In the past I’ve gone over the ins and outs of retiring early. These days, there are certainly still tons of options at your disposal. More than ever, it’s important to look at retirement closely and make decisions about how you’ll want to spend your life in your retirement. I may sound like a broken record, but it’s important that you figure out what lifestyle will mesh with your financial status and your requirements to be happy. Consequently, that’s why I’ll be going over the cash flow strategy for early retirement – particularly with real estate!
What Does Cash Flow Mean?
Cash flow is a simple term, and it sounds like exactly what it is. It’s just how the money is flowing in or out of your household. There couldn’t be anything simpler, right? So, your cash flow strategy in retirement in specifically how you’re planning what is coming in and what is going out. Again, it’s definitely a simple concept, but the details can be rough for those not used to managing their finances. For example, in retirement you may have to be liquidating investments routinely to pay bills, and the goal will likely be to keep those bills as static as possible so that there are no curve balls.
Would Liquidity Be An Issue?
By now, if you’re concerned about liquidity, you’re on the right track! One of the major concerns regarding cash flow is the liquidity of your assets and how you can minimize loss while living in comfort. As with most everything in personal finance, it depends. Primarily, it will be based on what types of assets you have, and how you’re using them to bring in cash. For now, let’s focus on retirement accounts and index fund or ETF investments you may have that you’re pulling from.
How To Withdraw Appropriately
I’ve gone over a lot of the legwork in my article on retirement planning. Assuming you’ve read that or already have the fundamentals down, the key is withdrawing appropriately in retirement. Some people like to keep a large emergency fund and just withdraw when the market is doing well. That plan is great – when it works.
In theory, you could do something like that and potentially not experience major issues – like a major and long-lasting bear market. However, to play it safe, the best thing to do is to periodically make withdrawals from your retirement accounts. For example, let’s say you need $3,000 per month for your expenses. You could withdrawal that $3,000 at the same time every month, or $9,000 every few months.
The people who try to time the market and wait to withdrawal until there is an upturn can have a myriad of issues. For starters, they may lose most or all of their emergency fund. Additionally, they may find themselves in a long recession and just end up withdrawing their funds at an even steeper loss.
To prevent any confusion – I do recommend a hefty emergency fund no matter what strategy you opt for.
Pensions & Social Security
Another aspect to consider with your cash flow strategy is any pension you may have as well as social security payments. Pensions seem to be dying off, so kudos if you have one! It can be very helpful for maintaining a good lifestyle in retirement, so make sure you include it in your calculations. Beyond that, you can also keep social security in mind.
If you’re near retirement age, it’s fair to get nitty gritty with the details of your social security payments and how it factors into your plan. However, for those of you who are far away from retiring, I recommend keeping it out of your plans. There is a lot up in the air with social security, so it’s unknown if the payments will be higher or lower in the future – and I like to err on the side of caution.
How Much Money Is Needed?
How much money you need is entirely different for every case. Most experts recommend saving somewhere between 20x to 35x your annual income for retirement. Now, where you land on that is based on other sources of income you expect to have, your risk level, and so on. Think it out and decide what is best for you!
Emergency Fund Size
And that brings me to my next point. I usually recommend savings 6 months worth of expenses in an emergency fund, stored in a high-yield savings account like the one Axos offers. For those reaching retirement, it may be time to beef that emergency fund up for extra protection. On the low end, save up at least one year worth of expenses. On the higher, and more cautious, end of things I’d suggest two to three years worth of expenses saved up.
Inflation Is Nasty
As a quick caveat, I want to point out how nasty inflation can be over time, especially in your retirement years. It’s a natural part of the economy, so you need to learn to live with it and not fear it. Of course, keep it in mind with your retirement cash flow strategy. You will probably need more cash each year during your retirement, so consider that with your plan.
The Traditional Method Works, But There Are Others
Everything I’ve detailed so far is the more “traditional” method. You save money, invest it in stocks, and then withdraw it routinely so that you have the cash flow you need. This is a good method and works for many people. Honestly, as long as you stick to long-term strategies, it generally proves highly effective – assuming you are disciplined with your goals. Fortunately, there are other methods at your disposal, which you can use in conjunction with the traditional method if you so choose.
Real Estate
Which brings me to real estate – a fan favorite, and for good reason. Real estate has made more people millionaires than I can count, and it continues to be a good investment for building wealth. One cash flow strategy, which is becoming increasingly common it seems, is to use rental properties to help with your cash flow in retirement.
Value Increases With Inflation
First off, real estate is great because it increases in value, along with inflation. There are dips in the market, as there are with anything, but over time you see a good trend with this. So, your properties are increasing in value as the years go on – including how much you can charge for rent. As you increase the rent you charge, this can help you keep up with your own increase in expenses caused by inflation.
It Can Keep A Constant Income
The next thing I love about this is that you can keep a fairly constant stream of income, if you know what you’re doing and are diligent about who you let rent your property. You’ll get monthly rent – and that’s nothing but a massive boon.
You Need To Know What You’re Doing
I will mention one unfortunate caveat that comes with real estate and rental properties – you need to know what you’re doing. It’s not as simple as investing in index funds and ETFs. It’s far less friendly for beginners, so you need to gain some experience with it before you rely on it for your income. In other words, this strategy is best for people who learned the ins and outs of real estate before they retired.
Conclusion
Hopefully this article gave you everything you need to start coming up with a retirement cash flow strategy. If you have any thoughts on the topic, let us know in the comments. For more content like this, and a free budgeting template and financial goals worksheet, be sure to sign up for the Bitter to Richer newsletter!
