Have you heard all those different statistics about how much you will need to retire? “Statistics are like bikinis. What they reveal is suggestive, but what they conceal is vital. (Aaron Levenstein).
When you crunch the numbers and project what you will need for retirement, you must remember that the math never changes – it’s all about the assumptions that go into the math.
There are 4 critical assumptions that go into the retirement projection mix. And the way you set your assumptions can dramatically change the bottom line. What assumptions are we talking about? Things like rates of return and cost of living.
Why should you care? Just a 2% increase in the rate of inflation can more than double the amount of retirement savings you need.
The 4 most critical assumptions:
- How long will you live? (What happens if you outlive your estimates by 10 years or more?)
- What level of income will you need when you retire (or WANT when you retire – two different things! )
- What should we use for a rate of inflation? (If you are like me, you remember the double-digit inflation of the eighties)
- What will your investments return? (Should we use the historical average? What about volatility and how your portfolio is allocated?)
One thing we as planners have learned over the years is to always review and change our assumptions in light of current economic environments. This is critical when you may live 20 or 30 years in retirement. We also make sure we run several different scenarios with changing assumptions to see what the numbers tell us. We find very often that a small change, such as working one or two more years, can have a very dramatic effect on outcomes.
A financial plan should be a fluid and changing thing. You must review and/or revise it at least every 2-3 years (we do this annually for our clients) to adjust the assumptions, re-crunch the numbers and make necessary changes AS THEY OCCUR.
Bottom line: There may well be a “magic number” for retirement – but unfortunately it changes!