Wealth is Good
Cash Flow Is Better

Recently our family went out to eat, and while waiting for our entrées one of our sons asked us what we’d like to do when we retire. A good question…one that was fun to answer. My wife said travel and dine out. I agreed, but added that since I am a boy and boys like their toys I absolutely need to a retirement house (not retirement home – not yet anyway) with a play room. Of course any respectable play room requires a pool table, audio-visual gadgets, the obligatory big screen TV, and so on.

Ah, but the fun must eventually end. In this case the end came with a follow-up question, “How are you going to pay for these things?” That’s a more serious question, and it requires more serious thought.

When you think of what you’ll need to pay for during retirement, every expense can be grouped into one of two general categories: lump sum purchases or ongoing expenses. Purchasing a retirement house with play room requires a lump sum payment. So does a special trip or vacation.

Dining, on the other hand – whether it’s done at home or at a restaurant – is more of an ongoing, recurring expenditure. So are transportation costs, clothing, medical costs and insurance, utility expenses, etc.

                               When you think of what you’ll need to pay for during

                               retirement, every expense can be grouped into one of two

                               general categories: lump sum purchases or ongoing expenses.

So, back to the question “How are you going to pay for these things?” With your retirement fund, of course. But how does your retirement fund allow you to make lump sum purchases without seriously depleting itself? And how does it also fund ongoing, recurring expenditures? The answer is, it depends on what your retirement fund is comprised of.

Net worth might not be enough

As discussed in our preceding article, net worth is the sum total of all your household assets minus the total amount of your liabilities, or debts. Net worth is a measure of your wealth, and it is often used as a measure of the value of one’s retirement fund.

Let’s say you have a net worth at retirement of $1.2 million. Is that enough? Well, there are many different ways to achieve a net worth of $1.2 million. You might have $1.2 million in assets and $0 in liabilities, or you could have $2.2 million in assets and $1 million in liabilities. In the latter case, you would probably have fairly high monthly payments on your debts, and that could seriously cut into your ability to pay your recurring retirement expenses.

What if we just focus on your assets. Are all assets the same? If you have $1.2 million in assets and $0 in liabilities but $1.1 million of your asset total is from your primary residence, how will your assets help you pay those nasty recurring retirement expenses?

As you can see, net worth might not be sufficient, by itself, as a retirement measure. At the very least, the composition of your net worth is an important consideration. In our next article we will suggest another measure that, together with net worth, could complete the picture.

In the meantime we welcome your thoughts on this and other financial planning topics.

Keith Whelan is Cashflownavigator's founder and author of the "Wealth is Good, Cash Flow is Better" e-booklet. He is a graduate of Columbia University Business School, teaches at Rutgers University, and has over 30 years experience in the banking and financial services industry. Keith, his wife Cindy, and their two sons live in New Jersey.