7 Steps to Estimating Your In-Retirement Cash-Flow Needs
Rules of thumb may be too high for affluent retirees with high savings rates, but healthcare costs are a major swing factor.
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.com, 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%.