Financial planning involves creating a variety of projections to model the future as accurately as possible. To give yourself the highest probability of success your assumptions must be realistic. Below I’ll talk about some of the most common assumptions when building your financial plan.

Investment Returns
While the past decade has been a great time to be in the stock market, investment returns for the future should be moderated. For a portfolio with a growth objective, we use a 7.3% annual rate of return. Your growth rate may vary depending on your investment objective and risk tolerance.

Why do we use this percentage? Historically, the stock market has returned 10% annually. The worst 30-year annual return for the stock market is 7.8% (See below). We generally like to use a more conservative estimate. After building the base case, we will run multiple scenarios with returns above and below average.

You can’t turn on the news recently without hearing about inflation. For those who don’t know, inflation is the general rise of the cost of goods or services. For example, if you currently spend $80,000 a year, in 20 years the same lifestyle will cost almost $120,000 (assuming 2% inflation).

We normally use a 2-3% inflation rate for our financial plans. The past decade inflation has averaged 1.92% which is closer to the Fed’s target of 2%. Just like the stock market, inflation will have periods above and below the historical average.

US Inflation Rate

Life Expectancy
Outliving your money is one of the most common and significant fears people have about their retirement. According to the CDC, the average life expectancy in the U.S. is 77 years old. As with all assumptions, we like to be cautious and use a target life expectancy of 100.

Bottom Line
It’s important to make sure that any assumptions are well thought out and realistic. If you need help with your financial plan, please don’t hesitate to contact us.

George Maroudas
Twitter @ChicagoAdvisor

Disclaimers and Sources:

Average Annual Return 10% from Investopedia
Inflation data from YCharts
Stock market annual returns 1926-2021 data from Dimensional Advisors
Life expectancy of 77 years old from the CDC

Stock investing includes risks, including fluctuating prices and loss or principal. This information is not intended to provide specific advice or recommendations about any stock nor is it intended to be a recommendation to buy, sell or hold any stock investment. We suggest speaking with your financial professional about your situation prior to investing. 

Please consult your financial advisor regarding your specific situation. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy ensures success or protects against loss. This information is not intended to be a substitute for specific individualized tax advice. The Standard & Poor’s Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.