Cash Flow Management
by Frederick R. MacLean

The three most dreaded words in the
English language are ‘negative cash flow.’ – David Tang

Your romantic images of your retirement years probably include travel, secluded beaches, time with friends and grandchildren and, most important, relaxation.  A more realistic picture of your retirement, however, might look different.

Many of us find it difficult to relax as we transition to retirement. Our jobs provide us daily structure and often define our personal identities, so no longer working can cause us to be anxious and stressed about how we will spend our time and who we are going to be. For most of us, though, the main source of anxiety and stress in retirement is money: the realization that our investment portfolio’s cash is now flowing out to support our spending versus being saved for the future.

As this realization sinks in, our clients tend to ask more questions about the interest rates on their bonds or the dividend yields on the stocks in their portfolio, but what they really want to know is much more general: will their investment portfolio be able to distribute enough cash to support them for the remainder of their lives?


During your working years, cash flow management is relatively simple: you receive cash from a paycheck or distributions from a small business, and you funnel the portion you do not immediately spend into a variety of savings and investment plans. Directing cash into your investments is easy because it does not generate capital gains and usually does not need to be done on a specific schedule. In fact, the most important part of managing incoming cash these days is making sure you do not have too much cash languishing in checking or money market accounts, which currently pay a near-zero interest rate.

During retirement, managing cash flow is far trickier. Your Social Security will generate some regular income, but it probably will not pay all your bills, so you will need to supplement your Social Security income with distributions from the investments you made during your working years. Unfortunately, very few people understand how to do this in a cost-effective and tax-efficient manner. 

As with any other aspect of your long-term financial well-being, cash flow management requires a well-designed plan, and this is where a good advisor comes in. Stock dividends and bond interest payments will be part of your cash flow plan, but you can generate cash from other sources as well, and these might be more tax efficient and provide greater long-term portfolio returns.


Right now, interest rates are far below historical averages, so many retirees would find it difficult to support their cash flow needs from interest payments on high-quality bonds alone. As a result, some retirees might keep a significant portion of their wealth in a cash account and take regular withdrawals from that account, but a near-zero interest rate on cash can be a significant drag on long-term investment returns.

A better approach would be to supplement interest and dividend payments with a trading
strategy that takes advantage of prevailing market conditions to create cash flow from the most efficient source at a particular time. For example, the period immediately following a sharp rise in stock prices might be a good time for a retired investor to take some profits off the table by selling some stocks and using that cash to pay bills. In most cases, this not only is more efficient from an investment standpoint but also comes with a lower tax bill than a stream of taxable interest payments does.

Conversely, if stocks have been declining lately, a good advisor might suggest selling some of the more conservative portfolio bond holdings to generate cash flow. This strategy is very efficient from a tax perspective, and it allows you to avoid selling stocks at depressed prices.

A good advisor will create an efficient plan that meets any retiree’s unique tax, spending, and risk constraints. Such a plan can generate regular cash flow from your diversified portfolio, regardless of current interest rates, and deliver a recurring distribution to you, just like a paycheck would. And when you have regular cash payments coming in, you can alleviate – or maybe even eliminate – your money-related anxiety and stress, so that you can relax and enjoy all the things you have always associated with the romantic ideal
of retirement.