Six steps to estimating your in-retirement cash-flow needs

Rules of thumb may be too high for affluent retirees with high savings rates.

Christine Benz 24 August, 2018 | 5:00PM

New retirees frequently rhapsodize about the joys of tossing of their alarm clocks into the trash and filling their days with whatever activities they find gratifying. But if they're honest, most new retirees find the financial aspect of the retirement transition to be a little jarring.

On Morningstar.ca, we've talked at length about the challenges of extracting cash flow from a portfolio in the current era of ultralow yields. But estimating actual cash-flow needs is a tricky business, too. While retirees are often counseled to estimate that they'll spend 75% to 80% of their working incomes in retirement, a paper by Morningstar's head of retirement research, David Blanchett, demonstrated that there can be huge variations in income-replacement rates among retirees -- with factors such as pre-retirement income and savings rates serving as key swing factors. Based on Blanchett's findings, higher-income, higher-saving households may well need just 60% (or even less) of their pre-retirement income during retirement, while lower-earning, lower-saving households may need closer to 90%.

Ultimately, it may be difficult to forecast your actual income-replacement needs with a great deal of precision. Even as you attempt to anticipate every in-retirement expense to the penny, unforeseen expenditures such as healthcare costs can buffet spending around on a year-to-year basis. But because anticipated income needs are such a key ingredient in the retirement-income puzzle, it's helpful to come up with as realistic a figure as possible while also being realistic that your own expenditures are apt to vary over time.

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About Author

Christine Benz

Christine Benz  Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz.