The WSJ had an interesting article about retirement planning that you will need a subscription to read.
The article isolates some omissions in process that could be very important. First the article tackles inflation. Many people fail to account for inflation in their planning and the contention in this article is that those that do often figure too low. The standard 3% assumption might be too low. While I am not sure if 3% is too low I do know that if 5% turns out to right and you plan for 3%, a lot of your numbers will be way off.
The idea of rerunning your numbers with a 5% inflation rate to see what happens makes sense. A couple of tweaks could mitigate a chunk of the damage caused by a higher inflation rate.
Next the article touches on spending. People that are in the early years of retirement are likely to spend more on lifestyle (travel and hobbies) than people later in retirement. But older retirees are likely to spend more, a lot more, on medical care than younger retirees. The article doesn't really offer much on this topic.
The article touches on longevity. This is important. Based on medical innovation it is a reasonable bet that today's average 50 year old could live ten years longer than they might otherwise expect.
The article also touches on the withdrawal rate that I have mentioned on this site before and drew so many comments. The article went with 4%. Obviously the number is reasonable, but the lower the better.
I was disappointed that the article did not focus at all on alternative ideas for creating income. It makes sense to me that innovative ideas along these lines will help ensure a successful retirement, financially.
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2 comments:
I read that WSJ article with some interest since my wife and I retired to Prescott in 2000 at ages 53 and 47 respectively. We use an annual 4% withdrawal from our investments as the max we spend in a given year. Since we are self-retired with no company provided healthcare and only a small pension, our biggest shock in 6 years has been the rising cost of healthcare and utilities (in the Prescott area). I don't think a 3% overall inflation rate has covered it.
great point. Not saying I know, but I wonder if the spike in healthcare costs over the last couple of years will be followed by plateau.
The other thing is that prices of a lot of things, granted more along the lines of durable goods, are going down.
3% as an average may be right or wrong but part of the planning is understanding what you spend money on and trying to understand what price trends could be for those items.
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