Why Cash Flow is King!

There is a lot of work in planning for an early retirement. My partner and I discussed our finances fairly frequently.

And one of the biggest topic that regularly came up in our finance discussion is "where is the cash coming from to fund our daily expenses if we stop working today?"

I think the idea of having just $1 mill net worth (or whatever you think is the reasonable amount to retire) is not enough when planning for retirement. I see a lot of articles out there that talk about having sufficient net worth to retire but fail to expand on asset diversification and accessibility to cash to fund your daily expenses.

..and if you are retiring from the workforce well before turning 65 years old and don't' plan to go back to work ever again, you really have to think your retirement in two phases.

One - the period between your early retirement age to your pension age.

Two - the period between your pension age and death.

And unless you are one of the lucky ones where you've accumulated enough in super to cover your retirement in period two and have stuffed up so much cash in your savings account to cover your expenses (plus inflation) in period one of your retirement, I really think you have to juggle between growth and accessibility to cash to fund for your daily expenses.

Some common financial scenarios I've seen among the F.I.R.E communities are as per below:

Scenario one - Accumulated enough net worth and invest 100% in balanced or growth index fund/shares returning around 8-10% average and live off from annual conversion of shares to cash at 3-4% rate to fund period one of retirement + few dollars in super.

Scenario two - Accumulated enough net worth through properties (either all fully paid off or partially paid off but earn enough rentals to cover mortgage and other expenses) and live off the rentals or through slowly liquidating from the build up equities + few dollars in super.

Scenario three - Accumulated enough net worth through high dividend shares and live off the dividends in period one retirement + few dollars in super.

Scenario four - Accumulated enough net worth through a combination of both properties and shares, earning enough rentals and dividend to fund daily expenses in period one of retirement + few dollars in super.

..plus more! (Share in the comments below 👇 if you know any other scenarios!)

I feel when going through these financial planning exercises, it's important to go through beyond the question of how much net worth is enough to retire early.

Some of the financial questions I think one can ask (but not limited to) when planning to retire early (Read - Emotions, Purpose, Meaning after early retirement):

• What level of net worth will comfortably cover both phase one and phase two?

• Where is the cash coming from to fund both phases?

• How will taxes impact my retirement fund and withdrawal strategies?

• Is my savings and investments structured to meet rising inflation, especially during phase one?

• What strategies will I use to bridge the gap between early retirement and pension age to access super or government pension?

• What about health care? Should I get private health care or rely on having just Medicare?

• What about unexpected expenses, do I have enough in my emergency fund or have fast enough access to cash to be able to cover unexpected expenses?

• How can I ensure my investment portfolio is balanced for growth, stability, and accessibility throughout retirement?

• Have I accounted for other potential costs such as lifestyle changes? What if I want kids and if I already have a kid, what if I want more?

• Will I need to support anyone else, like kids or aging parents, during my retirement?

• Do I need to own my own home? or should I rent for flexibility? Or should I own an investment property with a view of moving into them some day when I am ready to settle down in one location?

• Do I want a stationary lifestyle where I settle in one location? Or do I want nomadic lifestyles in my retirement?

• Do I plan to get government pension when I reach preservation age? Or am I going to rely on my super for phase two? Or am I planning to do both?

• What is my fall back plan if the 4% rule/FIRE theory is wrong and I ran out of money before I reach preservation age?

Mind you.. above 👆 will always be evolving as you age. Therefore, it's important to have these discussions or check-ins regularly, even after your retirement.

Anyway, some things to think about.

Good luck and till next post x