From the July 2008 issue of Research Magazine • Subscribe!

July 1, 2008

Tracking Cash Flow and 'Practicing' Retirement

During clients' working years, the emphasis is on accumulating assets that can generate sufficient income for when the client stops working. The underlying question that drives savings and investment decisions, however, is how much retirement income will the client need?

Research has led to rules-of-thumb suggesting a range of 70 percent to over 100 percent replacement income, depending on the client's spending patterns. There's the rub: If the clients don't know where their money goes while they are working, how can they know how much they will need after retiring? Rules-of-thumb are a good starting place, but they can be wildly innacurate for some clients.

Veda Cassells-Jones' retired clients know exactly where their money goes. Cassells-Jones, who holds the CFP, AIF and CLTC designations and is president of Commonwealth Financial Network-affiliate C-J Advisory Inc. in San Jose, Calif., is a firm believer in the value of monitoring cash flow. About three years before the clients retire, she starts talking seriously with them about becoming more aware of cash flow and doing what Cassells-Jones calls "practicing for retirement."

She has developed a worksheet that she calls a "Third Age Expense Worksheet," because the clients' cash flow will be different when they're no longer working. The analysis allows Cassells-Jones to determine how much income the clients will need each month for living expenses.

"Because I've refined it so many times over so many years, there isn't any spending category that isn't listed on the worksheet," she says. "The conversation is ongoing prior to their retirement so they are aware of their spending. My goal for them is to make sure the withdrawals from their investment accounts are no greater than 4 percent each year over the long term."

Asking clients, especially those accustomed to spending whatever they wish, to start tracking their cash flow just before they retire could be problematic. Cassells-Jones doesn't encounter any resistance, however, because all her clients, regardless of age, track their cash flow from the beginning of their work with her. As a result, the clients have a continuous understanding of their cash flow at every stage.

"Whether they do it by hand, Quicken, or with our cash flow statement, that is critical to our having a relationship," she says. "It is the key to everything else we do, so they are aware of that all the way along. When it comes time for retirement, it's just more emphasis on something they are familiar with."

Reprints Discuss this story
This is where the comments go.