As inveterate watchers of sitcom reruns (and a real-life Felix/Oscar combination), my sister and I loved The Odd Couple while we were growing up. One of our favorite episodes featured a courtroom sequence in which Felix (Tony Randall) berates a witness to "never assume," and proceeds to use the chalkboard to demonstrate what happens when you do. More years later than I care to admit, the mere mention of the word "assume" makes me smile.
But assumptions aren’t always a laughing matter, and that’s certainly true when it comes to retirement planning, where “hope for the best, plan for the worst” is a reasonable motto.
Incorrect—and usually too rosy—retirement-planning assumptions are particularly problematic because, by the time a retiree or pre-retiree realizes her plan is in trouble, she may have few ways to correct it; spending less or working longer may be the only viable options.
Common—and Dangerous—Retirement Assumptions
- Stock and bond market returns will be robust.
- Inflation will be benign.
- You will be able to work past 65.
- You will receive an inheritance.
Steps to Avoid These Assumptions
- Lower your market-return projections and consider reducing your planned withdrawal rate.
- Use longer-term inflation numbers to plan and consider inflation hedges in your retirement portfolio.
- Be ready to fall back on other measures, like increasing your savings rate, if you aren't able to continue working.
- Don’t rely on an inheritance and communicate about it early.
Dangerous Retirement Assumption 1: Stock and Bond Market Returns Will Be Robust
Most retirement calculators ask you to estimate what your portfolio will return over your holding period. It may be tempting to plug in strong returns to help avoid hard choices like deferring retirement or spending less, but think twice.
To be sure, stocks’ long-term gains have been pretty robust. The S&P 500 generated annualized returns of more than 10% from 1926 through August 2023, and returns over the past 15 years have been in that same ballpark. But there have been certain stretches in market history when returns have been much less than that...
What to do instead: Employ sober return projections and stay flexible with your in-retirement portfolio withdrawals.
Dangerous Retirement Assumption 2: Inflation Will Be Benign
During most of the past two decades, inflation was a nonissue, with the Consumer Price Index increasing by just 2% or even less in most years...
What to do instead: Use longer-term inflation numbers to plan and consider inflation hedges in your retirement portfolio.
Dangerous Retirement Assumption 3: You Will Be Able to Work Past Age 65
Never mind how you feel about working longer: The financial merits of working longer are irrefutable...
What to do instead: Be ready to fall back on other measures, like increasing your savings rate.
Dangerous Retirement Assumption 4: You Will Receive an Inheritance
It's a convention in movies for children to be crestfallen when their parents don't leave them an inheritance, and a few studies show that there can be a disconnect...
What to do instead: Don't rely on an inheritance and communicate about it early.
