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Planning Assumptions That Should Be Avoided

Written by Zachary Morris, CFP® on .

Even the Most Disciplined of Planners Can Fall Victim to Faulty Planning Practices

Even if you consider yourself an accomplished and disciplined planner – and, perhaps, even more so if you fall into this category – it’s uncomfortable to face unexpected financial hurdles. Since no one can perfectly plan for the unexpected, however, it happens from time to time. It could be that your career takes a turn you didn’t foresee, or maybe your child’s college education ends up far costlier than you expected. All of a sudden, you find yourself facing a future where your savings goals may be in jeopardy.

Although no planning is foolproof, avoiding some common – and faulty – planning assumptions can help ensure your long-term goals won’t be in danger.

Goal: Retirement

Common Assumption: My expenses will be lower in retirement.

Many people need a reality check when it comes to retirement expenses. Not only are many retirees likely to spend just as much as they did when they were working, but they’re also apt to have additional expenses for things like travel or pursuing new passions.

Even if you aren’t planning to travel the globe or take up costly hobbies, you’ll need to prepare for additional healthcare expenses. This is especially important as average American life expectancies continue to rise since you want to be sure you won’t outlive your nest egg.

So, if you’ve been planning for lower expenses in retirement, it’s probably time for a course correction in your planning. When you consider your retirement savings goal, begin by assuming that your current expenses will remain the same, minus the amount you’re currently saving towards retirement. Then, you’ll be able to better calculate your target portfolio size and exactly how much you need to save each year. When considering unexpected expenses that may arise, think about any financial surprises from the past few years and use them as a guide. Finally, don’t forget to factor in inflation and increasing life expectancy, too.

Common Assumption: I’ll use Medicare to cover my retirement health care costs.

While it’s true that Medicare will cover many traditional medical and prescription expenses, retirees will also face many expenses that don’t fall under Medicare coverage. For example, you’ll likely pay out of pocket for most dental, vision, and hearing costs. In addition, Medicare won’t cover long-term care needs unless you get supplemental insurance in advance.

Your first-course correction here is to become an expert on what Medicare does and does not cover. Learn as much as you can at medicare.gov in order to familiarize yourself with what your out of pocket liabilities might be. You should also consider contributing to a health savings account (HSA) if your employer offers this benefit. These contributions are tax-deductible and typically grow tax-free. Withdrawals are also tax-free when used for qualified medical expenses. Finally, consider whether long-term care insurance might be right for you.

SEE ALSO: Estate Planning: Keeping Your Legacy in the Family

Common Assumption: I’ll be able to continue working as long as needed.

None of us want to imagine a scenario of struggle as we age, but a 2018 analysis by The Wall Street Journal showed that almost 8 million older Americans are having difficulty finding work. Not only could this impact your ability to pay monthly expenses, but it may severely limit your ability to save, too.

In order to protect yourself, stop assuming you’ll be able to continue working until you make the intentional decision to stop. Instead, take a second look at your savings projections and assume early retirement or low-wage work in your later years. The inability to find work is a true concern, as is your health. Many people wish to continue working but are simply unable due to health conditions. So, be sure you aren’t being overly reliant on your ability to earn a paycheck long-term.

Common Assumption: It’s best to be conservative with my investments in retirement.

Most people move toward a more conservative investment mix as they age and, in general, this is smart. After all, you’ve worked hard to build your wealth and you don’t want to take unnecessary risks. However, make sure you don’t lose sight of the risk of outliving your nest egg either. For this reason, a conservative retiree with a portfolio that is 20 percent equities and 80 percent cash or fixed-income may actually want to consider a greater allocation toward stocks in order to offset that risk.

To overcome this faulty assumption, talk with your financial advisor about whether greater exposure to stocks may be best for your portfolio. You don’t have to allocate 70 percent of your assets to stocks, but holding a mix of assets with varying levels of risk can help you continue to generate growth and mitigate the risk of outliving your money.

SEE ALSO: 5 Things to Understand About Wealth Transfer

Goal: College

Common Assumption: Educational debt is always worth it.

If you’ve been operating under the assumption that student loans are “good debt” that you shouldn’t shy away from, you may need to adjust your thinking. According to the Institute for College Access & Success, record numbers of student loan borrowers are defaulting on education loans every year. Those who aren’t are still finding that student loan debt makes it difficult or impossible to do things like buying a home or starting a family. It’s not just students struggling under this debt load either – many parents are picking up the burden through parent loans, too.

When it comes to college debt, you simply can’t afford to assume it will be worth it. It’s important to consider your future ability to pay back loans. Some majors are just more likely to lead to high-paying jobs than others, so there will be times when considering less expensive college options simply makes sense. In-state schools often offer more savings and completing general education requirements at a community college is a great way to save before transferring to another institution. Try to strategize for a balanced approach to paying for college expenses, including loans but also financial aid, parent and student income, and college savings.

Final Thoughts on Planning

An important part of thorough and strategic financial planning is challenging the assumptions your strategies are based on. It can be difficult to do this yourself, but working with a financial advisor who can look at your planning with a fresh perspective is often helpful. Catching faulty assumptions is important because it can save you money in the present and also preserve your ability to meet financial goals in the future.

Paces Ferry Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”).  This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.

 

Zachary Morris

Zachary Morris, CFP®

Having traveled to over 35 countries, Zach is a believer in Ralph Waldo Emerson’s statement that Life is about the journey, not the destination. Being a CERTIFIED FINANCIAL PLANNER™ provides Zach the opportunity to help clients define and realize their journey, and co-founding Paces Ferry Wealth Advisors, an independent firm, allows the freedom to define the client experience along the way.