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Investing: It's All About The Cash

Aug 17, 2007
It's vital that your nest egg last longer than you do. The only way for that to occur is if the nest egg continues to grow over time. If you take out more than you earn you are guaranteed to run out of money at some point. If your nest egg continues to grow, though, it will always last longer than you.

The first issue is how much money you can receive on a monthly basis. The second issue is how long you will live. The bottom line is that you need your income and your nest egg to continue increasing throughout your life.

I believe it's possible to do this by making a few, simple adjustments in the way you view retirement investing. Specifically, when it comes to managing their retirement portfolio, a retiree needs to think in terms of 'cash-flow' instead of 'income'.

Many find the decision to retire a very difficult one to make. Not having to 'punch the pay clock' every day is certainly appealing. The realization that there won't be any more company pay checks is frightening.

When a retiree thinks of replacing that paycheck he or she typically thinks in terms of income. "The pay check provided income. Since I'll no longer receive the pay check, I instead need to replace it with income from my investments."

Retirees want to keep their principal intact, so they need to be able to earn enough interest to live off of, right? Wrong.

From an investment point of view, income is thought of in terms of the interest. Investments that generate interest include things like certificates of deposit, government bonds and corporate bonds. On the other hand, investments such as stocks and real estate are thought of as growth investments.

Traditional financial planning confuses the terms 'safe' and 'stable' when it says you should transition your portfolio from a growth focus to an income focus. That means increasing the bond portion of the portfolio and decreasing the stock portion. That's also why the traditional approach is typically only able to generate a 4% income stream.

This thinking is flawed. Which is 'safer' over the next 40 years--a portfolio that continues to grow and that allows you to have a higher level of increasing income or one that only grows enough to allow you to barely get by? The second one is more 'stable' because it doesn't fluctuate as much, but that stability might mean running out of money.

'Cash flow' is different than income. Cash flow focuses more on the ability to continue to steadily deliver monies to replace that paycheck. But it's not tied to certain types of investments.

Picture a bucket with a small hole in the bottom. If there is enough water in the bucket, the water flowing out the bottom can continue without additional water being added. As long as additional water is added in time, the outward flow doesn't change. That's 'cash flow.'

Now, think of a money market account as your retirement bucket. Each month a pay check can be electronically transferred into your daily checking account. As your money manager, my job is to manage the portfolio such that I refill the 'bucket' when needed.

That freedom allows me to use investments that should provide a higher rate of return, such as stocks and real estate, but where the return may come more from an increasing share price instead of interest. When it comes time to replenish the bucket, I can determine where to get those funds based on market, economic and performance conditions.

I mentioned Joe another article. The key to providing Joe his paycheck while growing his portfolio is that I don't have to put most of his money into interest-type investments. Instead, I manage his portfolio to generate a higher overall rate of return.

Using these techniques, a properly managed portfolio should be able to sustain a withdrawal rate of around 7% while still growing the nest egg. But it must be managed properly. You can apply these same principles yourself, and it's easier than you think.
About the Author
Nationally-syndicated financial columnist and Certified Financial Planner Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He will answer your financial question FREE at http://www.guardingyourwealth.net
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