7 steps to forecasting your cash flow needs in retirement
New retirees frequently rhapsodize about the joys of tossing their alarm clocks into the trash and filling their days with whatever activities they find gratifying
New retirees frequently rhapsodize about the joys of tossing 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.
While retirees are often counseled to estimate that they’ll spend 75% to 80% of their working incomes in retirement, a paper by David Blanchett, formerly of Morningstar and now at PGIM, found that higher-income, higher-saving households may need just 60%, or even less, of their preretirement income during retirement, while lower-earning, lower-saving households may need closer to 90%.
It may be difficult to forecast your actual income-replacement needs, so here are the key steps to take as you do so:
If you’re close to retirement and seek to maintain a standard of living in retirement similar to what you had while you were working, using your current salary as a baseline is reasonable. But if you’re younger — say, in your 40s — it may be wise to nudge up your baseline income for retirement-planning purposes, because your current income may not be reflective of what you’ll want to spend when you eventually retire.
Not only are you apt to receive cost-of-living adjustments as the years go by, but career gains could also lead to a higher salary over time, which you may want to “replace” in retirement. As Blanchett noted in his paper, the average college-educated individual will make a 50% higher salary at retirement than he or she did at age 25. Gains in salary over time are less
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