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Most of the articles/blogs/websites on retirement savings concentrate on adding more savings and investments to increase the net worth of an individual. But a higher net worth doesn't imply that a person can be financially secure, unless he or she also has a dependable cash flow every year. So isn't building a yearly cash flow to cover all expenses more important than building net worth?

5

In the early years of saving for retirement you need to build net worth. Once you get closer to needing the money you will start focusing more on cash flow to be able to live off the savings you have accumulated. I think the answer depends on how close to retirement you are.

If you are talking about investing in general and not just retirement savings then I prefer to focus on a hybrid. Building net worth with part of my portfolio and generating cash flow with the rest.

3

Your focus on what your retirement portfolio does will shift as you age. If you are younger, then save a good deal and invest on high percent returns in higher risk categories because you have time to absorb losses.

As you get closer to retirement, shift your wealth to less risky but smaller returns.

My plans for cash flow are you invest now and have a big pile of cash in accounts to withdraw. My investments are in targeted life cycle funds where a fund manager adjusts the risks vs return for me. In my 2040 fund I am currently pretty risky, but in the year 2035, it will be pretty safe.

I won't need to rely on interest income*, hopefully my pile will be large enough that I can take from it like it was a regular savings account.

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    * hope hope hope hope – MrChrister Apr 6 '11 at 21:45
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    here's a contrary view: if you have time to absorb losses, you also have time to let a nice tame balanced fund compound, and no need to live through the stress and behavioral temptations created by a high risk portfolio. Also if something unexpected comes up in 15 years and you need the money, you won't have a strategy that absolutely assumes a 30 year horizon. Tough to know 100% that you don't need the money for 30 years. – Havoc P Apr 7 '11 at 3:38
  • @HavocP - you bet. I think that nicely explains the differences we have in risk tolerance, as I think my peaks and valleys will end up ultimately higher than a steady climb. Both are very valid, and neither is perfectly right. Everybody show have both concepts in their portfolio. – MrChrister Apr 7 '11 at 14:07
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    Looking at it another way, the younger you are the more flexibility you have to compensate for losses by reducing future expenses. That is, you can speculate not just using your savings but using your future discretionary income. If the gamble fails then drive a cheaper car and save more. Of course if you have a fixed pension fund goal then really you're not gambling your pension fund when you do that, you're gambling your car budget, but you're doing it via choice of pension investments... – Steve Jessop May 5 '14 at 13:45
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You can convert net worth to cash flow at any time by selling some assets. (Assuming we are talking about publicly traded stocks and bonds.)

High cash flow can be a red flag, that is, you can get in trouble "reaching for yield." Here's an elaboration on that: http://alephblog.com/2011/03/01/musings-on-yield/

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