Retirement Planning Assumptions
One thing that we do in our firm is help people with retirement planning. Part of the planning involves figuring out what people need to do investment-wise in order to live the retirement lifestyle they want. But you don’t need a professional like me to get a good estimate. Across the web there are a myriad of calculators to help you determine your goal. While I think we can give you a more complete picture, I would be overreaching if I told you that any number we come up with is entirely correct.
“And people pay you for this?” you may ask. Yes, they do. Why don’t I do a better job of it? Because the task is fundamentally impossible. Some of the numbers needed to fill in the blanks require predictions of the future. Try as I might, my crystal ball stays cloudy. What can’t I (fore)see? A few examples:
Investment return. This is the average return you expect to make on your investments. So, how much is that? Well, the average return for stocks is around 10%. But if you had counted on that number for the last decade of investing, you would have been sorely disappointed.
Inflation rate. Here things are better. The range of inflation has been tighter than for investments. Yet the inflation rate during the Great Depression was a whole lot different (as in negative) than what you saw in the ‘70s and ‘80s, when we were in a hyper-inflation situation.
Tax rate. Do you assume that taxes will remain exactly where they are? Think they are going higher? How much higher? And what about the items that get taxed? You may figure out the tax bracket successfully, but will capital gains or dividend taxation change? How about deductions for charity or home mortgage interest? It’s hard to figure out what might happen in two years, let alone 20.
Social Security. A major income source for most retirees is Social Security. Can we assume that Congress will fix its fiscal problem and the benefits will remain the same?
Longevity. Here’s the question many want to know and many don’t…when are you going to die? After all, I need the money to last as long as you do. Unless I know how long you are going to last, it’s hard to figure out the answer. And if there are two of you, I need to know both of the unknown dates.
As you can see, at best retirement planning is a difficult thing to do. Still, making a plan is better than no plan at all. And while no one knows what these numbers will be, we can make guesses…preferably educated ones that can be adjusted later as we have more data. Just don’t think that whatever you come up with is exactly the right answer. And don’t think that no answer is any better.
This article was published under the title "Planning for the golden years can be tricky" in the Wichita Falls Times Record News on March 25, 2012.