Cash Flow Problems in Retirement

By Gary Silverman, CFP®

When it comes to creating a budget in retirement, a big part of it is understanding your cash flow. And to understand cash flow, you need to know all the problems that get in its way.

Death is a problem. This is especially true if you are the one who died. But at least your money woes are over. Not so with your survivors. When you die, income streams tied to only your life go away or are reduced. This will happen with Social Security, pensions, and the like. That is why I typically recommend getting survivor benefits so that your spouse will continue to receive an income. You’ll have to see what makes the best sense in your circumstances.

But suffice it to say that if upon your death income goes down, then you need to look at how that budget will work for those you leave behind in retirement. If a shortfall exists, it needs to be made up somehow. This is where life insurance comes in handy. Or you can start lowering your spending now so that if this happens, there is no deficit.

Oh, and Uncle Sam isn’t going to help. A single person pays more taxes than a married couple does on the same income. It’s quite possible with survivor benefits and investment income that your surviving spouse will be in a higher tax bracket than you’re in now. Take that into consideration.

It is not a loving act to just ignore these things if doing so will require your spouse to cut spending by 10, 20, 30% or more after you die—especially if you’re not willing to do so yourself.

Health care is a problem, too. I have no idea what medical care in this country will look like next year let alone what it will cost 10, 20, or 30 years from now. But no matter what it costs, you will either pay for it in premiums, taxes, or out-of-pocket. Don’t forget to include your best guess as to what this might be in your budget.

This includes long-term care.

Let’s imagine that later in life you have a need for long-term care. Many people assume their spouse will take care of them, but realize if you are old and sick, your spouse may be as well. “Oh, then, my kids will take care of me.” If so, then who is going to replace the income lost by that child or take care of their family while they are taking care of you? While that might happen, burdening your kids is selfish if you could have arranged things for yourself. Let’s say that your needs are modest and that it costs $60,000 a year. This is on top of the current expenses your spouse has.

How does that work with your budget?

If it doesn’t, solutions such as insurance and Medicaid planning are called for. For Medicaid planning talk with an attorney; for insurance, determine how to fit the premiums into your budget.

Next time we’ll look at the problem of guaranteed income streams. Trust me, there are some.

Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing