If it isn't guaranteed, it is best to leave money out of your planning calculations.Do a baseline plan with social security, pensions and savings that are guaranteed.
Whether you are planning for a retirement or reaching some specific goal, like money for a child's education, conservative estimates will increase the likelihood that you don't come up short.
Let's go through some key assumptions one at a time. Joe and Mary come to you for retirement planning, they are certain they will need $3,000 a month to get by, but they don't plan to retire for another 10 years or so.
That means the $3,000 is not going to be enough because inflation will add to the prices for almost everything.
Inflation is measured for us in the US by the consumer price index (CPI) . ''We can just ignore inflation then.'' ''Well not so fast there.'' you need to tell him. Over a 10-year period the $3,000 per month you need today will increase by 2% to the 10th power!
''Are we going to have enough money for you to retire when the time comes?
Assumptions make projections for important financial indicators into an uncertain future.In fact, the SSA estimates that 25% of them will live to be over 90.That means you jointly have to come up with a good number for this.'' What you need to do now is remind Joe and Mary that 20 years is an average.That means over half of today's 65 year olds will live longer than that!At this point Joe pulls you aside with some information. They don't talk about it much but I think they have a lot of money stashed away somewhere.I have always planned on us getting a sizeable inheritance from them when the time comes.''.The Social Security Administration has projections for this.A rule of thumb is that a 65-year-old can expect to live another 20 years. Rates of returns on financial investments need to be made.Returns on fixed income securities like US Treasuries and corporate bonds are known to investors and published on financial websites. A mixed portfolio of stocks is historically expected to return 10% per year, but that is a long term average that includes wild upswings and devastating crashes.It is best to project current returns into the future. The stocks traded on major exchanges number in the thousands. Financial publications and websites can offer guidance on the direction that stocks will take in the future and the returns that can be expected.