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Spending Order of Operations

  • Evaluate your “cash reserve”
    • Rank all of your expenses as one of the following:
      • Essential Spending
      • Comfortable Spending 
      • Extravagant Spending
    • Target X years of “Essential” and “Comfortable” spending
      • Calculation
        • Estimate your “Essential” and “Comfortable” spending for X years
        • Add the total deductibles for all insurance policies, and a conservative estimate for co-pays
        • Subtract your guaranteed income sources (e.g., Disability Insurance, Social Security, Pension, and Annuity Benefits, etc.)
        • Subtract your semi-guaranteed income sources (e.g. Wages/Commissions, Rents, Life Insurance, RMDs, Deferred Compensation, Business Buy-out, etc.)
        • If the result is a positive number, make up the difference from your investment portfolio
        • If the result is a negative number, consider an additional “Comfortable” or “Extravagant” spending
    • Update the target value annually
  • Evaluate each item on your balance sheet based on the quality of the capital
    • Rank each item as one of the following:
      • Very Low
      • Below Average
      • Average
      • Above Average
      • Very High
    • Spend in order from very low to very high quality
    • Update the capital quality ranking annually
  • Cash Flow Driven Investing
    • Match specific capital and investments, within your investment portfolio, to the timing of your “Comfortable” and “Extravagant” spending
  • Spending Logistics
    • First, spend from your guaranteed and semi-guaranteed income sources
    • Second, spend from your cash reserve
    • Third, spend from your investment portfolio
      • During “up” years
        • Divide your gains into thirds
          • 1/3 of the gains
            • First, reinvest in your portfolio and/or increase lifestyle certainty
          • 1/3 of gains
            • First, replenish your “cash reserve” and/or capital
            • Second, spend on “Comfortable” or “Extravagant” spending
            • Third, reinvest in your portfolio and/or increase lifestyle certainty
          • 1/3 of gains
            • First, spend on “Comfortable” or “Extravagant” spending
            • Second, reinvest in your portfolio and/or increase lifestyle certainty
        • Increase lifestyle certainty
          • At regular intervals, explore using the growth in your portfolio to purchase additional guaranteed income via annuity benefits and paid-up life insurance
          • Once your guaranteed income sources cover all “Essential” and “Comfortable” expenses, determine whether you want additional guaranteed income or investment portfolio to support your future “Extravagant” spending
          • Determine how to best maximize your surplus financial resources in terms of flexibility and certainty
      • During “down” years
        • Moderate your “Comfortable” and “Extravagant” expenses