Mastering Your Cash Flow Strategy in Retirement

Mastering Your Cash Flow Strategy in Retirement – (0:00)

Alek Johnson: Good afternoon, everyone. Welcome, and thank you for joining me during this holiday season. I hope you all had a wonderful Thanksgiving and that you have some exciting plans for Christmas and New Year.

I truly appreciate you taking the time to join me today. Of all the times we could discuss cash flow, I imagine this is not the most convenient. Many of you are likely out shopping for family and friends, so I’m especially grateful for your attention.

For those who registered early, you may have noticed I changed the webinar title. Originally, it was called Mastering Debt Management in Retirement, but I’ve since renamed it to Mastering Your Cash Flow Strategy. I wanted to address that change up front.

While debt management is certainly important, as I delved deeper into the topic, I realized it was too narrow in focus. I wanted this discussion to capture the broader financial picture. Having expenses doesn’t necessarily mean you’re in debt, so I believe this more holistic approach—focusing on cash flow—will be more beneficial. That said, if you registered specifically for debt management, I apologize for the shift. I’ll still touch on it, but it won’t be the primary focus today.

With that, let me introduce myself. My name is Alek Johnson, and I am a Certified Financial Planner™ and one of the lead advisors here at Peterson Wealth.

Before we dive in, I have a couple of quick housekeeping items:

First, I aim to keep this presentation to around 30 minutes. We may go slightly over, but it should stay close to that half-hour mark.

If you have questions during the presentation, please feel free to use the Q&A feature at the bottom of your screen. My colleague, Zach Swensen, is with us today. He’s another Certified Financial Planner™ and works closely with me here at Peterson Wealth. Zach will monitor the Q&A and do his best to answer your questions. At the end of the webinar, I’ll address a few general questions as well.

If you have a more individualized question, please don’t hesitate to reach out. If you’re a client, connect with your advisor here at Peterson Wealth. If you’re exploring the possibility of working with us or just curious, you’re welcome to schedule a free consultation, and we’d be happy to assist you.

Additionally, there will be a survey sent out after the webinar. Please use this opportunity to provide feedback and suggest future topics. Your input is incredibly valuable and helps us create a more enjoyable experience for everyone.

Lastly, a quick disclaimer: This presentation is not intended as investment advice. I don’t know the specifics of your financial situation, but I hope you’ll find a few helpful insights from today’s discussion.

Why is cash flow important?

Now, let’s begin by addressing why the topic of cash flow is so important. I’d like to start by sharing some recent statistics to highlight the urgency of maintaining positive cash flow.

Cash flow statistics

According to the latest consumer debt data from the Federal Reserve Bank of New York, credit card balances have risen by $396 billion since the first quarter of 2021, when credit card debt hit a low of $770 billion during the pandemic. Over the past three and a half years, credit card balances in America have increased by 51%.

Currently, credit card debt stands at $1.166 trillion, which is $239 billion higher than the previous all-time high before the pandemic—a 26% increase from that peak.

Additionally, mortgage debt increased by $75 billion in the third quarter of 2024 and by $580 billion over the past year. Credit card debt alone rose by $24 billion last quarter and $87 billion over the last year.

This rising debt isn’t surprising, given the high inflation of the past few years, leading to increased costs for goods and services, coupled with the high interest rates on credit cards.

Cash flow statistics for retirees

While this data paints a concerning picture for Americans as a whole, what does it mean specifically for retirees?

Unfortunately, retirees aren’t immune to the issue. In 2024, 68% of retirees reported having outstanding credit card debt, up from 40% in 2022—a 28% increase in just two years.

Moreover, spending beyond their means has also become a significant concern. In 2024, 31% of retirees reported spending more than they could afford, compared to just 17% in 2020. That’s nearly double in four years, with more retirees relying on credit cards for expenses they can’t afford.

The last statistic I want to highlight is about consumer sentiment among retirees. Half of retirees currently feel they have saved less than what they will need for retirement. About one-third believe they have saved the right amount, while only 17% feel they have saved more than they will need. This means that 50% of retirees are uncertain whether their savings will last throughout their retirement years, which is a significant concern.

With that in mind, my goal today is to help you better understand how to manage your cash flow—whether you’re preparing for retirement in the near future or are already retired. We’ll start by covering the basics of cash flow in retirement, address some frequently asked questions that directly impact your cash flow, and finish with practical strategies to help you manage your finances more effectively.

The Basics of Retirement Cash Flow – (7:23)

In my experience as a financial advisor, I’ve learned that retirement is fundamentally a cash flow game. If you can master managing your inflows and outflows at a high level, you’ll gain confidence in your financial stability during retirement.

Accumulation phase and distribution phase

Let’s begin by discussing the differences in cash flow during the two major phases of life: the accumulation phase (while working) and the distribution phase (in retirement).

Accumulation phase

During the accumulation phase, the focus is on building wealth and managing debt and future risks. Your income is typically more flexible since you’re working and have control over your earnings. Expenses during this phase are often centered around paying down a mortgage, raising children, or covering their educational costs.

In retirement, your income shifts from employment earnings to your retirement accounts. What you’ve accumulated now becomes the foundation of your income, transitioning from a more flexible to a fixed income model. The focus moves from building wealth to preserving it, ensuring it lasts throughout retirement.

Expenses also shift. Instead of focusing on mortgage payments or child-rearing costs, retirees often face higher healthcare expenses. In the early stages of retirement, there’s often more travel—whether to visit family or for leisure—which creates a dynamic change in spending patterns.

Distribution phase

Because retirees are no longer working, it’s critical to understand where your income is coming from. Unlike someone working part-time who can pick up an extra shift to fund a purchase, retirees often rely solely on what they saved during their accumulation years.

It’s essential to understand your income sources and their characteristics:

• Cost-of-Living Adjustments (COLA): Does your income source, such as Social Security or a pension, have a COLA to account for inflation?
• Taxability: How are different income sources taxed? For example, Social Security, retirement accounts, and brokerage accounts each have unique tax implications.

These factors determine whether you’ll maintain a positive cash flow (more income than expenses) or experience a negative cash flow (more expenses than income).

In addition to income changes, retirees face specific challenges:

1. Loss of Annual Raises: Retirees no longer receive work-related raises or bonuses.
2. No Contributions to Retirement Accounts: Without new contributions, retirees must ensure their investments generate sufficient income.
3. Market Volatility: Retirees need strategies to manage market downturns to avoid jeopardizing their financial security.

In retirement, the responsibility to maintain purchasing power, mitigate volatility, and ensure your money lasts as long as you do lies entirely with you. Each of these challenges significantly impacts your cash flow and requires careful planning.

Retirement Cash Flow Frequently Asked Questions – (11:40)

Now that we’ve covered the basics, I want to address five frequently asked questions that I’ve heard countless times. These questions touch on budgeting, managing cash flow, and broader financial considerations. While this isn’t solely a budgeting or credit card debt webinar, these questions are vital to shaping your financial picture in retirement.

Let’s dive into them next.

Each of these questions will be addressed one at a time, as they all have some level of impact on your financial situation. Let’s dive into the first question.

How Much Do I Need to Retire?

This is a question I hear from prospective clients all the time: “Alek, how much do I need to have saved to retire? What’s the golden number?”

It’s the million-dollar question, but the reality is—and I know you’ll love this answer—it depends on your cash flow.

When clients ask me this, my response is often, “How much do you want to spend each month?”

I’ve worked with clients who are perfectly content living off $3,000 a month. They receive their Social Security check, withdraw a small amount from their IRA, and lead a happy, fulfilling life.

On the other hand, I’ve had clients who struggle to live within a $25,000-a-month budget. One of these clients might have a few hundred thousand dollars saved, while the other is a multimillionaire. Yet, the latter still faces cash flow challenges, while the former does not.

The key here is that your spending needs dictate how much you’ll need for retirement, and this varies significantly from person to person. However, a general rule of thumb is to aim for about 25 times your desired annual income saved by the time you retire.

For example, if you want to withdraw $50,000 annually from your investments, you should aim to save around $1.25 million. This is based on the commonly referenced “4% rule,” which suggests withdrawing 4% of your portfolio annually to ensure it lasts throughout retirement.

Other factors to consider include your travel plans, healthcare costs, and legacy goals. Do you plan to leave money for your children, or do you feel they’re financially secure on their own? Each of these factors will influence your cash flow needs in retirement. Determining your “golden number” requires thoughtful consideration of your unique circumstances.

Should I Pay Off My Mortgage Before Retiring?

This is another common question, and it’s an important one. Deciding whether to pay off your mortgage before retirement is both a financial and emotional decision.

Financially, it may not always make sense to pay off your mortgage, especially if you have a low-interest rate. For example, during the historically low interest rate period around COVID, many clients had mortgage rates of 2–3%. In these cases, continuing to make the payments while investing their cash for potentially higher returns often made more sense.

However, emotions often play a significant role in this decision. Many clients feel more comfortable entering retirement completely debt-free, even if it’s not the most financially advantageous choice. Paying off the mortgage can provide peace of mind and free up room in the retirement budget.

That said, there are scenarios where paying off your mortgage might not make sense. For example, if the only way to pay it off is by withdrawing funds from a tax-deferred account like an IRA or 401(k), you’d need to account for the tax liability on that withdrawal.

Let’s say you owe $200,000 on your mortgage. To pay it off using your IRA, you might need to withdraw closer to $250,000 to cover the taxes. This could significantly deplete your retirement savings.

Because of these complexities, I highly recommend consulting with your financial advisor or accountant to determine the best course of action for your unique situation.

Can I Retire If I Still Have Debt?

This is another valid and frequently asked question. The answer, once again, comes down to your cash flow.

If you can’t afford to stop working because you need your income to service your debt, then it’s probably not a good time to retire. Conversely, if you can maintain a positive cash flow in retirement—meaning your income exceeds your expenses—you can likely consider retiring, even if you have some debt.

Many of my clients carry some form of debt into retirement, whether it’s a mortgage, auto loan, or home equity line of credit (HELOC).

The critical consideration here is understanding the difference between good debt and bad debt:

• Good debt is used to acquire assets or opportunities that can grow your net worth over time.

For example, a mortgage is considered good debt because you’re investing in real estate, an asset likely to appreciate over time. In contrast, bad debt includes items like credit cards, personal loans, or payday loans—debts that don’t contribute to financial growth and are often tied to purchases that lose value quickly.

Another key aspect tied to debt is the difference between simple interest and compound interest:

• Simple Interest: Applies only to the principal amount of a loan, such as with mortgages or car loans.
• Compound Interest: This applies to both the principal and any accrued interest. For example, with credit card debt, you pay interest on the initial balance and on the accumulated interest, which can grow quickly—especially since credit cards often compound interest daily.

If you’re on the right side of compound interest, like when investing, it can work wonders for your finances. But on the wrong side, such as carrying credit card debt, it can be very harmful and costly if balances aren’t paid in full each month.

Lump Sum vs. Annuitizing a Pension

Another frequent question is whether to take a lump sum from a pension or annuitize it, receiving monthly payments throughout retirement.

Several factors influence this decision, including:

• Longevity expectations: How long do you anticipate needing income?
• Spending habits: Whether you’re disciplined with large sums of money.
• Inflation protection: Whether the pension includes cost-of-living adjustments (COLA).

Your advisor can help run the numbers, but in my experience, it often makes more sense to take the lump sum. A lump sum offers greater flexibility and the potential for growth if invested wisely. However, if you worry about spending the money too quickly and running out of income later, annuitizing might be the better option to ensure a steady, reliable income stream.

This decision, like paying off a mortgage, also includes a behavioral aspect. Ensuring positive cash flow throughout retirement often requires balancing financial analysis with personal habits and emotions.

How to Pay for Major Expenses in Retirement

One common concern is how to cover significant expenses in retirement—things like buying a new car, taking big vacations, home renovations, or handling unexpected costs.

Beyond maintaining an emergency fund, there are two primary approaches:

Build it into your retirement budget

You can allocate a portion of your monthly income to save for large expenses. However, this requires significant discipline. It’s easy to spend money that lands in your checking account, so consistently setting aside funds for future needs takes a high degree of frugality.

Create a slush fund

A slush fund is a lump sum set aside specifically for large, irregular expenses. For example, if you have $1.2 million saved at retirement, you might allocate $1 million to your retirement income plan and keep $200,000 in a separate slush fund.

This fund can remain invested and grow, but it’s available for use when needed without impacting your monthly income plan. While once it’s gone, it’s gone, it allows you to handle large purchases without disrupting your regular inflows and outflows.

Practical Strategies to Manage Cash Flow – (23:27)

Now that we’ve covered these frequently asked questions, let’s discuss practical strategies for managing cash flow.

First and foremost—and I know this isn’t glamorous—you need to establish a clear budget.

I often hear things like, “Alek, I hate budgeting. It’s boring. It’s stressful. It’s only for people in debt.” But the reality is, that budgeting is an empowering tool that helps you achieve your goals and take control of your financial life.

Many people believe that if they just had a certain amount of money, they wouldn’t need a budget. The truth is, regardless of your financial situation, budgeting provides clarity and control over your cash flow.

If you believe having more money means you won’t need a budget, consider the countless lottery winners who, despite receiving millions, thought they didn’t need a budget and ended up completely broke.

In my opinion, a budget is a tool that empowers you to spend confidently and achieve true financial freedom. Knowing exactly where your money is going eliminates guesswork, reduces financial anxiety, and allows you to plan your spending without guilt or uncertainty.

There are many ways to create a budget—whether using apps, spreadsheets, or old-school pen and paper. Regardless of your method, it’s important to categorize your expenses into fixed, variable, and discretionary costs. This approach ensures you can also account for irregular expenses.

Unfortunately, we don’t have time today to dive into the specifics of creating a budget, but my colleague Alex Call has given a detailed webinar on the topic. If you’d like access to that resource, feel free to reach out to us for the link.

Let me share two client stories that illustrate the importance of budgeting.

One couple retired with approximately $1 million in their 401(k). During their working years, they had never earned more than $75,000–$80,000 annually. However, in their first two years of retirement, they withdrew over $300,000 from their 401(k)—an amount far exceeding their retirement plan.

Upon reviewing their situation, we discovered they had also accrued $60,000 in credit card debt. Because they only had tax-deferred accounts, we needed to withdraw $80,000 to cover both the credit card balance and the associated taxes. They hadn’t understood the compounding interest working against them on their credit cards.

If they had been more diligent about budgeting, this financial nightmare could likely have been avoided. It’s far easier to increase your spending than to cut back later, so setting clear limits upfront is critical.

On the other end of the spectrum, I had a client who was financially well off but hesitant to take a long-desired trip near the end of his career. He worried the trip would strain his finances.

During our meeting, we built a retirement income plan and discovered that he could take that trip every year for the rest of his life without jeopardizing his financial stability. Budgeting showed him not just his limitations, but also what he could confidently spend on experiences he valued.

Budgeting works both ways—it helps you manage limitations while empowering you to enjoy the things that matter most.

How to maintain positive cash flow through retirement

Here are a few key recommendations to maintain positive cash flow throughout retirement:

Establish an Emergency Fund

Maintain at least three to six months of essential expenses in liquid assets like savings or CDs. This provides a safety net for unexpected events and peace of mind.

Ensure Proper Insurance Coverage

No matter how skilled you are at budgeting or investing, a single financial disaster can ruin you if you’re not adequately insured. Make sure you have proper auto, health, and home insurance. Additionally, consider how you’ll address long-term care needs, as many retirees may need to self-insure in this area.

Track Your Spending

Be disciplined, but also kind to yourself. A common mistake is creating a budget and then never revisiting it. Budgeting isn’t just a one-time exercise—it’s an ongoing tool to guide your spending and keep your finances on track.

Often, people avoid revisiting their budget because they’re afraid of facing reality—perhaps overspending has occurred, and they’d rather not confront it. If that sounds familiar, I encourage you to be kind to yourself. Budgets don’t have to be perfect. Instead, give yourself credit for the effort and use it as an opportunity to refine your financial habits.

Another strategy I recommend is seeking support. Whether it’s through professional financial management or simply an accountability partner, reaching out for help can make a huge difference in maintaining positive cash flow during retirement. Don’t hesitate to lean on others for guidance or encouragement if you find yourself struggling.

Create a Retirement Income Plan – (31:01)

Finally, I cannot overstate the importance of having a solid retirement income plan.

Your plan should ensure:

• Inflation protection: Maintaining your purchasing power over 30 years or more.
• Consistent income: Market fluctuations shouldn’t affect your monthly income.
• Longevity of assets: Your money should outlive you, not the other way around.

A good retirement income plan helps you determine how much to withdraw, which accounts to pull from (e.g., Roth IRAs, brokerage accounts, 401(k)s), and how to maximize your income while minimizing risks.

At our firm, we utilize the Perennial Income Model™, a proprietary process designed to help clients maximize their income and mitigate retirement risks.

We’re transparent about sharing this model. Whether through free consultations, Scott Peterson’s book Plan on Living, our website, or presentations at events like BYU Education Week, we make the model accessible.

Why? Because the true value isn’t in creating the plan—it’s in managing and monitoring it over the course of a 20-, 25-, or 30-year retirement. Adjustments are inevitable, and a successful plan must remain flexible to adapt to life’s changes. Think of your retirement income plan as a living, breathing document that evolves with your needs.

A well-thought-out plan, when monitored and adjusted regularly, is the key to maintaining positive cash flow and confidently spending throughout retirement.

Summary – (33:47)

To wrap things up, here’s a quick recap:

1. Debt Trends: Debt, particularly among retirees, is rising due to inflation and high interest rates.
2. Cash Flow Perspective: Retirement requires a paradigm shift in how you think about and manage cash flow.
3. Key Decisions: Understand the consequences of major financial choices, such as lump sum versus annuitizing a pension or handling large purchases.
4. Budget Discipline: Establish and stick to a budget—it’s a cornerstone of financial confidence.
5. Retirement Income Plan: The most critical component of your financial strategy is having a well-designed and flexible income plan.

Before opening it up to questions, I want to remind you about the book Plan on Living by Scott Peterson. If you don’t have a copy, please request one—it’s free! If you’d like to share it with a friend, simply provide their name and address (or yours if you’d like to deliver it personally), and we’ll send a copy their way.

Thank you all for attending today’s webinar. I know December is a busy time with the holidays, so I truly appreciate you taking the time to tune in and talk about cash flow and income planning.

Before wrapping up, I want to remind everyone about the survey that will appear after the meeting ends. If you could take a moment to fill it out and provide your feedback, we’d greatly appreciate it.

Question and Answer Session – (35:27)

Zach, are there any general questions from the audience?

Zach Swenson: No general questions at this time, Alec. However, if anyone has specific questions after the webinar, we encourage you to reach out. You can email us at alek@petersonwealth or marketing@petersonwealth. Whether your question is general or specific to your financial situation, we’d be happy to help.

Alek Johnson: Thank you all again for taking the time to join us today. I know this is a busy season, and I appreciate your attention and engagement. Wishing you all a very Merry Christmas and a Happy New Year. We look forward to connecting with you again soon!