Why Cash Flow Investing Is Your Best Income-Generating Option

  by Shelley Seagler

Is a nest egg of one million dollars enough to retire comfortably? How about half that amount? What’s the minimum you would need saved in order to have a comfortable monthly income after retirement?  How would cash flow investing make reaching your income needs even easier?

Those close to retirement are often discouraged by the financial figures they receive from retirement savings calculators. A monthly income of $5,000 requires around $1.5 million in your retirement portfolio to generate this amount (using a “safe” 4% annual withdrawal rate).

But even then, that amount only covers you for 30 years. What happens if you want to live off of more than $5,000 a month? The higher your monthly expenses, the more retirement funds you will need, which may be discouraging to many.

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Cash flow investing allows you to generate a comfortable monthly income without having millions of dollars squirreled away in a nest egg. It also helps retirees overcome some of the biggest challenges they face when it comes to investing, including things like taxation and inflation.

But is it the right option for you? Here’s what to know.

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Challenges to Investing for Retirement

There are several obstacles to generating income for retirement that you may have little control over, including the length of your retirement, market volatility, inflation and taxation. Cash flow investing can help mitigate these obstacles in certain cases, but it’s important to know what you’re up against.

Challenge #1: Longevity

No one can really predict exactly how long their retirement will be, and one of the biggest challenges when trying to determine how much you will need for retirement is knowing how many years you will have to stretch your nest egg to meet your day-to-day expenses. You don’t want to outlive your retirement funds.

Cash flow investing alleviates some of this burden by allowing you to generate income for as many years as necessary, and should you pass away sooner than expected, your portfolio can be passed on to your beneficiaries, allowing you to leave a legacy for those coming after you.

Challenge #2: Volatility

Another thing that can be difficult or nearly impossible to predict at times is the market’s volatility. Market swings and “Black Swan” events (earthquakes, financial crisis, etc.) can happen, and when they do, they can have a major impact on the financial market.

Cash flow investing gives you the opportunity to invest in lower-risk options, like covered calls and choosing diversified stocks that have proven to be reliable over time. You won’t have to be swayed by the market’s rises and falls because you’ll be generating income month after month.

Challenge #3: Inflation

The rate of prices of goods increases each year, which means that the number of expenses your retirement income covers may change over time. For many retired people, higher inflation is especially difficult because they may be living on a fixed income that can’t support rising costs. In addition, many of the goods and services most often used by retirees are already experiencing greater-than-average price inflation (like healthcare).

This means that your nest egg may not cover your bills the same way in 10 or 15 years as they do now, so you will need to adjust your levels of income accordingly over time. With cash flow investing, your income you need to live comfortably can also increase keeping pace with inflation.

Challenge #4: Taxation

Taxes on retirement and investment income can be tricky to manage if you don’t know what you’re doing. Depending on your situation, some of your Social Security, retirement funds (401k, etc.) and retirement income may be taxable. If you only have 85% of your budgeted income to work with, you may not be able to enjoy your retirement money as much as you hoped.

With cash flow investing, you can increase your average monthly income to cover any reductions as the result of taxes. This means that you can have the lifestyle you want while still paying any taxes or fees that you would otherwise owe.

Does Cash Flow Investing Work for Everyone?

Even though cash flow investing can help ease the obstacles to living well in retirement, many retirees may not consider themselves savvy enough investors to give it a shot. The good news is that you don’t have to be a professional investor to generate income from your portfolio.

Cash flow investing is, in simplest terms, about creating income streams to cover your monthly expenses, and there are many different ways you can create cash flow in order to do so.  You can generate income from a diversified portfolio and reduce the risk of running out of money in retirement.

With real estate investing, for example, cash flow is the result of proceeds from rent payments.   You could also purchase a multi-unit building, like an apartment complex, and manage the property for monthly income. Or you could own a vending machine on a property that makes an income (or all three options).

But real estate is just one type of cash flow investment. There’s also option investing (a large part of the Snider Investment Method) that deals with covered calls, puts and other forms of equity. A covered call is an options strategy that involves both stock and an options contract. The investor buys (or already owns) a stock, then sells call options for the same amount (or less) of stock, and then waits for the options contract to be exercised or to expire.

Covered calls tend to be a more popular option for investors, as it’s lower risk than real estate investing and gives you slightly more control over your portfolio. But in either case, you have freedom.

This makes cash flow investing a great choice for retirees who want to generate monthly income from a variety of sources but who don’t want to be pigeonholed into a single type of investment.

With cash flow investing, you’re covered by a broad range of low-risk investments that can provide you with sustainable income over as many years as you need it. This makes it a near-perfect income generating option, especially for retirees.

Follow these 7 tips to maximize your retirement portfolio

Final Thoughts

Cash flow investing is a great income-generating option because of its flexibility and reliability. Many retirees stick with the same investment approach in retirement even though their investment objective changes from growth to income.  Shifting to a cash flow investment approach can create a larger, more dependable income source throughout retirement.  Retirees can put their money to work rather than rely on the old Buy and Hold (we like to call it Buy and Hope) mentality.

Investing for cash flow also means that you have a little more security to weather the ups and downs of the market, inflation rates, taxes and other factors that may be outside your control.

Although there are some things that you won’t be able to predict when it comes to how much you need in retirement (like the length of your retirement, for instance), cash flow investing gives you the most freedom to live comfortably so you don’t have to worry about bills even when your retirement ends.

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