Cash flow vs. income: retirement planning when interest rates are low

If you’re thinking about retirement, and how you’re going to sustain your lifestyle in the next chapter of your life, you’re probably worried about retirement income –especially given today’s low and falling bank term deposit rates.

Quite often, investors will try to meet all of their retirement expenditure needs solely from the income that their investments can produce. But in today’s low interest environment, where the OCR is at an all time low, retirement spenders need to be savvy and understand how their whole portfolio can work for them.

But don’t let low interest rates send you straight to the share market

As we move through a low-interest environment, it’s always tempting to chase riskier investments (such as shares) in the hope of earning just a little bit more income. 

But many people facing retirement pursue these higher-return investments without understanding the increased level of risk.  

A much more sensible approach to retirement planning is to first review your financial goals, create a financial plan, and understand whether you can take the risk – or if you even need to!

Pursuing a higher-risk investment comes with two potential problems:

• Losing some (or all!) of your money: 
  
  If you take on a high-risk, volatile investment and things go wrong, it’s much harder to recover now than if you were a younger person with more time on your side.
  
  Heading into retirement means you have to be far more careful with financial risks, because you don’t have the same secure earnings capability to help you rebuild and recover from losses. 
  
  However, that doesn’t automatically mean taking on no risk either. As most people will spend 20+ years in retirement, having enough growth potential in your portfolio will help you keep pace with inflation and make sure the money lasts the distance.
  
  
  
• Getting carried away with unnecessary risks:
  
  It’s easy to get sucked into the herd mentality of “go big or go home”, and it’s not uncommon for people to get carried away with investments without assurance that they need to take such risks in the first place.
  
  After consulting with a financial planner, many people find that they don’t require as much investment income as they initially thought. They also start to understand how their capital can be used to fund some of their desired spending needs.
  
  However, it is important that your process is closely monitored and reviewed regularly with your financial planner to make sure everything stays on track. 
  
  With expert guidance, clients are able to measure the lifestyle they wish to maintain and form an accurate plan for how these expenses or goals will be met – and a higher-risk investment is not always required! But if you do take on risk, it is with eyes wide open and your overall financial wellbeing in mind. 

You’ve likely spent most of your working life with an income-oriented mindset. Afterall, that’s how you’ve managed to afford all the nice things you’ve become accustomed to – and also how you were able to save up for your retirement.  

Like many people thinking about retirement, it may be difficult or daunting to plan for a lifestyle without the same reliable income you’ve had throughout your career.

But instead of asking “How much income can I get from this investment?”, step back and ask yourself “What do I enjoy doing, and how much does that cost?”

With the guidance of your financial planner, focusing on the cash flow necessary to meet your ongoing expenses is key to ascertain exactly what you need for the next chapter of your life.

By reviewing your current lifestyle, and better estimating your expenses and quantifying your future goals (such as a holiday or supporting your grandchildren with university), you can then start to gauge exactly how much cash flow is necessary to meet those requirements.

Shifting your focus from income to cash flow enables you think more about what you’ll need to meet your goals, rather than letting your investment income dictate your standard of living or potentially rushing into an unnecessarily higher-risk investment just to boost the income.

A financial planner helps you focus on what matters most in your life

One of the most common ‘light bulb moments’ clients have when they are presented with their financial plan is the realisation that just focusing on income and chasing higher return investments is not always required for them to meet their goals.  

When retirement planning in a low interest environment, the most important thing to articulate is what is important for you and your lifestyle. Then you can work backwards to find the most sensible and comfortable solution to meet those needs.

Avoid rushing into investments and income strategies, and focus first on what matters most to you and your future goals.