HOW MUCH LIQUIDITY WILL YOU NEED?
How to build a layer cake of assets to produce investment income, liquidity and growth
Figure out how much you spend each month on groceries, accommodation, utilities, clothing, grooming, transportation, travel, gifts and charities and so forth. Add in a fraction of the bills for home repairs or new or newer cars and other large expenses. Will that spending be constant or change when you retire?
Compare your spending to anticipated cash flow from work before you retire and taxable investments, registered investments after retirement, tax-free savings accounts, company pensions, CPP/QPP and OAS.
Add up sources of extra money such as cashing in stocks or bonds, mutual funds, exchange-traded fund, etc. If these sources of liquidity may be insufficient, then consider establishing lines of credit where you have deposits, e.g., banks and credit unions.
If all of the money you have or can access is inadequate, then consider raising bank balances to add liquidity or postponing expenses that would strain your accessible cash.
Evaluate free rides for liquidity at no cost; for example, new fridges with no payments for a year. Pay off the fridge in less than the free-ride period, and you gained time to keep investments in place rather than being forced to sell. These free liquidity deals are available for home appliances, vehicles, even furniture. When the free ride ends, the interest charged can be hefty, so mark payments in your calendar and keep the dates clear in your mind.
To provide for contingent liquidity and to avoid having to sell investments at a loss or to sell and take taxable gains or even lose a chance for more gains, use short government bonds or short bond exchange-traded funds, even one- to two-year government bonds. They pay little, usually less than one per cent a year, but you get cash flow and can get capital out with a phone call to an investment dealer or a click on your keyboard.
Last of all, and the easiest, if you don’t have the cash, think about postponing the spending.