The process is deceptively simple on the surface…just plug a few numbers into your favorite retirement calculator and within seconds you have a mathematically precise answer showing how much money you need to retire. Millions of people (including highly qualified financial planners) follow this exact process and bet their retirement security on the result every year. But, is it accurate? Can you actually rely on what it tells you? Unfortunately, like so many things today, it’s not as simple as it appears…
Hiding behind this facade of simplicity is a complicated maze of assumptions that can invalidate the results produced. Every retirement calculator, whether state-of-the-art Monte Carlo or old-school rules of thumb, must make certain assumptions in order to complete the calculation. There are no exceptions, and the accuracy of these assumptions can make or break your retirement security.
Let’s look a little closer at five of these assumptions, so you can decide if you should rethink how much money you need to retire:
Life Expectancy Assumption: How Long Must My Money Last In Retirement?
Most financial planners and retirement calculators assume a “normal” life expectancy unless health concerns merit a different conclusion. Normal life expectancy is determined by consulting actuarial tables like those used by the IRS or insurance companies to determine average life span.
This sounds reasonable on the surface but is fatally flawed from an individual retirement planning standpoint. Actuarial tables are only valid when applied to large numbers but have zero validity for any one person’s retirement. The truth is your date with destiny is no more likely to occur at the statistical average than any year before or after that date. Planning on an average lifespan is completely misleading and can cause you to dangerously underestimate savings needs.