Four Dangerous Assumptions of Retirement Planning

Since the majority of our work with clients centers on planning for retirement, when I ran across this piece from Morningstar, I felt compelled to share these with you.  It is easy for both clients and planners to be tempted to use one or more of these assumptions as “fallbacks” when trying to make a retirement plan work, when in reality, the best assumptions might be spend less and save more!   

Dangerous Assumptions When Planning for Retirement:

Stock and Bond Market Returns Will Be Rosy. When we run retirement plans for our clients we use projected rates of returns for the entire period of retirement of between 5%-7% depending on the particular client’s risk tolerance. After the past two years of above average market performance some believe the 5% to 7% to be an overly conservative assumption for returns.  From our perspective it is important to remember we are projecting returns over a 20 to 30 year period and we must take into account the strong market years such as 2013 with the horrible market years like 2008. Our philosophy is that if a retirement plan can work with a 5%-7% projected rate of return it certainly will work with returns in excess of that amount.

Inflation Will Be Mild or Nonexistent.  If you assume no inflation during retirement you are assuming that 25 years from now a dollar will purchase essentially the same goods and services as it will today.  As a general rule we project annual inflation in our retirement plans of 2.5% per year. We can adjust these projections upward if a client has a specific concern about inflation going forward. One area where we do feel it is prudent to UNDER estimate inflation in retirement relates to cost of living adjustments for Social Security. With the anemic inflation adjustments to annual Social Security benefits over the past 6 years,  and recent chatter that the Social Security Administration could change how they calculate inflation going forward, as a baseline, we are only assuming a 1% annual increase in benefits in our retirement plans.

You’ll be Able To Work Past Age 65. This is something we frequently encounter as we are finding that many people embrace the idea of working past 65.  Some make this assumption because they enjoy what they do and relish the mental and social stimulation that comes from their jobs, while others must help close the “funding gap” in their retirement plan and need the extra years of generating income to fully fund their goals. The concern we have as we walk through a retirement plan with our clients is that despite the best intentions of continuing to work, it is important to note and plan for the fact that health considerations (the worker’s, his or her spouse’s or their parents’) can unexpectedly make working past age 65 impossible.

You’ll Receive an Inheritance.   This is not an assumption that we have run into that often as most clients realize the risk of counting on inheritance for retirement.  It is important to note however that increasing longevity, combined with long-term care needs, means that even parents who intend for their children to receive an inheritance, may not be able to or it may be less than they intended.

We feel it is our job to help  clients identify potential risks to their retirement plans so those plans are not derailed by faulty reasoning.  In doing so, we work to implement solutions and stress test scenarios that will give clients the highest probability of success for reaching their retirement goals.

Until next time. 

—Brett C. Hixon, CFP®

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