time, however. Today we will focus on your actual annual gap and how we plan for it.

Below, we have illustrated Mr and Mrs Client’s withdrawals and ultimately their percentage “gap”. This is the amount that will need to come from your investment assets and therefore we will want to also protect, similar to the annual income bucket and emergency fund. However, given the time frame of the needs, we expand our focus on how to protect this. First, a portion of the annual income needed will be able to be covered by dividends and interest. Let’s say your portfolio 2-2.5% of the 3.85% needed in 2021 is covered by annual investment income, we then need to focus on the remaining percentage needed. This would be 1.35-1.85%, or approximately $50k, in 2021. Since this is needed in less than 1 – 1½ years, we would include this in the income bucket, then looking out at the following years, we want to plan accordingly. In this example, in the 5th year, additional funds are needed due to a second home purchase. We may wish to put some or all of these funds in a short term fixed income investment so that it is protected and will not lose value before it is needed. Of course, these conversations are tailored to each family’s needs as well as risk tolerance.

Tax Efficiency in Cash Flow planning

Part of the cash flow planning process is maximizing your after tax cash flow, while minimizing your taxes. By having a good handle on your family’s goals and cash flow needs, we are able to help you, many times in coordination with your CPA, find the most tax efficient manner of funding what’s important to you and meeting your financial obligations. There are a number of strategies available, some simple, some much more complex that we can implement to maximize your income and minimize your tax impact.

What should I be thinking about?

Please do not hesitate to reach out to us to review your current overall plan and your cash flow needs. We have reviewed this recently in our last meetings, but things may have changed over the past 3 months as our lives have changed dramatically due to COVID-19. Many of us have decreased expenses as we have cancelled family trips or reunions and kids’ camps, while others have new expenses due to being furloughed, impact to your own business, or a new goal that has popped up due to new social distancing measures. And many have not seen a change as your kids continue to be accepted and attend universities, retirement dates are still set, etc. So whatever your situation is, we want to make sure you are comfortable with your cash flow, or for many, your “Retirement Paycheck” over the coming years. We are focused on planning accordingly to take advantage of what the markets give us and new tax laws while protecting the funding needed from your portfolio so you may continue to focus on what matters most!


The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results.