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Within the archives of HD is this comment:
“I built a spreadsheet and proved that the math worked for me and my wife with our facts and assumptions.”
Making assumptions means accepting something as true or certain without proof, often based on your own beliefs, past experiences rather than on concrete evidence. You can’t prove an assumption, but you can test it.
The exact subject associated with the above comment, is not important. Suffice to say though that it related to lifetime retirement income security – important stuff. The validity of those assumptions will not be tested for many years.
People sometimes make assumptions (sometimes unconsciously) that steer them toward the answers they want. This tendency is linked to cognitive biases. For example, our emotions or goals can shape how we interpret information—so we may make assumptions that favor our preferred outcome.
Planning for years in the future with many possible variables requires assumptions, nothing can be known with certainty.
How did you go about setting your assumptions? How did you become comfortable with your final choice? Have you had the opportunity yet to test those you relied on to make financial/retirement decisions?
Facts: our current pension payments (2), both with COLA’s, already more than cover our expenses and also provide for transfers into a savings account. We each also have target date funds, I have an IRA, and we’ve got approximately 2 years of expenses in our emergency fund. We are 67 and 66, so no immediate need to reduce the IRA through RMD’s/QCD’s. Neither of us is taking social security benefits yet.
My assumption: the pension COLA’s will continue to keep pace with cost increases (healthcare, utilities, food, etc.) and our SS benefits, emergency fund, TDF’s, and IRA will provide “backup funds” if or when necessary.
I have this all plotted out in my spreadsheet (my forecast), because I like messing around with the numbers, and that gives me a ready confirmation that “the math” works for us now as well as into the future. Another earlier writer mentioned “margin”, and I believe our margin is sufficient. Time will tell, but I assume all will work out just fine.
Not much risk with assumptions there. You are in a good and unique place for sure.
Sounds like former employees of a government entity or college.
Good guess — both long-time public school educators.
Many years ago, when borrowing against my home for seed money to start my business, the bank required a business plan. I provided one with very modest growth forecasts—even those indicated I would become a multimillionaire within ten years. The bank found my plan conservative and reasonable. Reality, however, had other ideas and laughed heartily at those assumptions. I never became that multimillionaire. So much for forecasts and assumptions.
Well, it wasn’t just you — the bankers you had review your plan also must have had forecasts and assumptions that aligned with yours!
I guess they did… until the GFC, then they politely asked for all their money back lol
I think this post says more about you and your lack of comfort/antipathy toward modelling than it does about assumptions.
The fact that assumptions have to be made doesn’t mean they are skewed toward driving a result that the user wants. IME it is the opposite – I take some data points from the personal finance world at large and round down and even model doomsday scenarios.
Read up on Monte Carlo analysis if you really want to understand the full spectrum of outcomes from a range of data points (and yes we know that 1/10,000+ case of failure would worry you so you wouldn’t retire but that’s you).
It says nothing about me, it’s not about me. It’s just a factual observation and a question that may be of interest to some people.
And yes, people and personalities do drive the development of assumptions. At least that’s what the research says. I never made assumptions in the context of the subject we are talking about.
So, have all your assumptions worked out or not?
Ask me in 30 years. And the answer then will be no. Because they aren’t exact predictions.
That won’t have meant they’ve not been useful or evolved over the interim.
Only a fool or the luckiest person on earth would answer “yes”. You don’t need all assumptions to pan out if a plan has sufficient margin.
We all build financial systems for our retirement, some have a high degree of certainty, others not so much. For me, the work of modeling my system, predicting how it will work, and tracking actual results feels far better than the alternative: driving in the dark with my headlights off. Perhaps I’m “fooled by randomness” and my own delusions, but so far the data tell a different story.
Perhaps it says more about how we each naturally have a different level of comfort with uncertainty?
Mine is crazy high. Dick’s may be a lot lower.
Spreadsheets can only show you possible future results. This is because their results are controlled by the laws of probability. All assumptions are inherently incorrect. But, for each, there is some probability that it might be correct. To judge the collective result, you must multiply all these individual probabilities. The greater the number of assumptions and the more years for these assumptions to be utilized the lower will be the aggregate probability. You can test this by multiplying 99% by itself 10 or 15 times…..
As George E.P. Box said: “All models are wrong, but some are useful.”
Indeed little can be known about our future with certainty, except outcomes most driven by human nature, which never changes. And yet we plan (God laughs).
I document all my assumptions in our plan and review most annually, some quarterly.
Key numeric assumptions for future projections come from the best long-term data I can find (or sometimes buy).
Because the past is an imperfect guide to the future, I create margin for error or surprises: assumptions on the growth or income side of projections are de-rated by at least 25% and some as much as 50%. I love a good night’s sleep.
I record performance of each account weekly, monthly, and annually so I can compare past results vs future expectations and course-correct as we fly the plane.
I remember, 30 or so years back, getting my first computer along with free Microsoft Office software. I had a blast setting up spreadsheets for budgets and planning. I proved without a shadow of doubt, the exact year I’d hit a million bucks. Then life interfered. Blew my assumptions right out of the water.
However, something good came of my futile exercise. It nudged me down the road, piqued my interest in planning. It helped get me to my final destination, albeit with several unplanned stops.
For me those stops included divorce and a change of occupation, accompanied with several years of laughable income. Everyone has unplanned stops, maybe sickness/injury, kids college education, or just bad luck of some sort.
It’s hard to build “life” into one’s assumptions.
It is indeed hard!
Over decades of planning, I discovered most failures in a plan are of imagination not calculation. If you do it long enough, you either develop a great sense of humor and humility, learning to be skeptical and realistic, or you become the darkest cynic.