If you’re relatively young or not yet 50, earning more than enough income at work, and living the lifestyle you more or less prefer, cash flow ain’t yer problem. Think about it from a practical viewpoint.
You’re paying taxes, saving money, going on vacations, and educating your kids. You have retirement plans at work, (please stop it) and have some other capital you’d like to invest in real estate. You’ve always been told cash flow is the way to go, so that’s what you set your sights on. That’s also why thousands of couples reach retirement with far less retirement income than was easily within their grasp when they started 15-30 years earlier. How much is far less you ask? If we’re talkin’ about 30 years of chasing cash flow over capital growth it could easily mean a 5-figure reduction in monthly income at retirement. Really.
Here’s the deal
All cash flow is, is a yield on a pile of cash or equity. The bigger the pile, the bigger the cash flow. The idea in the early years is to build the original pile into multiple BIG piles. The yield (interest rate as an example) is gonna be roughly the same for a million dollar pile as it is for the 5 million dollar pile. The difference is the amount of dollars the yield generates. It’s the same X% yield in both scenarios — only the size of the piles of cash are different. The central theme of retirement is for income, especially after tax income, to be as large as possible. To the extent you opt for cash flow over capital growth in the years preceding your actual, you know, need for cash flow, you are purposefully guaranteeing your retirement income will be far less than it easily could’ve been.
Debating this principle is akin to debating gravity.
Editor’s UPDATE 12/22/09: Jeff wanted to explore this topic deeper, and as such, has posted the following: Worshipping At the Altar of Cash Flow – II.
Next — how do you plan for sufficient tax shelter after you’ve successfully arrived at retirement with all that income?
Photo: Vinay Deep