It is always nice when we run across a personal finance expert who speaks the same language that we do. This week, we read an article by Christine Benz entitled “Forget Income Replacement, Focus on Supplying Cash Flow Needs.” Ms. Benz is the Director of Personal Finance at Morningstar. The title of her article reminded us of our post of June 14, 2020, Focus on Retirement Spending, Not Retirement Income.
In her article, Ms. Benz suggests a process involving adjusting current cash flows to help determine how much money will be needed in retirement. Her suggested process is consistent with our Recommended Financial Planning Process.
She notes that she deliberately uses the term “cash flow” rather than “income” because “income is another one of those words that just seems to confuse people.” We agree with her choice of words. As noted in our March 23, 2021 post entitled Words Matter, we said, “Since the primary focus of our website is to help you determine how much you can afford to spend in retirement, we generally avoid using the term “retirement income”, as it can mean different things to different people. “
Given the brevity of Ms. Benz’ article, she does not elaborate on how she would propose to determine the present values of the future cash flows that may be needed, as we do in our recommended process. If she did, she could then describe how her process could also be used to determine answers to the following types of questions:
- Can I (or we) afford to retire? (or, how much can I afford to spend in retirement?), and
- How much of my assets should I invest in risky vs. non-risky investments to support my spending goals?
She could also discuss:
- How future spending can be kept on track through periodic cash flow valuations, and
- how assumptions used to determine present values can be periodically stress-tested to help households assess and manage their risks in retirement.
