What is a Cash Flow Projection?
When you engage the services of a professional financial planner, you should be provided with a cash flow projection. In this article, we’ll explain why this report is essential for a successful retirement plan.
It’s More Than a Budget
A budget is simply a plan on how you will spend your income, usually on a monthly or annual basis. It maps out how you can pay your bills on time and allocate the remainder to personal and savings goals. A cash flow projection, on the other hand, is a far more comprehensive estimate of how the sources of your income and expenses will change over time, especially as you transition from employment to retirement. It’s like a financial forecast, and that takes into consideration the effects of taxes and inflation.
Elements of a Cash Flow Projection
Living Expenses – Planning for how much money you need to cover your living expenses is an essential part of the cash flow assessment. A financial advisor can determine what types of accounts and contribution amounts you need to help you achieve your long-term objectives. During retirement, you will likely have similar expenses as you did during your working years – housing, groceries, utilities, vehicles, etc. However, you may have additional goals like enjoying hobbies or travel. It’s important to have an accurate estimate of your expenses so that you do not fall short once you retire.
Income – Once you leave the workforce, you’ll need to have another source of income to replace your former paycheck. You may receive income from Social Security, pensions, dividends and interest, retirement plan distributions, or other savings accounts. A cash flow projection can help determine the types of income that may be available to fund your retirement and the best time to draw from each.
Health Insurance – After your employment ends, you may not be able to carry over your employer’s health insurance indefinitely. If you retire before being eligible for Medicare, you may need to acquire an individual health plan through the Affordable Care Act (ACA) Marketplace or another private insurer. The law is subject to change and your ultimate costs and tax consequences may vary wildly from year to year if not properly managed.
Taxes – Taxes are inevitable, but a successful financial plan should aim to minimize your tax bill. Whether it is helping you manage capital gains, realize income from the sale of property or a business, or distribute funds from retirement accounts, a cash flow projection can illustrate the various scenarios to determine the most tax-efficient plan.
Inflation – A dollar today will not be worth as much in the future, so accounting for this is critical. If not properly estimated, you could see your purchasing power dwindling to the point of not being able to maintain your lifestyle.
Putting the Puzzle Together
You should not enter retirement without having a cash flow projection. A qualified financial planning professional can …
Determine how much you should contribute to your IRAs, Roth IRAs, 401(k)s, etc.
Account for how inflation erodes your purchasing power over time.
Optimize available ACA subsidies.
Know the tax treatment for the types of accounts you have and recommend a distribution strategy to minimize your tax bill.
Calculate the most efficient time for you to start taking your Social Security benefits.
Plan for the time that required minimum distributions from your retirement accounts are due and help you plan for charitable gifting to reduce taxes.
Call Professional Financial Management Today
There’s no better time than now to start planning for your retirement. Contact PFM today to schedule a no-obligation meeting to learn more about our cash flow projection and retirement planning service.