"Mornin', Hank." "Mornin', Jeb." The weathered dairy farmers standing by the cash register had grown up tending their families' Herefords just outside of Blair in north-central New Hampshire. More acquaintances than what you would call friends, they have been exchanging routine Saturday-morning pleasantries at Granite State Feed & Supply their whole adult lives.

In their late fifties now, Hank and Jeb see each other at the Grange on Wednesday nights, and on Sundays, they nod across the aisle in the white clapboard church their great-grandparents helped build in "aught five." Neither has seen the "new" airport in Manchester that opened in 1996. Farming is their life.

Leaning against the checkout counter, Jeb asked casually, "How's the cash flow, Hank?" "Cash flow's fine, Jeb. Jest cain't seem to stop none of it," the other allowed. "Yep," Jeb pursed his lips and nodded knowingly.

Later that same summer, Jeb and Hank happened to be loading Saturday supplies into their Ford pickups behind the feed store. "Mornin', Jeb." "Mornin', Hank. I hear you won $2 million in the lottery. Whatcha gonna do now?" "Well," Hank began thoughtfully as though considering the question for the first time, "s'pose I'll jest keep farmin' till it's all gone."

Don't Ask Me To Do It!

Whether your clients are dairy farmers or doctors, you probably recognize Hank's casual, almost helpless attitude toward cash flow. It has been my experience as a personal financial advisor that many families are unsatisfied with the quality of life they have built for themselves. But it doesn't occur to them to take a fresh look at how they spend their money. Most seem to have more or less stumbled into their particular pattern of spending through a series of unrelated, not especially thoughtful decisions. People tend to get set in their ways, and the older we get, the more we seem to resist change ... even when we're unhappy with our circumstances.

Rare is the household that actually prioritizes its wants and needs and makes a realistic plan about how to spend its income. The very word "budget" has fallen into serious disrepute. It smacks of self-denial, never a very popular concept. In its worst interpretations, it implies penury and financial failure, as in: "They have to budget every nickel."

As an advisor, you understand that the classic idea of budgeting is to thoughtfully allocate a predicted level of income across a range of possible uses in a way that will produce maximum personal satisfaction. Its purpose is to empower, not to confine. In our practice, we have discovered that calling this exercise a "spending plan" makes it considerably more acceptable to clients because it changes the focus from what we cannot have or do to what we can.

An Exciting Process

Most prospective retirees come to our offices looking for help with investments and estate planning. And we're glad they come because we love to do those things. But our preretirement interviews very often lead us to what has always been the foundation of the financial-planning process ... cash flow.

Retirement is a natural watershed in life, a time for reflecting on our past and speculating a little bit about what may lie ahead. There is an element of sadness in retiring from a job or selling a business. And retiring can stimulate increased awareness of our mortality. Nevertheless, some of what we see as we peer into our misty futures can be very energizing.

Perhaps we see time to pursue interests that always came second to our professional commitments. Maybe we look forward to the chance to visit with family members who are scattered across the country, or to finally kick back and read Dostoyevsky or Augustine! These attractive possibilities often free up retirees to put their history, their dreams and their assets all on the table, like some great Monopoly game, and to consider what might be. It is the retirement advisor's privilege to encourage this sort of optimism and to facilitate the process.

I used to think that a clean-sheet approach to making a retirement spending plan offered the most potential for creativity. And that may work for you. But I seem to get better results when we start by preparing a detailed worksheet describing the preretirement income and spending. This is a cathartic process that flushes to the surface the whys and wherefores of a family's current lifestyle. It brings up memories ("I remember we bought this house thinking that we would expand the kitchen. Then Maggie got accepted at Princeton ...). This is a perfect time to think out loud about whether they still want the bigger kitchen, or would a beautiful, low-maintenance condo by the water be more fun?

Our spending-plan worksheet (see end of article) has an income section and a spending section that is divided among fixed spending, variable spending and taxes (see the sample of our spending-plan worksheet). When planning for impending retirement, I like to develop two versions of the clients' spending plan: One describes "What Has Been" and the other "What Will Be."

We begin by filling out the income section of each version. This allows us to see just how the cash inflow is going to change after the client's last paycheck. For most people, though certainly not all, gross cash income is going to be less when they retire. And most people have already thought about that and felt a certain amount of anxiety about it. Usually, by preparing these two income worksheets first, what was vague and threatening becomes measurable and manageable.

The trickiest number in the income section of our spending plan is "investment income." Should we write in only estimated taxable income? That would be useful when we get to projecting the annual income tax bill. Or we might just count cash income from interest, dividends and mutual fund distributions in both the taxable and tax-deferred accounts. Some clients feel that by planning to spend only cash income they won't be "spending principal," something their parents taught them never to do! Another approach is to plan on withdrawing some fixed percentage of the nest egg each year.

I have found that selecting the best approach to the "investment-income question" depends on client-specific issues. These include whether it is important to preserve their nest egg for estate purposes; whether clients are interested in front-loading their retirement lifestyle with more expensive activities while they are younger; whether it is appropriate to anticipate an inheritance, etc. Sometimes I elect the most conservative figure for "investment income" at this stage of the process, knowing that I may want to revisit it after we examine the spending plans.

So Many Choices

I usually ask the clients to work at home on the details of their current spending rather than going through the list with me. In the case of couples, I encourage them to work on it together. They send me their work before our next meeting. I review it, making notes where I think a category may be underestimated and where I believe retirement may bring a significant increase or decrease in a line item. I also fill out the income tax section myself, for both versions of the plan. Then the fun begins.

At our next meeting, we review my notes and questions and amend the "What Has Been" version of their spending plan. Now we are ready for the "What Will Be" version, for which we have already completed the income and taxes sections. I guide the discussion first to big spending categories that may change in the first year of retirement: Will we change our charitable habits? We can stop saving for retirement, right? Should we pay off the mortgage? Maybe we can move! Oh, my, we have to take care of our own medical insurance until Medicare kicks in. Do we still need that whole-life policy, dear? Hey, it's jeans from now on ... slash that clothing budget!

This discussion of possibilities is usually wide-ranging and exhilarating! We ask clients to consider each spending category without thinking about its impact on the total; this encourages more open-ended discussion of possibilities and feelings about alternatives.

Eventually, we total all the "What Can Be" spending categories and compare it with the expected income in the section we call "calculation of surplus or deficit." This is the reality check. If there is a surplus after funding all the dreams, eureka! Often there is an operating cash-flow deficit on the first pass. Sometimes this is OK. To see if the result is workable from a long-term perspective, we plug this spending-plan data into our long-term cash-flow worksheet. If it appears to jeopardize the clients' lifetime security or other personal goals, we go back to the income and spending assumptions and work on trade-offs and priorities until our clients have successfully described their affordable dream.

Spending Plan

J. Michael Martin, JD, CFP, is president of Financial Advantage in Columbia, Md.