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Cashflow Management and the need for liquidity as you approach retirement

This week I am writing on one of the most misunderstood topics – cashflow management and the need for liquidity. There is a clear distinction between budgeting and cashflow management. Typically, budgeting involves rigid income streams which in term restrict the amount you have to spend.

For families who wish to build wealth over time and generations, cashflow management is essential and usually these families have budgeting in check as they realize the effect that unchecked discretionary spending has on  wealth and the ability to maintain wealth. Our experience is that wealthier families spend less than what people typically think. The reason for this is they are often attuned to the reality that continuing deficits results in the sale of assets at unfavourable times, at unfavourable prices with unnecessary cost and taxes. Outcome wealth deaccumulation!

For this reason, understanding the cashflows generated and when they materialise from your investments, properties and bank accounts is essential to cashflow management.

Now we take the example provided above and we compare it to the aging of the population and the need for liquidity as we age. It is no secret that we crossed the threshold some years ago and we are now in deaccumulation mode. This means there are now more monies in superannuation pension funds than there are in superannuation accumulation funds. Symbolic of an aging population.

Aging members increasingly draw down against their superannuation assets at a time when markets are at their highest levels historically and some would say, pretty much priced for perfection. It doesn’t take much to upset the apple cart particularly if inflation numbers start to rise again.

For most of our clients who are a few years out from retirement and certainly going into retirement, we practice “bucketing” of capital to preserve wealth. See diagram below.

Investment and superannuation investment portfolios can be structured into three asset ‘buckets’ in preparation for and throughout retirement. This concept has long been practised by the wealthy and can be applied to all manner of assets including direct property which falls into the Long Term Bucket. Mitigating the risk of capital loss is paramount as you transition into the pension phase, as you have a shorter time horizon to regain capital in the event of a market downturn. Below I describe the buckets of capital.

The Short- and Medium-term Buckets allow for separate isolation of your defensive and more income focused assets. They also allow for the drawing of lifestyle payments, expenses, and ad hoc payments as they occur. The Short and Medium Buckets generally have minimal volatility, and you can count on these Buckets to support your lifestyle during market downturns and recession.

The Long-Term Bucket supports our growth assets which are far more volatile, but will in the longer term provide the most growth. They will also provide some income but significantly less than the Short- and Medium-Term Buckets.  In the longer term the harvesting of the profits from the Long-Term Buckets will provide the growth capital to top up the Short Term and Medium Buckets. In the short term the access to ready cash also means that in serious down turns, apart from maintaining your lifestyle, you can also be positioned for buying opportunities when distressed quality assets go on sale.

Hopefully, my general disposition has been of interest in preparing your lifetime accumulated assets for your retirement and for transfer to future generations.

Speak to one of our financial advisers