Adjusting your spending to avoid negative cash flows and to choose your legacy.


The MoneyReady App offers several calculators to manage cash flows over your lifetime.

Some people are good budgeters and have a very good idea of how much they spend each year, but others have no idea, particularly when we ask how much they expect to spend after retirement. Often the answer is: as much as I can and die broke!

How much you can spend obviously depends on your income, and on how much you save or withdraw from savings. Income is usually quite predictable. Over your lifetime, you will have several sources of income and variable expenses. For income, you have your salary, your rental incomes, your private pensions, and also public pensions (CPP/QPP and OAS) that we estimate for you. We can estimate how much will be available in your savings accounts given your input savings rate and the account growth rates. We can also estimate some expenses for you, like taxes or interest on LOANS you may have entered. But otherwise, we require you to tell us how much you spend, and plan to spend, for the rest of your life. This spending is entered in EXPENSES in the MoneyReady App. We include giving to charities or loved-ones during your lifetime as part of this spending.

If we know your expenses, then we can calculate your cash flow for every year. You can add EXPENSES and by trial and error determine your amount of spending such that you never run out of money (a negative cash-flow situation), and thus determine the spending that you can afford while still leaving a legacy to your heirs if that’s what you want.

Since this is a bit tedious to do, I have now added a new feature to the MoneyReady App to automate the process and guide you in determining the level of spending that you can afford. Click on the CHOOSE YOUR LEGACY button and it will ask you for the amount in today's dollars and after tax and probate that you want to leave to your heirs. Then we will automatically determine how much to reduce expenses to first fix any cash-flow problems if necessary, and then how much to increase or decrease expenses to leave the legacy you desire. Even if you want to die broke, you might want to leave yourself a cushion in case you (or your spouse) dies later than planned.

Consider your liquid net-worth. That is all the money you have in your accounts, minus personal loans (but not mortgages or Home Equity Lines of Credit, which we consider just reduce the value of your house or other properties, your non-liquid net-worth). Your liquid net-worth at death after all taxes and probate is your liquid-legacy. If your liquid net-worth reaches zero or becomes negative before you die, then you have a cash-flow problem. The MoneyReady App TIME MACHINE will tell you with a warning if you'll run into a cash-flow problem in your lifetime with your chosen financial scenario. In that case, the TIME MACHINE doesn't stop. It generously give you an interest-free, overnight loan on December 31, so you can cover the deficit that year. The catch is you have to repay it immediately on January 1, so it adds to your expenses the following year. We do it this way because the cash-flow problem might be temporary; that is you might be able to recover if income increases later on. But no one is going to give you a break like that in real life, so we warn you that your financial plan needs to be revised, and by looking at the results and when you run into problems, you may be able to remedy the situation.


To help you do that automatically, you can use the CHOOSE YOUR LEGACY button to calculate an amount by which you must reduce your EXPENSES so that there are no more cash flow problems or to increase your legacy, or an amount by which you must increase your EXPENSES to reduce your legacy. One of your expenses is always tax, and that value changes with your amount of spending. This is because the more you spend, the more you need to withdraw from accounts. This can increase your tax bill (a withdrawal from a tax-deferred account like an RRSP is taxable, and capital-gains taxes can arise when selling investments from a non-registered account) and sometime decrease it (you have less taxable interest and dividends from depleted non-registered accounts). So calculating the amount to decrease (or increase) your expenses requires an iterative algorithm.

One common reason for cash-flow problems (besides overspending), is that you are not allowed to withdraw from Locked-In Registered Accounts (LIRAs) and Defined Contribution Pension Plans (DCPPs) until they are converted to Life Income Funds (LIFs), and then, there are maximum yearly withdrawal amounts on the LIFs. This maximum depends on the balance of the account, your age and your province. You may end up with a negative cash flow, even there are plenty of funds in one or more of these accounts! Our algorithm thus first reduces your liquid net-worth in any year by any locked-in money. Then it considers the date at which you have the most negative liquid net-worth and calculates an amount to reduce your spending from today to that date to bring that up to zero. But then another dip below zero might occur at another date, so we calculate another amount from today to that new date, and we do this until there are no more cash-flow problems.

In fact you may now end up with a legacy. It then considers increased or decreased expenses to bring your after-tax (and probate) liquid legacy to the value desired. So this is a second level of iteration such that the whole process requires several runs of the TIME MACHINE, but it usually converges quite quickly to a solution.

The result of a run of CHOOSE YOUR LEGACY is a list of one or more EXPENSEs to add, with their start and end dates. You can click to add them all automatically. These expenses will be Joint if you have a spouse (Joint expenses are shared proportionally to income in the TIME MACHINE, and are inherited in full should one spouse outlive the other). Some calculated expenses might be negative. Before reworking your budget, you can run the TIME MACHINE with the new expenses as is (including negative expenses), and make sure you are satisfied with the results.

Increasing spending is easy, and for those solutions, you can tell the program to automatically add the calculated extra expenses to your list of EXPENSES. But what about reducing spending? If you already entered a budget of expenses (this new tool makes that optional), the program's solution could be to have negative expenses, and that can be confusing to people. But the TIME MACHINE can handle them quite well, it's just math. Once you are satisfied with the result you can go back to your list of expenses and remove any negative ones by reducing positive ones. Unfortunately, we can't do that for you, because we don't know which of your expenses you are willing to reduce: you have to figure it out. To help you with that, there is a graph of your total expenses over time, so you can see what they are at any date and when they change at any date.

You may not like the results if you need to decrease your spending drastically. In that case, you need to increase your income by, for example, delaying retirement or downsizing your home. You can easily change your scenario in the MoneyReady App to consider any such options.

Because the CHOOSE YOUR LEGACY tool requires several runs of the TIME MACHINE, it requires a subscription to the MoneyReady App. This feature of the MoneyReady App will help you to more quickly and easily create a complete financial plan in order to reach your financial goals.