John Maxwell once said, “A budget is telling your money where to go instead of wondering where it went.” Today, there are many commercially available software packages to assist consumers with budgeting and cash flow. Notwithstanding, many of our clients have turned to us for assistance in establishing, revising and forward-projecting budgets and cash flow as part of an integrated, comprehensive financial planning analysis. The strategies we employ for budgeting and cash flow analysis take on new dimensions before and after retirement.

Before retirement, budgeting centers around managing income and expenses, saving for future goals, and building wealth. Regular assessments of monthly cash flows and disciplined budgeting lay the groundwork for financial success.

One crucial aspect of pre-retirement financial planning is the concept of “paying yourself first.” Before paying bills or discretionary expenses, allocate a portion of your income towards savings and investments. This simple yet powerful practice ensures that you prioritize your financial future. After a month or two, you likely won’t even notice this sum is “gone” from your budget. When you add to your savings and investments immediately after you get paid, your monthly spending naturally adjusts to what is left.

One easy way for pre-retirees to “pay yourself first” is to utilize Employer-Sponsored Qualified Retirement Plans. These investment plans, such as 401(k)s, come with unique benefits that can significantly boost financial well-being. Many employers offer matching contributions, effectively giving free money for your retirement. Additionally, contributions to these plans may offer tax advantages, allowing one to reduce taxable income and potentially grow investments more efficiently. Many employer-sponsored plans now offer Roth savings options, as well – as opposed to the traditional pre-tax deferral method. The Roth 401(k) is a better deal because you only pay income taxes on your contributions. This allows your earnings to grow tax-free, and you do not pay any income taxes on normal retirement distributions.

Paying yourself first makes it easier to “Dollar Cost Average” or commit to investing a fixed dollar amount at regular intervals, such as monthly or quarterly. Dollar cost averaging aims to reduce the emotional and financial impact of market gyrations. Predicting market highs or lows is an impossible task; instead, focusing on accumulating assets steadily, irrespective of short-term market movements, has proven to be most successful in wealth accumulation. Despite its short-term fluctuations, the stock market has historically provided higher long-term returns than other securities like bonds and cash equivalents. By investing in a diversified portfolio of stocks, you position yourself to benefit from the market’s growth potential. Over time, the compounding effect of reinvested dividends and capital appreciation can lead to substantial wealth creation.

Upon entering retirement, focus shifts from accumulating wealth to managing and preserving assets. An assessment of monthly cash flows can determine a safe withdrawal rate from savings and investments. This ensures a balance between sustaining a comfortable lifestyle and safeguarding the longevity of savings. The integration of predictable income sources establishes a reliable foundation for a retirement budget. Sources like Social Security and pensions provide a steady stream of income, supplemented by qualified retirement account distributions to account for any expenses not covered by guaranteed income.

Maintaining liquidity is crucial for retirement if facing unexpected expenses or market downturns. Having a portion set aside in cash or short-term investments allows for coverage of immediate needs without having to sell off long-term investments at potentially unfavorable times. This liquidity acts as a financial safety net, which can assist with tax planning, provide flexibility, and reduce the impact of market volatility on your retirement income.

As you age, healthcare needs often increase, and the rising costs of medical services can impede a retirement budget significantly. Foresight in retirement planning should account for potential healthcare expenses, considering factors such as Medicare coverage, supplemental health and prescription drug insurance, and out-of-pocket costs. Understanding and mitigating these risks in advance can help avoid financial strain and ensure that retirement savings can adequately cover health-related needs.

In summary, the dynamics of budgeting and cash flow analysis undergo a notable shift from pre-retirement to post-retirement. Pre-retirement strategies focus on wealth accumulation and growth, while post-retirement considerations revolve around assessing guaranteed income sources to determine safe withdrawal rates, managing liquidity, and mitigating risks like potential healthcare costs. At Eagle Ridge we recognize the evolving needs of our clients and can help you develop a financial plan that prioritizes your objectives.