Cash-flow management is one of the most critical elements of a wealth plan. This is the strategic process of monitoring, analyzing and optimizing the money coming into and going out of your investments to maximize your available funds and minimize the negative effects of market downturns.
At FORM Wealth, cash-flow management is the foundation of our discretionary investment strategy, Total Relationship Investing™ (TR Vest™). Simply put, your cash-management plan determines how money flows in and out of your life. It can make the difference between steady retirement income and unnecessary losses.
We are here to manage your retirement funds so you can spend your time and energy doing what you enjoy.
The benefits of “dollar-cost averaging”
When you’re in the accumulation phase of life — earning money (as opposed to the distribution phase, when you begin withdrawing your retirement savings), the best strategy is simple: Put your money to work, and let time in the market compound your wealth. It’s a long-term strategy.
With TR Vest™, we use blended research to guide portfolio design and then let time be your ally. If you are saving monthly — whether in retirement accounts or regular investment accounts — dollar-cost averaging (DCA) is an excellent strategy. You invest a fixed amount of money at regular intervals, regardless of market conditions.
DCA removes the uncertainty of market timing. By investing the same amount every month, you naturally buy more shares when the market dips and fewer when prices are high. DCA takes the emotion and guesswork out of investing and helps you build a consistent investing habit.
Over time, this approach can enable you to build wealth with less emotional stress and uncertainty.
The risks of “dollar-cost ravaging”
What works well on the way in, however, can become dangerous on the way out.
Far too many advisors encourage retirees to fund withdrawals the same way they funded their contributions — by systematically selling each month. When retirees withdraw a fixed amount of money during a down market, it can have a negative effect on their portfolios. In the financial services profession, this mistake is sometimes referred to as “dollar-cost ravaging.” Also called “sequence of returns risk,” it’s the opposite of dollar-cost averaging.
“Dollar cost ravaging” is the detrimental effect of withdrawing fixed dollar amounts from an investment portfolio during a market downturn. This action forces more shares to be sold at depressed prices to generate the same income, which depletes a portfolio faster than expected. It also irreversibly damages long-term sustainability.
Building cash reserves helps protect your retirement savings
Cash-flow management is a core strategy we use to protect your wealth, reduce stress and help you enjoy retirement the way you’ve always envisioned.
Instead of relying on monthly liquidations, we help clients build a cash reserve — typically 12 to 24 months’ worth of anticipated withdrawals. We raise this cash when markets are at or near all-time highs, locking in gains and avoiding forced selling during downturns.
These funds then flow into your life like a paycheck-replacement system. On whatever schedule works best for you — monthly, semi-monthly or quarterly — you will receive the amount you need to cover expenses and fund the life you want to live.
This approach requires more work on our end, but it’s worth it. It helps our clients avoid the pitfalls of dollar-cost ravaging and helps provide stability during volatile markets. As a result, it increases the odds that you can live confidently in retirement without worrying about when or how to sell investments.
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It is extremely important to work with your financial advisor once you retire and begin living off your retirement savings. At this life stage, you no longer have the luxury of time to make up any losses! If the market is experiencing a prolonged decline in prices, then each one of your withdrawals reduces your portfolio’s balance and is not offset by new deposits.
There are several ways we can help you avoid the potentially devastating effects of dollar-cost ravaging. For example, we can delay or reduce distribution of your savings from investments that are declining. Depending on your situation and the status of the markets, we can advise you if and when you might need to reduce the percent you initially planned to withdraw. We also will advise you on ways to reduce your reliance on your portfolio.
We are here to protect your wealth from market fluctuations and to manage your cash flow so that income generated from your investments keeps pace with the constantly increasing cost of living once you retire.
We’ve had the privilege of helping many individuals prepare for retirement. Since most people retire only once, planning ahead can provide greater clarity. Our team brings knowledge and experience to help you explore strategies designed around your unique goals and circumstances.
