4 Dangerous Assumptions That Could Hurt Your Retirement Plan

A version of this article previously appeared on Aug. 31, 2022.

As inveterate watchers of sitcom reruns (and a real-life Felix/Oscar combination), my sister and I loved The Odd Couple while we were growing up. One of our favorite episodes featured a courtroom sequence in which Felix (Tony Randall) berates a witness to “never assume,” and proceeds to use the chalkboard to demonstrate what happens when you do. More years later than I care to admit, the mere mention of the word “assume” makes me smile.

But assumptions aren’t always a laughing matter, and that’s certainly true when it comes to retirement planning, where “hope for the best, plan for the worst” is a reasonable motto. Incorrect—and usually too rosy—retirement-planning assumptions are particularly problematic because, by the time a retiree or pre-retiree realizes her plan is in trouble, she may have few ways to correct it; spending less or working longer may be the only viable options.

Here are some common—and dangerous—assumptions that individuals make when planning for retirement:

1. Stock and bond market returns will be robust.
2. Inflation will be benign.
3. You will be able to work past 65.
4. You will receive an inheritance.

And here are some steps to avoid them:

1. Lower your market-return projections and consider reducing your planned withdrawal rate.
2. Use longer-term inflation numbers to plan and consider inflation hedges in your retirement portfolio.
3. Be ready to fall back on other measures, like increasing your savings rate, if you aren't able to continue working.
4. Don’t rely on an inheritance and communicate about it early.

Dangerous Retirement Assumption 1: Stock and Bond Market Returns Will Be Robust

Most retirement calculators ask you to estimate what your portfolio will return over your holding period. It may be tempting to plug in strong returns to help avoid hard choices like deferring retirement or spending less, but think twice.

To be sure, stocks’ long-term gains have been pretty robust. The S&P 500 generated annualized returns of more than 10% from 1926 through August 2023, and returns over the past 15 years have been in that same ballpark. But there have been certain stretches in market history when returns have been much less than that; in the decade ended in 2009, for example—the so-called “lost decade”—the S&P 500 actually lost money on an annualized basis.

The reason for stocks’ weak showing during that period was that they were pricey in 2000, at the outset of the period. Stock prices aren’t in Armageddon territory now, but nor are they cheap by any measure. Morningstar Investor’s fair value measure indicates that stocks in our coverage universe are trading right around their fair values. But another valuation measure, the Shiller P/E ratio, which adjusts for cyclical factors, is currently at 31, versus a long-term median of just over half that figure. Bond return forecasts are starting to look up thanks to increasing bond yields, but they’re nothing to write home about in absolute terms, especially on an inflation-adjusted basis.

What to do instead: Employ sober return projections and stay flexible with your in-retirement portfolio withdrawals. Those valuation metrics suggest that prudent investors should ratchet down their market-return projections somewhat just to be safe, at least for the next decade, and that has implications for retirement planning. In Morningstar’s 2022 research on retirement income, for example, embedding somewhat muted return expectations for stocks and bonds resulted in a safe starting withdrawal percentage of just 3.8% on a balanced portfolio over 30 years. But we also explored ways to lift that starting percentage, including employing some variability in spending.

Dangerous Retirement Assumption 2: Inflation Will Be Benign

During most of the past two decades, inflation was a nonissue, with the Consumer Price Index increasing by just 2% or even less in most years. That made inflation easy to ignore or at least downplay when forecasting retirement spending. The past few years, however, illustrate the peril of assuming that consumer prices would remain in a steady state. When inflation rears its head, that means retirees need to withdraw more than they anticipated from their portfolios just to maintain their standards of living. Bill Bengen, the author of the original “4% guideline” research, articulated concerns about that very issue when we interviewed him in December 2021.

What to do instead: Use longer-term inflation numbers to plan and consider inflation hedges in your retirement portfolio. Rather than assuming that inflation will stay good and low in the years leading up to and during retirement, investors should use longer-term inflation numbers to help guide their planning decisions; 3% is a reasonable starting point. And to the extent that they can, investors should customize their inflation forecasts based on their actual consumption baskets. For example, healthcare costs are often a bigger slice of many retirees’ expenditures than they are for the general population, while housing spending may be a lower component of retirees’ total outlay, especially if they own their own homes.

The possibility that inflation could run higher during your retirement than it did from 2000-20 also argues for laying in inflation hedges in your retirement portfolio to help preserve purchasing power once you begin spending your retirement assets. That means stocks, which historically have had a better shot of outgaining inflation than any other asset class, as well as Treasury Inflation-Protected Securities and I Bonds, commodities, precious-metals equities, and real estate. It also argues against holding too much in fixed-rate investments whose return potential is negative once inflation is factored in.

Dangerous Retirement Assumption 3: You Will Be Able to Work Past Age 65

Never mind how you feel about working longer: The financial merits of working longer are irrefutable. Continued portfolio contributions, delayed withdrawals, and delayed Social Security filing can all greatly enhance a retirement portfolio’s durability. Given those considerations, as well as the ebbing away of pensions, increasing longevity, and the fact that the financial crisis did a number on many pre-retirees’ portfolios, it should come as no surprise that older adults are pushing back their planned retirement dates. Whereas just 11% of individuals surveyed in the 1991 Employee Benefit Research Institute’s Retirement Confidence Survey said they planned to retire after age 65, that percentage had more than tripled—to 41%—in the 2022 survey.

Yet there appears to be a disconnect between pre-retirees’ plans to delay retirement and whether they actually do. Forty-six percent of workers leave the workforce earlier than planned, according to EBRI research. Some of that divergence, especially recently, may owe to enlarged portfolio balances, the result of an extended stock market run. But health considerations (the worker’s, a spouse’s, or parents’), unemployment, or untenable physical demands of the job likely play a role for some.

What to do instead: Be ready to fall back on other measures, like increasing your savings rate. While working longer can deliver a three-fer for your retirement plan—as outlined above—it's a mistake to assume that you'll be able to do so. If you've run the numbers and it looks like you'll fall short, you can plan to work longer while also pursuing other measures, such as increasing your savings rate and scaling back your planned in-retirement spending. At a minimum, give your post-age-65 income projections a haircut to allow for the possibility that you may not be able to—or may choose not to—earn as high an income in your later years as you did in your peak earnings years.

Dangerous Retirement Assumption 4: You Will Receive an Inheritance

It's a convention in movies for children to be crestfallen when their parents don't leave them an inheritance, and a few studies show that there can be a disconnect between what children expect to receive and their eventual windfalls. While about 70% of the millennials surveyed by Natixis said they expected to receive a windfall, just 40% of their parents planned to leave one. A Schwab survey identified a similar disconnect in inheritors' expectations versus reality. Increasing longevity, combined with long-term-care needs and rising long-term-care costs, means that even parents who intend for their children to inherit assets from them may not be able to.

Adult children who expect an inheritance that doesn't materialize may be inclined to overspend and undersave during their peak earning years. And by the time their parents pass away and don't leave them a windfall—or leave them much less than they expected—it could be too late to make up for the shortfall.

What to do instead: Don’t rely on an inheritance and communicate about it early. Don’t rely on unknowns. If you’re incorporating an expected inheritance into your retirement plan, it’s wise to begin communicating about that topic as soon as possible. Alternatively, if you don’t want or need an inheritance, but suspect that your parents are forgoing their own consumption to give you one, you can have that conversation, too.