One of the most frustrating parts of retirement planning is the fact that no matter how ironclad yours might be, there will always be someone who will tell you that its wrong. And unfortunately they’re right.
They’re right in the sense that no one can predict what is going to happen in the future. Assumptions are the gears that make our retirement machines work. Choose unwisely and your plan will deviate from reality very quickly.
Nearly every assumption we use in retirement planning is up for debate.
The average annualized market return we use to forecast how much our portfolios will grow is really nothing more than just an “average”. You see this all the time that someone will make an Excel spreadsheet where their nest egg magically grows by 10 percent year over year. In real life, no one’s portfolio goes upward by 10 percent each year. That’s ridiculous.
Along the same lines, that average market return is based on the performance of the prior 100 years (or so). What if the market does worse or even better?
Inflation is also in the same boat. Is assuming that it’s really going to go up by an average of 3 percent each year true? Not likely. Inflation rates are just as cyclical as market returns.
We can try to be more sporadic and random with forecasting possible market returns using a Monte Carlo analysis. But are these numbers any more representative of how the markets behave then when we use past historical data? At least with historical data, the markets follow some vague cyclical trends. Because of the random nature of the Monte Carlo analysis, is this really helping us to do what we intended?
What about our assumptions with taxes? How do we really know what the rates will be tomorrow or 50 years in the future? What if some new administration suddenly decided that we now owe taxes on our Roth savings?
What if Social Security really does dry up, gets taken away, or is completely replaced by something new?
What if the 4 percent safe withdrawal rule turns out to be not safe at all 30 years from now?
Suppose you think you’re going to be really smart, avoid the market gamble altogether, and purchase an annuity? Even then, what guarantee do you have that the annuity company you purchased it from is still going to be in business?
To all of this, I say:
Don’t Worry. Plan for Your Retirement Anyways.
Do it anyways because it gives you a target to strive towards. Without a destination, how are you supposed to know where to go? Without a plan, you’re in a lifeboat in the middle of the ocean. You’re all alone with nowhere to go for shelter, and it’s just a matter of time.
Do it because as flawed as our assumptions may be, what other choice do you have?
Do it anyways because I’m willing to bet that there are more people who have benefited from retirement planning than there are those lives were destroyed by it.
Do it because even if you are wrong, along the way you can always course-correct and get back on track towards your goal. This is part of our human survival instinct.
Remember that with each year that passes and the more people that focus on retirement planning and wealth building, the better our assumptions and the closer to perfection we get.
Do it because, if you don’t, it’s a fact that you WILL end up passing up on the golden opportunity to avoid paying taxes; as much as $4,500 per year (if you’re in the 25% tax bracket). If it’s you and your spouse, that’s up to $49,000 per year.
In addition, you might also be passing up on a TON of free money through your employer matches. Where else are you going to get up to a 100% return on your savings simply for … saving?
Do it because “time” is your most valuable resource when it comes to investing. You literally don’t have to know anything about investing to take advantage of this incredible asset. The longer you’re in the game and the more years that pass, the greater of a chance that the magic of compounding returns will do their thing and make your money start growing. It won’t seem like much at first, but over time those returns will start to grow exponentially and out-weigh even your own contributions.
Do it because you’ll learn the discipline of saving and exercise it year over year. Having the ability to stick to a budget and live off of less than what you earn will only help guarantee the success of your retirement, regardless of whatever happens to your nest egg as a result of the markets.
Do it because there’s a chance that you will be right. Just like how the skeptics can say your assumptions are wrong, there’s an equal chance that things may actually continue along the same trends as they always have. You might actually reach your target age for retirement, be sitting on a nest egg of one to two million dollars, and be able to successfully passively live off of it for the rest of your life.
You’ll be glad that you had done what you did and didn’t pay attention to the skeptics. And I’ll be glad to hear you got there.
Readers – What are the some of the doubts and skepticism you face when you’re making your own retirement plans? Either external or perhaps even from your own internal doubts?
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