Dangerous Financial Assumptions That Can Wreck Your Future

Have you ever seen the old TV show “The Odd Couple”? You know the original that starred Jack Klugman as “Oscar” and the brilliant Tony Randall as “Felix”. You can learn a lot of things on TV you know, especially when it comes from the genius of someone like Neil Simon and his iconic comedy. Back in the day, my favorite and most memorable episode of the show featured Felix explaining in a courtroom scene how you should never “assume” anything and on a chalkboard he draws the memorable line that: “when you assume, you make an ass of u and me!”

Some financial assumptions are necessary to plan your future, but others can be dangerous and even wreck all your preparations and work.

As funny as that line is, making assumptions about things doesn’t always cause a chuckle. When you make assumptions about your finances, for example, you often find that what you assumed would happen just doesn’t happen at all. Assumptions about your retirement plan may be shot to pieces because you assumed your plan made years ago would be just fine! When it comes to finances, rather than assume anything you should be planning for the worst and hoping for the best. You want to be able to react and adjust to what you don’t really know, don’t you?

Dangerous Financial Assumptions

Here are four dangerous assumptions people often make when planning their retirement and financial future, as well as how to avoid making these mistakes.

Dangerous Assumption #1: Inflation will remain low or non-existent

It’s easy to think that just because inflation has been mild during the recent past that it can continue on and on. When you think that way, it lets you choose to be more conservative in your planning and that may cause a real shortfall in what you will need to survive in retirement if inflation rears its head. Back in the 1980’s for example, inflation roared at levels in the teens as a percent so it can and could happen again.

Solution: Think long term when it comes to inflation and start with a more aggressive 3% annual forecast rather than the 1% or less that has been occurring during the past decade. When planning your money needs, adjust your personal expense predictions for your actual personal retirement needs which often means more spent for healthcare and food and less on housing and clothing. Make your investments ones that have traditionally outpaced inflation like Treasury protected securities, I-bonds and things like real estate and precious metal investments.

Dangerous Assumption #2: The stock and bond markets will be just fine and remain rosy

To be sure,  S&P investments in the market have been good over a century of investing and have averaged about 10% gains over each decade from 1915 thru 2015.  Even right now markets are in record breaking mode, but do not be complacent. There have been periods when the market has in fact reversed that trend and as recent as the decade that ended in 2009 (known as the “lost decade”) we saw the S&P 500 actually lose money during that period! That can happen again.

Solution: Scale down your estimates for returns on your stock projections from 10% to about 5-6% according to Vanguard and Morningstar executives. Being more conservative in your investments for retirement can avoid bigger losses that you just may not be able to make up before actually retiring. In the bond market, be even more conservative planning about 2% gains. The current returns are practically no gains and 2% isn’t even keeping up with inflation if it continues on the way the past 10 years have been going.

Dangerous Assumption #3: You will work beyond your full retirement age, earn more and thus increase your Social Security payout

Many people say that they plan to work beyond their retirement age, in fact more than triple those who said so in 1990 (11%) actually said that in 2015 (36%). In theory, that’s a great plan. Earnings increase the longer you’re working and you continue to contribute to your retirement plan, investments, etc. The disappearance of pension plans means working makes up for that deficit.

The reality is this. There is a real disconnect between the intention to work longer and build more wealth through your job than what actually happens. Most people do not continue to work after their full retirement age despite their intentions to do so. In fact, many do not even work until their full retirement age. Of those that left the workforce early, 60% cite health problems or disability as the reason. Planning to work until age 65 and beyond just may not be possible.

I know this from personal experience. I had intended to keep working, at least part-time, past age 65. But after my heart attack at age 62, I switched to part-time work and then had to retire altogether a year and a half later.

Solution: Scaling back your pre-retirement expenses is the place to start if you are thinking of retiring early or not extending your work life into your post retirement age. Also, increase your saving rate while you are still working. And be sure to take care of your health. Lastly, consider a part time (although it may be a lower paying) job as a bridge to retirement after full retirement age.

Dangerous Assumption #4: You will inherit money from your parents when they die

While it is true that children do inherit money from their families and particularly their parents, the number of them that actually does inherit is declining. Baby boomers are expected to have inherited trillions with almost 2 out of 3 of them receiving money from their parents. However, that number is projected to fall to just 1 out of 2 in the planning by rich Baby Boomers for their own kids.

There are reasons for this. For one, the longer life span we enjoy today has caused many to use more of their funds while still alive. Secondly, health care is ever increasing and more effective so that it’s not uncommon to spend hundreds of dollars on medication and doctor visits each month. Thirdly, Baby Boomers feel that some Gen-Xers have become lazy and expect an inheritance. While the Boomers benefitted, some of that came from the hardships that their parents experienced during the Great Depression and as a result they wanted to help their own children with money to fund their lives as well as their retirement. Boomers feel that their kids have had a wealth of life advantages that they have already provided and intend to use their money for themselves in big amounts.

Solution: Don’t count your chickens before they hatch and don’t count on money from your parents as inheritance that you may not be getting. If you need to, have that talk about inheritance sooner rather than later so you can plan accordingly. Having that talk can also let you know if your parents are hurting themselves by not using their money for their health and enjoyment in life, and you should discourage that from occurring.

One of the most common discussions I had with my clients when discussing their retirement plans with them was shocking even back in the late 1990’s. When I would ask about their retirement plans I often heard, “Oh, I don’t have one. My parents are leaving me money for my retirement!” My response was always the same. I’d say “What if they live to be a hundred and need that money for themselves?”

Your financial future is something that you are constantly prepping for and if you are not, you may be heading for serious problems. Start conversing with your partner, your parents, and financial advisor right now.  You don’t have to “assume” anything and you should make sure any assumptions you use are well thought out.

What financial assumptions have you made in your planning? Are you prepared if those assumptions turn out to be untrue?


  1. Emily @ JohnJaneDoe

    Good points, Gary. I always point out to the folks who are afraid to invest that historical inflation rates have been much higher than what they’ve been used to…there’s no way to just save enough if we hit double digit annual inflation for a couple of years if you haven’t let the market work for you.

    1. I can understand why you might have thought debt was no big deal. Mortgage debt, for example, can be a responsibility that leads to equity and financial health. The credit card debt which you experienced, and so many of us deal with, is a different matter. Educating the next generation is a great thing to do when you can tell them from your own experience. Thanks, Brian.

  2. We used to be brainwashed by those financial whizzes who lectured that we would need 80% of our salaries to live off of in retirement. We were able to break that assumption by tracking our expenses for several years and proving that it is not a rule to live by.

  3. Fruclassity (Ruth)

    Another assumption people seem to be making, similar to the one about low inflation rates, is about low interest rates. It really does look like interest rates about to go up – as we have been warned for years. I’m SO glad our debts will be gone before higher interest rates have a chance to make them more of a burden. Great list here, Gary!

    1. You’re so right, Ruth. It appears that we’re on the verge of interest rate hikes and we’ve gotten so used to the low rates that it will be quite a shock as we go into 2017. If the rate hikes continue, it will certainly cost those in debt a considerable amount, which they probably have not factored into any repayment plan.

  4. You are so right about inflation. I remember double-digit inflation in the 70s and early 80s. And how about interest rates? There was a co-worker from my previous job who would always talk about his first mortgage. The year was 1978, and the interest rate on that 30-year fixed loan was 18%! But as you pointed out, if happened before, it will happen again. For all of mankind’s advances, we still haven’t completely conquered inflation and high interest rates. Those beasts will surely show up again. Thank you, Gary, for this very timely reminder. I hope your warning is heeded.

    P.S. I love your Odd Couple analogy. The Odd Couple was easily one of the top 10 sitcoms of all time. My favorite episode was the one where Oscar and Felix appear on Password. “Aristophanes!”

    1. Thanks, Mr. Groovy. I hope we’re not headed back for really high inflation. But if so, it’s good to be prepared with alternative ways to support ourselves. On the subject of the Odd Couple, I have to admit, I almost know the dialogue from every episode, and I still find it as funny today as I did 50 years ago. I remember the Password episode well…”Ridiculous!”

  5. Daniel Palmer

    Just by making assumptions 3 and 4, you could be in for a rude awakening when you retire! I also think that because a lot of people like to act richer than they are, made possible by consumer debt, their kids assume that there must then also be a huge inheritance awaiting.

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