Numerous variables go into every retirement projection, making it an inexact science at best. This is why it always pays to allow for some “wiggle room” when it comes to forecasting your future retirement account balance.
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Just a few wrong assumptions about your retirement can dramatically affect your results, so it pays to consider a wide range of possible outcomes. Here are some of the most dangerous assumptions about retirement that could kill your savings fast, along with suggestions as to how to avoid falling into that trap.
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You Will Live an ‘Average’ Lifespan
One of the biggest variables when it comes to outliving your money in retirement is how long you will live. Unfortunately, this is one of the least predictable variables in any retirement plan.
If you build your entire plan around an assumption that you will live an “average” lifespan, you might run out of money if you end up living a long life. While you can make some educated guesses about how long you might live based on your family history and your personal lifestyle, always factor in the possibility that you might live much longer.
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You Will Remain Healthy
According to the Bureau of Labor Statistics, seniors spend 13% of their retirement income on healthcare. The average household headed by someone at least 65 years old spent a whopping $57,818 on healthcare in 2022, the most recent year for which data is available.
If you have serious healthcare issues, this number could increase significantly, to the point that it could derail your retirement plans. Factoring in a larger-than-average budget for healthcare could help keep your retirement budget on track.
Your Expenses Will Decrease
In many cases, expenses decrease for seniors after they retire. However, that’s not an assumption on which to bank your whole retirement.
If you live in a high-cost area or plan to “live it up” in retirement, eating out often and traveling the world, it’s quite possible that your expenses will actually increase. Plan out your intended lifestyle long before you retire so that you build the appropriate expenses into your budget.
Markets Will Remain Consistent
Along with anticipated life expectancy, market returns are the most critical component of a long-term retirement projection. If you invest your account in a balanced portfolio and assume you’ll generate a consistent 7% annual return, you might have a problem if markets hit a rough patch.
While market averages may seem fairly smooth over the long run, over the short run, they can be anything but. From the start of 2000 through the end of 2009, for example, the S&P 500 index, which has a long-term average annual return of about 10%, posted a negative return, averaging a loss of -0.97% every year over that “lost decade.”
Inflation Will Remain Low
For the past 50 years, the U.S. has enjoyed relatively low inflation, averaging about 3.2%. In fact, from 2012 through 2020, the annual change in the rate of inflation never broke higher than 2.4%.
However, over the past four years, the CPI has posted annual gains of 4.7%, 8.0%, 4.1% and 3.2%, respectively. While the Fed seems to have inflation under control as the end of 2024 approaches, you should factor in rising costs to your retirement projections to ensure inflation doesn’t devour all of your savings.
You’ll Be Able To Work
Many retirees plan on working after they formally retire, hoping to both boost their incomes and keep their minds occupied. But it’s entirely possible that you’ll be forced to retire, perhaps even earlier than you anticipate, due to physical limitations.
In that case, your retirement will be entirely dependent on your savings, supplemented by Social Security or any pension income you may have. As working in retirement may not be possible for every senior, view it as a potential way to generate extra expendable income, not as the solution that will fund your entire retirement.
You’ll Receive an Inheritance
Some workers assume that they’ll receive an inheritance that will take care of their retirement needs, but that’s a dangerous game. If you fall out of favor with your anticipated benefactor — or if they end up spending more of their money than they anticipate — you might be left with a shortfall that will be impossible to make up.
Always build a retirement plan assuming you won’t receive any outside gifts so that you’re prepared for a worst-case scenario. If you do end up the heir to an inheritance, you can use that money to live a better lifestyle, relieve stress that you’ll outlive your money or perhaps even donate it to a charity.
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This article originally appeared on GOBankingRates.com: 7 Dangerous Assumptions About Retirement That Could Kill Your Savings Fast
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