Retirement calculation pitfalls

Congrats on taking the first step and figuring out how much you’ll need when you retire. Here are pitfalls to watch out for.

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Question:

I’m pretty conservative by nature. My pantry is so well stocked I could feed Brangelina’s entire brood for a year. So it won’t surprise you that I have used a number of those retirement calculators online to figure out how big a nest egg I’m going to need. What I want to know is, what I might have forgotten in my calculations.

Answer:

In case I get the munchies during a nuclear war, I now know where to call. Thanks for the reassurance.

Now, first, let me say that just figuring out a number—any number—puts you ahead of most people. Well done. You’re right that there are a few pitfalls to be aware of, and not just for ultra-conservative people like you. For example:

Going into too much detail

Calculating what you need is part science, and part science fiction. Remember, you are just coming up with an estimate—your best guess based on what you know now. There is no way to know what the actual number will be. So going into too much detail can lead to overconfidence because you think you’ve ‘figured it out’.

Neglecting family health history

If you have longevity in your family, you need to plan for it. The same goes for ill health, either for you or a family member who is going to need additional support after you retire. This could include a relative with special needs or a parent who still needs care after you stop working.

Tapering spending too aggressively

A lot of people think they will be able to cut expenses significantly once they move out of ‘active retirement’. What they forget is that there is a whole other basket of expenses to consider: Medical expenses not covered by insurance, renovations required to account for mobility issues, home care, moving into an assisted living facility. Don’t expect that just because you’re no longer fit enough to trek the Himalayas that you won’t need as much money to live.

Underestimating inflation

The overall inflation rate might be just 2 or 3% per year, but what about inflation on the things you’re going to need as you age? For example, nursing home costs were up 5.2% year over year and that trend is likely to continue.

Overestimating portfolio performance

Sure, a 7% return has happened in the past. But that is no guarantee that it will happen in the future. This is especially true as you decrease your equity holdings and increase fixed income as you age. It is worth checking to see what happens to your estimate if your actual returns come in lower than you predict.

Deluding yourself about how long you’ll work for

I’m Generation X and a lot of peers say that they’ll just work longer than their parents did. That might be your intention now, but what if you can’t? What if the job prospects for 75-year-olds in your field are bleak? What if you have a health condition that prevents you from doing the same work for the same money that you did at 45?

Forgetting to update your estimate

How much you need to retire is an ever-changing number. Update your estimate with new information on portfolio performance, plus any changes to the areas discussed above.

You stock your pantry by yourself. But you might manage your money with the help of a financial adviser. If so, talk through these pitfalls during your next meeting with him or her to see if you need to add another can or two of soup to your stash.

4 comments on “Retirement calculation pitfalls

  1. The title suggestings that the article is about "Calculating your retirement needs". Unfortunately, there is not a single calculation. I believe your audience wants examples of calculations and that's what I thought I would find. More over, they want some connection between Title and Article. You have once again lied to the reader. You do it too often and the reader will leave.

    Reply

    • Agree. The article was different from the title, and was therefore quite annoying..

      Reply

  2. Hi
    A common question and the answer often starts off with 'It depends'. I believe you have covered off the core issues pretty well. Just a couple of others to consider. Downsizing the house, that is sell the main house and buy a smaller one cold leave extra cash. Any inheritance that could be coming their way from elderly family (not a nice subject to talk about but a reality). Putting all of that into a calculator can be difficult and stressful. The the end result will change anyway through events out of your control, so don't forget to enjoy yourself along the way to retirement. Cheers

    Reply

  3. Definitely, definitely enjoy yourself along the way. I agree 100%.

    Reply

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