Consumers and practitioners alike often fall into a trap. In lieu of calculating a retirement plan, we instead rely too heavily on oversimplified rules of thumb and general advice. Rules of thumb, like saving 10% towards retirement and spending 4% of your balance during retirement, can point us in the right direction, but won’t get us there. Unfortunately, many consumers seeking advice receive little more than a precursory glance at the specific facts of their situation.
It’s easy to fail because retirement planning is more complicated than it appears. Consumers are sometimes lulled into a false sense of security, especially when someone who should know better asserts everything will work out fine if you just buy their company’s product. The truth is, there are way too many variables involved to wing it. Some of the issues I continually see ignored are as follows:
1. Inflation. We are currently in a low inflationary environment, but will it continue? Don’t count on it, because pieces of your retirement income stream could get left in the dust if you do not consider inflation in your scenario. Even a modest inflation rate will drastically increase your probability of running out of money.
2. Death. Most often, retirement scenarios assume a long life for both spouses. Rarely will an early death of one spouse be considered, and this is a huge mistake. Pension and Social Security income will most likely be reduced at death of the first spouse. These poor assumptions also encourage bad decisions regarding life insurance.
3. Long Term Care. Most of us are very aware of the costs and likelihood of losing our ability to care for ourselves at some point, but the solutions have never been more complex than they are today. Insurance to cover the cost of long term care is extremely expensive and does not cover enough of the risk. Long term care touches almost every aspect of a good retirement plan, and must be considered in every decision, from where you live to how you exercise and diet.
4. Investment Return. The longer we live, the more critical real return becomes. Real return is your investment return over inflation. Cash will lose money on a real return basis every year to inflation and a bond portfolio will probably only break even just above inflation. Stocks must be owned at a relevant level to sustain retirement income over a long retirement time horizon.
In order to avoid these traps and others, a retirement plan must be run by a qualified planner using robust software. Drawing pictures on a napkin over lunch is great for advisers and insurance agents closing a sale, but will not properly consider all of the variables for a sound plan of action. Do you have a retirement plan you can count on? If not, reach out to a CFP® practitioner or CONTACT US for a complementary initial consultation.
