Trade Strategies for Retirement and Trader Taxation

Retirement: Making the Right Assumptions

When it comes to putting together a successful retirement plan for our clients, nothing is more critical than making well-informed and accurate assumptions (the same probably goes for you too). After all, the goal of living comfortably for another 30 years after the end of their and your working life can be a difficult thing to achieve. So what are some of these assumptions? Let’s take a look.

One of the first and most important assumptions to make is how long you are likely to live. While this may sound somewhat morbid, estimated life expectancy is a key metric when creating a retirement plan (including the right allocation for your investment portfolio). The best way to determine life expectancy is with actuarial (mortality) tables provided by the insurance industry.

Once you’ve determined your life expectancy, it’s important that you understand what it means. Simply put, if your life expectancy is 75 years, that means that of everyone born in the same birth year, only 50% will still be with us at age 75.

This crucial piece of information is especially important for the next assumption:  what your living expenses will be for the remainder of your retirement. In addition to making assumptions about inflation—expenses are likely to go up, especially healthcare costs—it’s perhaps more important to make assumptions about how your expenses will change over time. Determining the future mix of expenses will help you plan more accurately.

Obviously, medical expenses will be a dominate component of your spending plan. When making assumptions about the future cost of healthcare, be sure take a close and honest look at your family’s history. While there are no guarantees, your general health and estimated life expectancy will probably be similar to your forebears.

Once you have made assumptions about your future spending needs, you can begin the process of constructing your investment portfolio. This too will require some assumptions. These assumptions will be based on things such as past market performance, previous performance of certain asset classes and return expectations for any pension plans you may have, among others.

NOTE:  One thing you should not get caught up in is what you see, read or hear from the financial media machine. While providing some good information, the primary focus of television, magazines and newspapers (including The Wall Street Journal), is to sell commercial time, ad space or increase their circulation. This tends to tilt them toward more sensationalized stories. Besides, by the time something appears in the financial media, chances are it’s already been priced into the market.

At my firm, we tend to be fairly conservative when making assumptions about return estimates for our portfolios. But, we continue to believe a portfolio allocated across various asset classes such as growth (equities), stability/income (bonds) and accepted losses (cash) gives our clients—and you too?—the best opportunity to enjoy a comfortable retirement.


Related Reading:

Baby Boomer Retirement: Is Gold The Salvation?

Retire With Wealth: Pay Yourself First

Protect Profits For Your Retirement With Options