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Plan Well, Retire Well

Saving and investing your money
retirement cash flow

My Decision to Retire - Revisited

Four years ago, I announced my retirement here on the blog. I talked about the decision-making process that I went through, and the kinds of financial information that I used. (If you're reading this, you probably know that I was lucky enough to return to Extension on a part time basis and continue writing for the blog.)

Four years into my so-called "retirement," I revisited that post to see – in retrospect – how well that process had served me.

I realized that there was one thing I did back in 2012 that I didn't talk about in the blog post. And one thing was much more important than you might have thought from the post. Looking back, I believe these two items were the most critical to my decision.

Yes, I projected future expenses based on what we'd spent in the past, and I added major, one-time expenses that I expected. I looked at when my husband and I would each file for Social Security. I looked at our net worth, and I estimated how much annual income we could generate from our investable assets (things like investments and retirement accounts, not the house, car, etc.).

And I mentioned how I pulled all of that together:

I compared my expected income and expenses, and projected when and how much I will need to withdraw from on savings to fill the gaps.

But I now realize that this was the critical step for me. I decided to tell you more about this thing that I'll call a cash flow analysis.

Cash Flow Analysis

I set up a column for each year, starting with the year before I retired. I projected expenses for each of those years, mostly by inflating each subsequent year to account for inflation. For the early years, I listed income from employment for my husband and a very moderate amount of self-employed income for myself. For later years, I assumed that those sources of income stopped and Social Security benefits and my university pension started.

Then I calculated the gap for each year – the portion of our expenses that would exceed our income.

The graphic at the top of this post is an example of the first few years of a cash flow analysis. And in case you're wondering, No, it's not my actual, personal info.

How would that gap be covered?

First, I looked at how much additional cash we would need over the next five years, and where it might come from. Did we have money in a CD that would mature in a particular year? Did we have money in money market accounts or short term bond funds whose value should be pretty stable? I had been somewhat vaguely preparing for retirement. I had parked some money in CDs and moved some of our retirement plan money into a short term bond mutual fund, preparing for the fact that we might need access to cash in the next few years.

I entered those amounts as income into additional rows in the spreadsheet in the year we would use them. For CDs, that was the year it CD would mature. I used money from the short term bond fund to fill income gaps not covered by the CDs – but only if we would be old enough to access the money without penalty. (For those rules, see Tables 1 and 2 in Rules for Taking Distributions from Tax Deferred Retirement Plans). If these two sources were enough to cover our gaps in the first 3-5 years of retirement, then we could avoid possibly being forced to sell other types of investments at a bad time and suffer a loss.

Next, I totaled our investments from both retirement plans and regular (aka taxable) accounts, minus the money I expected us to use in the first 3-5 years. I estimated how much we could withdraw each year from that amount without running out of money until old, old age, like 100. (There are online calculators that will help you do this.)

The remaining gaps – any years where all of these sources of income together were still not sufficient to cover projected expenses – jumped out at me in red on the spreadsheet. They indicated that I might be forced to eat into our savings and investments too quickly and risk running out of money in later years, or have to curtail our lifestyle down the road.

Each annual red gap was a red flag, indicating that maybe retirement at that point wasn't a good idea.

Stress Testing My Decision

Here's the final thing I did before I sent in the official retirement papers. I think of this as stress-testing the decision. First, I thought of the best case scenario, both for retiring and for staying in my job. Then I tried to think of what the worst case scenario would be for staying and for going. Each person's ideas for this would be different, but here is one of my scenarios.

My worst case scenario for leaving my job had two parts. One was emotional, that early retirement would lead to stress and unhappiness for me and my husband. The other part was financial: What if I left my job, and my husband got laid off shortly thereafter? It was a very real possibility. That sent me back to the cash flow analysis, to do another version assuming that his earned income evaporated in the next year or two. How many more red spending gaps glared out at me, and how big were they?

Another part of this reality check was to ask myself what was the likelihood of any of these scenarios happening. I thought my best case scenarios had very little likelihood of happening. But my worst case scenarios seemed more likely. Whatever my decision, I had to face these risks and believe that I could manage them before retiring (or staying) felt OK.

Once I had faced my worst case scenarios and decided whether I was willing to accept those risks, I mailed in the papers.

How did it work out?

I think this process served me well. There have been some surprises. We had to replace two cars instead of the one for which I budgeted. (We had hoped to hit 200,000 miles on one of them, but it just wasn't in the cards.) The remodeling project cost more than we expected. Rules for married couples claiming Social Security changed. (These Social Security changes didn't actually affect my husband and me, but they will have a pretty substantial impact on others' income, especially in the early years of retirement.) On the plus side, I have been more successful with my own small business than I projected, and I've earned some additional money working again part time for Extension.

But here's the bottom line: The process I used to make the retirement decision gave me confidence so that I didn't panic when unexpected things happened. My cash flow analysis gave me a baseline to work from, so that I could make adjustments and re-evaluate our situation going forward.

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