There are quite a few universal truths when it comes to money and one them is that cashflow is king. That’s still true in retirement. It’s obvious really – if you’re spending more than is coming in, then you have to dip into capital to make up the difference. That’s fine, as long as you have capital from which to draw, and as long as you don’t draw down too quickly so that the capital runs out altogether.
One example of clients really not understanding this was a couple I met in their early 50s. By any measure they were wealthy – they had four properties, including two in London. They had money in the bank and good pension funds. He earned £250k a year and they had the lifestyle to match. They told me they wanted to spend £10,000 per month throughout their retirement, and they wanted to retire now.
They thought they had all the money they needed; I told them they’d run out completely by the time they were 71. They went white when I told them. For them the big issue is that they didn’t want to sell any property.
I told them they’d have to, unless they dialled back their spending by about 20%. They didn’t want to do that either. In the end, the company he worked for got bought out and he had a big windfall, but still they have reined in their spending.
Another example of how important cashflow is, is almost a kind of reverse example. In this case, a client couple had a seaside property, near to their home which was a successful holiday let. They had run it for decades and it had earned them about £28,000 per year, but they had grafted every Saturday to change it over for the incoming guests.
In the end, in their mid-70s, they sold the property. They bought it in the 80s for tuppence ha’penny and sold it for £900,000. But I got an exasperated call from the gentleman asking to come in and see me. Turned out she was really worried that they weren’t going to manage without the income from this property.
Now you’re doing the mental arithmetic in your heads while you’re reading this. Sure, they had lost the income, but they now had a chunk of money in the bank, even allowing for capital gains tax.Even if they put the sale proceeds under the mattress and took £28,000 year out of it to spend, they would have the best part of 30 years’ worth of income they could draw from capital – enough to take them both past age 100.
So, they came into my office, I somehow managed to get this across to her, and she literally wept in my office with relief. It was the strangest thing. Now this is a strong, intelligent woman who had run that holiday let business for decades – she wasn’t thick, or mathematically deficient in some way. And yet for her, the cashflow of the income coming in was everything, and she couldn’t get her head around it being repacked by capital.
Cashflow is still king, even in retirement. Just remember that cashflow can come from capital too and it is OK to erode capital!
Leave a Reply