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Hello, groovy freedomists. Today we’re excited to welcome our good friend, Gary, who blogs over at supersavingtips.com. Gary is a former retail executive who also worked in banking as a financial advisor. Now retired, he uses his professional and personal experiences to help others save money and master their personal finances. When he’s not busy writing, Gary enjoys baseball, music, and classic movies.
Mr. Groovy and I are big fans of Gary because we love saving money. And no blogger we know can match the “super saving tips” that Gary offers. Want to save money on transportation? He’s got you covered. Want to save money on food? Look no further. Want to save money on health, entertainment, and travel? Take a gander at this, this, and this. Gary’s a saving machine!
In Gary’s guest post today, he explores four dangerous financial assumptions people often make when planning for retirement. And he provides solutions on how to avoid them. Enjoy!
Have you ever seen the old TV show “The Odd Couple”? You know the original that starred Jack Klugman as “Oscar” and the brilliant Tony Randall as “Felix”. You can learn a lot of things on TV you know, especially when it comes from the genius of someone like Neil Simon and his iconic comedy. Back in the day, my favorite and most memorable episode of the show featured Felix explaining in a courtroom scene how you should never “assume” anything and on a chalkboard he draws the memorable line that: “when you assume, you make an ass of u and me!”
As funny as that line is, making assumptions about things doesn’t always cause a chuckle. When you make assumptions about your finances, for example, you often find that what you assumed would happen just doesn’t happen at all. Assumptions about your retirement plan may be shot to pieces because you assumed your plan made years ago would be just fine! When it comes to finances, rather than assume anything you should be planning for the worst and hoping for the best. You want to be able to react and adjust to what you don’t really know, don’t you?
Dangerous Financial Assumptions
Here are four dangerous assumptions people often make when planning their retirement and financial future, as well as how to avoid making these mistakes.
Dangerous Assumption #1: Inflation will remain low or non-existent
It’s easy to think that just because inflation has been mild during the recent past that it can continue on and on. When you think that way, it lets you choose to be more conservative in your planning and that may cause a real shortfall in what you will need to survive in retirement if inflation rears its head. Back in the 1980’s for example, inflation roared at levels in the teens as a percent so it can and could happen again.
Solution: Think long term when it comes to inflation and start with a more aggressive 3% annual forecast rather than the 1% or less that has been occurring during the past decade. When planning your money needs, adjust your personal expense predictions for your actual personal retirement needs which often means more spent for healthcare and food and less on housing and clothing. Make your investments ones that have traditionally outpaced inflation like Treasury protected securities, I-bonds and things like real estate and precious metal investments.
Dangerous Assumption #2: The stock and bond markets will be just fine and remain rosy
To be sure, S&P investments in the market have been good over a century of investing and have averaged about 10% gains over each decade from 1915 thru 2015. Even right now markets are in record breaking mode, but do not be complacent. There have been periods when the market has in fact reversed that trend and as recent as the decade that ended in 2009 (known as the “lost decade”) we saw the S&P 500 actually lose money during that period! That can happen again.
Solution: Scale down your estimates for returns on your stock projections from 10% to about 5-6% according to Vanguard and Morningstar executives. Being more conservative in your investments for retirement can avoid bigger losses that you just may not be able to make up before actually retiring. In the bond market, be even more conservative planning about 2% gains. The current returns are practically no gains and 2% isn’t even keeping up with inflation if it continues on the way the past 10 years have been going.
Dangerous Assumption #3: You will work beyond your full retirement age, earn more and thus increase your Social Security payout
Many people say that they plan to work beyond their retirement age, in fact more than triple those who said so in 1990 (11%) actually said that in 2015 (36%). In theory, that’s a great plan. Earnings increase the longer you’re working and you continue to contribute to your retirement plan, investments, etc. The disappearance of pension plans means working makes up for that deficit.
The reality is this. There is a real disconnect between the intention to work longer and build more wealth through your job than what actually happens. Most people do not continue to work after their full retirement age despite their intentions to do so. In fact, many do not even work until their full retirement age. Of those that left the workforce early, 60% cite health problems or disability as the reason. Planning to work until age 65 and beyond just may not be possible.
I know this from personal experience. I had intended to keep working, at least part-time, past age 65. But after my heart attack at age 62, I switched to part-time work and then had to retire altogether a year and a half later.
Solution: Scaling back your pre-retirement expenses is the place to start if you are thinking of retiring early or not extending your work life into your post retirement age. Also, increase your saving rate while you are still working. And be sure to take care of your health. Lastly, consider a part time (although it may be a lower paying) job as a bridge to retirement after full retirement age.
Dangerous Assumption #4: You will inherit money from your parents when they die
While it is true that children do inherit money from their families and particularly their parents, the number of them that actually does inherit is declining. Baby boomers are expected to have inherited trillions with almost 2 out of 3 of them receiving money from their parents. However, that number is projected to fall to just 1 out of 2 in the planning by rich Baby Boomers for their own kids.
There are reasons for this. For one, the longer life span we enjoy today has caused many to use more of their funds while still alive. Secondly, health care is ever increasing and more effective so that it’s not uncommon to spend hundreds of dollars on medication and doctor visits each month. Thirdly, Baby Boomers feel that some Gen-Xers have become lazy and expect an inheritance. While the Boomers benefitted, some of that came from the hardships that their parents experienced during the Great Depression and as a result they wanted to help their own children with money to fund their lives as well as their retirement. Boomers feel that their kids have had a wealth of life advantages that they have already provided and intend to use their money for themselves in big amounts.
Solution: Don’t count your chickens before they hatch and don’t count on money from your parents as inheritance that you may not be getting. If you need to, have that talk about inheritance sooner rather than later so you can plan accordingly. Having that talk can also let you know if your parents are hurting themselves by not using their money for their health and enjoyment in life, and you should discourage that from occurring.
One of the most common discussions I had with my clients when discussing their retirement plans with them was shocking even back in the late 1990’s. When I would ask about their retirement plans I often heard, “Oh, I don’t have one. My parents are leaving me money for my retirement!” My response was always the same. I’d say “What if they live to be a hundred and need that money for themselves?”
Your financial future is something that you are constantly prepping for and if you are not, you may be heading for serious problems. Start conversing with your partner, your parents, and financial advisor right now. You don’t have to “assume” anything and you should make sure any assumptions you use are well thought out.
What financial assumptions have you made in your planning? Are you prepared if those assumptions turn out to be untrue?
This post was originally published on Super Saving Tips, December 13, 2016.
If this is the advice for Gen X I can’t imagine what the advice will be for my children (youngest Millennials and oldest Gen Z). Despite whatever benefits Boomers say we’ve had (and they haven’t???), many younger Gen X ers and Millennials are having a hard time clearing student loan debt and accessing or maintaining career-level employment. Boomers didn’t have the expensive college tuition, nor did they, in the immediate years upon graduation, have to circumvent the biggest recession since the Great Depression. I am on the cusp between Gen X and Millennial and I can attest that many in my generation have had to delay the big lifetime milestones like first home purchases and starting a family in part because it wasn’t financially feasible. I know several that are still balancing student loan debt, mortgages, retirement investing and their own children’s 529 plans. And as I’m sure you know that delay matters. A late start in investing greatly affects the power of compounding interest. My husband and I are doing the best we can as are many readers of this and other personal finance blogs, but the cards we were dealt with are not the same as yours and a few of our “cards” are concerns previous generations have never had to deal with… specifically the extremely dangerous global threats created by climate change (natural disasters, resource scarcity and unhinging geopolitical structures). What you are saying is that many Boomers look at the future of Gen X and say to themselves “It all looks hunky dory.. I will go ahead and use up all those resources just on myself”. That, unfortunately, is not the perspective I have about my generation’s future and I have still much graver doubts about humanity’s youngest generations. In their lifetime, probably mine (and perhaps for a few Boomers ) the chickens will come to roost. The bill will be due. There will be no more kicking the can down the road. And honestly from talking to my own Boomer mother… she knows it’s true. She doesn’t deny it… And yet, like you and others of a particular age, she is steadfast in maintaining her intensive carbon-polluting, resource-consuming lifestyle. “The future be damned!” ” I won’t be around anyways!” And you know what I tell her.. fine.. go ahead.. but just remember this: the river runs downstream. I am now and forever committed to the survival and wellbeing of my children and the protection of the planet that they will inherit.
SJ, I’d be the first to admit that as a Baby Boomer, I had the enjoyment of a pretty affluent childhood especially when compared to what my parents grew up with during the Depression. As the parent of two Gen Xers, I really believe that my generation has gone way overboard in trying to make their lives better than ours and perhaps that has set them up for some kind of failure.
I also have to state that I grew up with college debt and took 10 years to pay mine off. In addition, in my thirties our country went through the oil crisis and by the time the 80’s rolled around saw a recession and mortgage interest rates in the teens which definitely complicated my life and others.
I greatly admire you feeling that you need to help your children with their challenges and they have many, because that is what parents do. The purpose of my writing this post was to simply say that when you’re young and in the prime of life, you should not look for easy roads to success and assume that it will be there for you. It might be, but you have to plan for the “what if’s” in life. I’m sure that your children will based on what you’ve said.
Thank you so much for sharing your thoughts.
I’m basically extremely conservative in my estimates. I’m planning for 0 pay increases over the next decade and 0 market returns. Plan for the worst, hope for the best.
That is a worst case scenario! I’m conservative too, but those thoughts might be record breaking. I certainly hope that you’ll have better results, but I understand how you feel.
These are great tips as always Gary! Might even say they’re rather groovy tips! 🙂
#2 is good, but one I struggle with a bit. I don’t think Vanguard or Morningstar have any better of a crystal ball than the rest of us. That said, we certainly could have another lost decade – chances are that we will at some point.
The S&P 500 lost about 21% over that ten-year stretch. A 60/40 portfolio lost just under 5%. Another reason to consider having bonds in your portfolio as someone gets closer to needing the money.
I think taking a conservative approach with your investments comes along as you progress toward retirement. The time to be somewhat aggressive is when you’re younger and you can look at the long time frame as an asset to grow your money. I definitely think that the market is a important part of building your financial wealth, but too many people speculate wildly and that can be dangerous. Thanks for your comments, Brad.
Dangerous assumptions indeed. I think your idea of being conservative and scaling back makes complete sense. Plan on needing less, earning less, and inflation going up is not a bad way of making sure you are ready to retire. Then if you end up with more cash then expected you can spend more. Bonus!
I personally would retire as soon as possible, but may be working until 60 for a pension. I don’t want to wait to have a heart attack and for my son to be out of the house before I can enjoy my time with him.
Mr. DDD, you have a great point when you say by scaling back and being conservative, you might wind up with some “extra” money. While shooting for early retirement is a great goal, there’s a lot of uncertainty in the additional years that you’ll be covering with your nest egg. I have to laugh, I often could be quoted as saying that I wasn’t going to keep working until I was found slumped over my desk and that retirement was always on my horizon.
Mr. G was planning on working until he was 67 until we figured out this early retirement thingy. Luckily he was able to do it at 55, although he could have counted on keeping his government job until then. But even if he stayed until 57 rather than 67 that would have been two more years of being miserable.
All good thoughts. I think people are way too rosy about staying in the job market as they age. Unless you have your own business, it can be awfully hard to guarantee that you’ll still have a good paying job as you age. Employers everywhere seem to prefer hiring younger employees who cost less or outsourcing jobs entirely.
As for inheritance, it’s hard to know your parents’ full financial picture (as well as anticipate medical costs.) Most people just don’t share their money situation, even with family members. Plus, assisted living costs are incredibly high. The average cost in the US is $3550 a month, not including any extras.
I’m always surprised when I hear people make these kind of assumptions, Emily. And I have to restrain myself from making a sharp comment to them. While my own parents made every effort to leave me an inheritance, that attitude came from the struggles they faced as children during the Depression. The Baby Boomers seem to be spending their money (like me) and not exactly making it a priority to leave it to their kids.
Great points Gary! The idea that you will be able to work up until (or after) your full retirement age is definitely something people have to think about. We know many people who had that plan, but health issues or caring for elderly parents ended those plans. As far as inheritances go, I believe I will get an inheritance – but I NEVER think about it. I wish my parents would use their money to enjoy the rest of their lives. Unfortunately my dad has Alzheimer’s – so their plans have drastically changed. Our longer life spans will definitely impact the amount of money we will have to pass on too. We will try to leave plenty for the kids – but we’ve always shared that you should never count on it.
Maintaining your standard of living when you retire is something that everyone has to give sincere thought to. There are basically two ways to have more money, one is to earn it (benefits, investments, pensions, part time work etc.), two is to cut expenses. Most people choose to downsize so that they can handle rising costs of retirement and healthcare. I appreciate you sharing your family’s story and wish you the best.
Not something that I’ve done but know people who do or say this: 1. I love my job so I don’t plan on retiring. Yes, but what if that job you love goes away? Or you get sick? Or something else? 2. I don’t want to sacrifice having fun now when I probably won’t even live a long life. That last one really does’t make much sense to me!
Generally speaking, when you’re young, you think you are immortal in the sense that you don’t really have to worry about what you’re going to do long ahead in your future. You live for the moment. While most of us do that for a little while, being grown up requires you to have a plan. And that plan should include dealing with the “what if’s” in life. It’s not as much fun, but it’s a necessity. Thanks for your comments, Tonya.
That last comment disturbs me too, Tonya. Some people would rather be in denial about the future than deal with it. Also, it’s almost like asking the universe to make sure your life is short. Who wants to live like that?
The “you only live once” excuse really burns me. You don’t need a lot of money to have fun. Last night Mrs G and I went to a local supermarket where 25 cent soft ice cream cones are served. So for 50 cents we had a blast. Those who need a lot of money “to live” have a serious lack of imagination.
Excellent list, Gary!! Luckily, I’m pretty risk averse so I always try to assume conservatively when it comes to our post retirement income, etc. It’s always better to have more money to live off of than to have to figure out a way to live on much less than you were expecting.
Words to live by, Laurie. I definitely agree.
Now that we’re retired we’re more conservative. Our SWR is about 2.5 percent and we’re also leaving room to cut expenses further if needed.
So true, Laurie. We retired with enough money not to be dependent on my pension and Social Security. That gives us a lot of wiggle room.
I was pretty bummed when Bogle himself forecasted slower growth overall for the coming decades domestically. Just about 3% less than the historical average we’ve enjoyed. 3% less compounding power is a heck of a difference, you would have to half your original projections! Bummer!
Bummer indeed! One way to deal with that is to use your asset allocation so that you can cover the various segments of the market, since there always seems to be some areas that grow even when the market isn’t growing. But if I really had the answers, I’d be typing this reply from Tahiti. 🙂 Thanks for your comments, Lily.
Agreed. Future returns 3% below normal is going to hurt. This will probably be a good environment for real estate or AirBnB. Real estate done right is a great way to boost a portfolio’s overall return.