CFP

Determining Retirement Needs - Projected Cash-Flow shortfalls

The first attempt at projecting retirement income for an individual or couple very likely will show a shortfall in cash flow. This is not unusual at all in retirement planning. Fortunately, there are a number of different steps that can be taken to try to make up for this shortfall. The further away an individual is from retirement, the easier it will be to make up for a projected cash flow shortfall.

Below are some steps to consider in such a case. They involve either increasing income or cutting expenses.
  • Increase savings - The first step somebody in the pre-retirement phase should take. More effective for somebody who has many years until retirement.
  • Investing for higher return - Involves a higher level of risk. Greater chance of success with those whose portfolios are too conservative for their given level of risk tolerance.
  • Working longer - Working just a couple years longer than planned can make a huge difference in an individual's retirement outlook.
  • Delaying Social Security benefits - As reviewed below, the longer an individual waits to collect Social Security retirement benefits, the greater the amount they will receive.
  • Cutting expenses - A careful review of expenses is in order, both as a way to increase retirement savings and eliminate a cash flow shortage.
  • Downsize housing - Somebody at or near retirement facing a large cash flow shortfall that will otherwise be difficult to make up may wish to consider the sale of a larger home and purchase of a smaller one. This may provide a lump sum that can be invested for income or be drawn upon in retirement. A careful consideration of real estate closing costs must be part of the analysis.
  • Reverse mortgage - A type of mortgage where homeowners can borrow money against the value of their home. No repayment of the mortgage (principal or interest) is required of the borrower(s) until the borrowers are deceased or the home is sold. After accounting for the initial mortgage amount, the rate at which interest accrues, the length of the loan and rate of home price appreciation, the transaction is structured so that the loan amount will not exceed the value of the home over the life of the loan.


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