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Cash flow in early retirement: Six considerations for high-net-worth individuals

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Many people dream of retiring early so they can spend more time with family and their passions outside of work. But early retirement can present some unique risks, even for high-net-worth individuals. To ensure financial goals are met, thoughtful planning is required, particularly when it comes to cash flow.

In a recent video presentation, Granite Harbor partner Tim Smith, CFP® discussed considerations for cash flow in early retirement, income tax planning, and strategies for achieving long-term stability. Watch that full presentation below or continue reading to find useful insights and strategies on how to satisfy cash flow needs in early retirement and beyond.

Cash flow considerations in early retirement

Determining expected cash flow needs is a crucial step in planning for early retirement. But there is a lot to consider in building an actionable plan that will allow an individual and their family to meet that need while still achieving other financial goals. Here are six areas to focus on when planning for cash flow in early retirement:

1. Maximizing employer-sponsored plans

Maximizing pre-tax contributions to employer-sponsored benefit plans like 401(k) plans can help reduce taxable income in a year when early retirees may potentially experience large severance payments. Pre-paying those deferrals in the first quarter can provide greater flexibility in choosing when to retire.

Some employer-sponsored plans allow for post-tax deferrals, with contributions capped by the IRS at $61,000 per year, including any pre-tax contributions, and employer contributions. Any money contributed on a post-tax basis can be strategically rolled over into a Roth IRA to achieve tax-free growth moving forward.

Individuals with income over $305,000 may not be eligible for employer 401(k) and other types of employer contributions. In these cases, deferred compensation plans can be used to take current year income and push it out into the future for tax planning purposes. Once a target retirement date has been set, individuals can schedule income to be deferred in that year, thereby lowering taxable exposure. However, elections for distributions must be made a minimum of five years prior to when that distribution will occur. So, it is important to be thoughtful when nearing retirement to ensure timing of distributions aligns with cash flow needs.

2. Timing of severance payments

Individuals receiving severance should consider how the timing of payments might impact cash flow in retirement. Individuals set to receive a large severance payment in the last year of working may be able to delay payment or spread payments out over multiple years. This could provide greater flexibility for tax planning purposes, as well as ensure cash will be available in the years it is most needed.

3. Cash bonuses and performance bonuses

It is important for those approaching retirement to fully understand their company’s policies for cash and bonus plans. Some questions to ask include:

  • Does the company base bonuses on tenure?
  • Do they pay a pro-rated bonus the year following severance?
  • If so, do they require employment at the end of the year (12/31) to receive a cash bonus the following year?

The last thing anyone would want is to leave their employer mid-year only to find out they just made themselves ineligible for a bonus because they had to be employed on December 31. So, thoroughly investigating those policies ahead of your decision can help maximize the value of bonus programs.

4. Pension elections

Individuals receiving a pension must make some important elections that can significantly impact cash flow in retirement. Perhaps the most important choice is whether to receive a lump sum or annuity payments. Both strategies have benefits and drawbacks that merit consideration.

Some of the advantages and disadvantages of a lump sum pension election include:



  • Lack of guaranteed income
  • Less certainty in future cash flow
  • Lose survivorship benefits (spousal guarantees)

Some of the advantages and disadvantages of electing annuity payments include:


  • Lifetime guaranteed income
  • Predictable cash flow for joint life


  • Lack of inflation protection
  • Lack of generational transfer
  • Lack of liquidity
  • Credit risk from company

If choosing an annuity payment, one strategy to consider is what Granite Harbor calls “Pension Maximization Using Life Insurance.” It's somewhat of a hybrid between taking a lump sum or an annuity payment. How the strategy works is to first calculate the value of the annuity payment of a single person (the retiree) and compare that to a full annuity payment with spousal benefit. A portion of that difference is then invested in a life insurance policy to replace the annuity payment that would cease should the employee pass away. The benefits of this strategy include:

  • Increased cash flow in retirement
  • Flexibility upon first spouse's death
  • No lost value on income in the event the beneficiary dies first
  • Preserve pension value for future generations

5. Health care coverage

Many people experience higher healthcare costs during their retirement years, and the unpredictability of those costs can present a serious risk to cash flow. If an individual is retiring early — before they reach Medicare eligibility at age 65 — there are several options for continuing healthcare coverage:

  • COBRA (for a maximum of 18 months)
  • Receiving coverage via a spouse’s insurance
  • Purchasing insurance from the public marketplace (Obamacare)
  • Securing private insurance

Strategic planning during working years can create a tax-advantaged way to pay for healthcare costs during the gap between employment and Medicare eligibility. If offered by an employer, a health savings account (HSA) can be funded with pre-tax dollars that can be used to pay for health care costs during early retirement. These types of accounts are typically tied to high deductible plans. But with some foresight, the tax benefits can be significant enough to warrant consideration.

6. Social Security

To collect full Social Security benefits, individuals must wait until they reach either 66 or 67 years of age, depending on year of birth. The earliest a person can start to receive Social Security payments is age 62. But these payments will be reduced on a sliding scale — from 25% to 30% — based on the number of months between age 62 and full retirement age.

So, for those retiring early, the decision becomes whether to collect benefits early, and if so, how early. The “right time” to turn on Social Security benefits differs for every individual and should be based on total cash flow need and a variety of other factors. By taking a comprehensive look at other potential sources of retirement income and predicted cash flow needs, early retirees can create a plan that aligns with their retirement goals.

Planning for a secure and enjoyable future

Inevitably, cash flow needs will change during retirement. But thoughtful planning ahead of time can mitigate risk and create tax-advantaged income streams that align with future needs. By taking time to consider all of the options available, high-net-worth individuals can retire early knowing their financial future is secure.

Thinking it may be time to reevaluate your retirement plans? Connect with Granite Harbor and we’ll set up a complimentary consultation to review your goals and how we can help you achieve your ideal retirement.

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