Retirement Needs Analysis
Assumptions for retirement planning
One of the primary difficulties of retirement planning centers around the fact that so many assumptions must be made. These include assumptions about interest rates, inflation, expected rates of return, life expectancies and other factors. Small changes in any of these factors can have a major impact on the financial security of a retiree.
The rate of inflation can have a huge effect on a retiree's standard of living, as it erodes the buying power of income that, in large part, may be fixed. A realistic projection of future inflation rates is needed to calculate the income and assets needed to retire.
Life expectancyLife expectancy - the age until which a person is expected to live - is a second critical factor in determining how much money an individual will need to set aside for retirement.
Joint Life Expectancy - For couples, the average number of years until the second person's death is longer than the individual life expectancy of either person alone. This means using whichever person's life expectancy is greater will result in underestimating the retirement needs of a couple.
The type of lifestyle an individual or couple seeks to live in retirement will greatly affect the level of retirement assets and income needed. Factors to consider:
· Travel plans
· Part-time employment plans
The rate of return an investor will earn while saving for retirement and then in retirement also require assumptions about the unknown. Typically, planners will rely on historic rates of return for various types of portfolios when drawing up a retirement plan. To be on the safe side, many planners use conservative estimates that may be a couple percentage points below historic rates of return.