Avoid Making These 7 Financial Assumptions
Reconsider these assumptions — the wrong one could prove costly.

In a sort of mental shorthand, many of us make certain assumptions regarding our financial lives. This may make financial planning—or the lack of it—a little easier, but unfortunately, these assumptions often are based on misinformation or just plain wishful thinking. In turn, such assumptions can prove extremely costly. Here are a few to reconsider.

Assume stocks will always return 25 percent...or 45 percent...or more

Yes, the recent drop in the markets may have thrown a little cold water on the party, but many investors remain convinced that U.S. stocks will resume their well-above-average returns far into the future. They are unhappy if their portfolios don't return at least 50 percent, perhaps 100 percent a year. Financial planners recommend injecting realistic assumptions into your portfolio planning. From 1926 to 1998, large-cap stocks, represented by the Dow and the S&P 500, averaged 11.2 percent a year. Not shabby, but certainly suggestive that high double-digit returns can be sustained. Instead of assuming high returns every year, diversify and target a realistic return that will still achieve your financial goals.

Assume you need to win the lottery to be wealthy

Three in ten Americans think their best chance to end up with at least half a million dollars in their lifetime is to win a lottery or sweepstakes, according to a recent poll by the Consumer Federation of America. Other studies show that 16 percent of Americans are counting on the lottery to pay for their retirement. Yet one out of 383 workers become millionaires every year, reports Texas Banking. [Who wants a fast million. Dallas Morning News, 4-10-00] Most of them become wealthy in two main ways: they spend less than they earn, and they invest their money so it will work for them.

Assume Social Security will pay for your retirement

Most experts believe Social Security will be there for people in the future, but don't depend on it for your main source of retirement income. Social Security replaces roughly 60 percent of $20,000 in pre-retirement income, 34 percent of $60,000 in pre-retirement income and 10 percent of $200,000 in pre-retirement income. Yet for one in five retirees, Social Security provides their entire income. Clearly most retirees must rely on pensions, employee-contribution plans such as 401(k)s, annuities, and personal savings and investments for the bulk of their retirement income.

Assume you'll live to age 80 or 85

You may well live longer. For example, men who live to age 65 will have an average life expectancy of another 15 years, according to the U.S. Census Bureau. But half of those men reaching age 65 will actually live longer than age 80. Furthermore, for every year you live beyond age 65, your average life expectancy is actually increasing. All of which means you need to plan for a long retirement — or a longer working life.

Assume you'll retire at your normal retirement age

Odds are, you won't retire when you planned. A recent survey by the Employee Benefits Research Institute, the American Savings Education Council and Mathew Greenwald & Associates found that 43 percent of early retirees said they had retired "earlier than planned," often because of "negative" events such as health problems, disability or layoffs. Other workers are finding they want, or need financially, to work beyond normal retirement age, often in a part-time or less stressful job.

Assume you don't need disability insurance

People often focus on life insurance. Yet according to the National Association of Insurance and Financial Advisors, Americans between the ages of 20 and 65 are more likely to become disabled than they are to die. It's difficult to qualify for federal or state disability assistance, and employer coverage is often limited, so consider privately purchased insurance. It replaces 60 to 80 percent of income lost because you are unable to work due to a disability.

Assume you don't need long-term care insurance

The odds are, you won't end up in a nursing home or require extensive home health care. The odds are your home won't burn to the ground, either, but you wouldn't think twice about going without homeowner's insurance. Why go without insurance that could protect you against the devastatingly high cost of long-term care? Yes, Medicaid will pay for long-term care, but you'll have to spend down or divest your assets to qualify, and the care probably won't be as good as what you'd receive from private coverage.

May 2000 - This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Judy M. Sescil, a subscriber of the Financial Planning Perspectives series.

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