Better Assumptions = Better Outcomes

When planning for your financial future, assumptions are one of the most critical factors in the process. While many assumptions are in our control, it is those out of our control that gets us in trouble. In the world of finance, there are no extra points for optimism or pessimism. To give yourself the highest probability of success, your assumptions must be realistic. To that end, below are some things to consider when developing your long-term financial planning assumptions:

Assume Conservative Rates of Return:

While the past ten years were a great time to be in the stock market, assumptions for the future need to be moderated. For an appropriate rate of return assumption, let me first offer some perspective. The broader S&P 500 stock market index returned approximately 12.5% over the past five years, 14% over the past ten years, and 9% over the past fifteen years.

Recommendation: A rule of thumb for planning is to err on the conservative side. Based on recent history, an 8% annual rate of return assumption seems appropriate.

Account for Inflation:

Inflation can vary from person to person, but there is little doubt it is one of the most significant risks for those trying to accomplish long term financial goals like retirement. Let me show you why! If you currently live off $50,000 annually, in today’s dollar terms, how much will you need to maintain the same lifestyle twenty years from now with a conservative 2% inflation rate? In this scenario, your expected annual cash flow need increases due to inflation from $50,000 to $74,297 (A 50% increase!! Ouch!). So how does one combat this? While bonds are a vital component of a diversified portfolio strategy, they alone will not offer the necessary protection against inflation. The best way to counter inflation is to spend less, save, and invest more. It means a “Growth Strategy,” including exposure to stocks and other productive risk assets, is a must! Use realistic rate of return assumptions (See Above) for a diversified portfolio to see if your portfolio is set up to defend against inflation’s negative effects.

Be More Reliant on Personal Savings/Investing:

Much is made about the underfunding of pensions, particularly those sponsored by private companies. Many pensions claim to be on sound financial footing, but in truth, are ticking time bombs. As a result, many private companies are freezing plans for current and/or new employees and terminating pension plans altogether in favor of defined contribution plans funded by employee deferrals.

Recommendation: While pensions at the federal, state, and local government level are less of a concern due to their taxing power, future pensioners of all types should put themselves in a position where they are less reliant on these future income streams.


Follow The Welch Group every Tuesday morning on WBRC Fox 6 for the money Tuesday segment.

 Fox 6 Talking Points:

  • Assume Conservative Rates of Return
  • Account for Inflation
  • Be More Reliant on Personal Savings/Investing


Marshall Clay CFP, JD, is a Partner and Senior Advisor at The Welch Group, LLC, which specializes in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™.  In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.



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