The joke about assumptions is an old one but it still makes me smile. But when it comes to your retirement, assumptions are anything but amusing. Your retirement plan needs to throw away the assumptions and adopt a “hope for the best, plan for the worst” philosophy.

Retirement plans are often filled with rosy assumptions about the future that are hugely problematic. These assumptions are so problematic because by the time the degree of inaccuracy is discovered, there may be little one can do to correct it.

Here are three of the most common mistaken assumptions that our clients have made over the years, and some steps to help you avoid them.

Assumption #1: I have a retirement plan so I can put my worries behind me

Half of the people who walk through our doors already have a retirement plan and are merely looking for confirmation of somebody else’s work. Before even opening a document, we ask a couple of quick questions that usually cause us, and our clients, to put their document aside.

How old is the plan?

If the plan has not been updated in more than 12 months, it is probably not worth the paper it is written on. Your plan is no more than a collection of best guesses about the future and a lot can happen over the course of a year – unexpected life events happen, investments outperform or underperform, and most importantly, our desires for the future change.

The best approach is to treat your plan like a living document where information is regularly added, deleted, and updated. Check the projections and make course corrections well ahead of potential trouble spots. Depending on your approach, continual updates can seem overwhelming, but the right tools make it easier. If you are not up to making monthly updates, then be sure to set aside time for the exercise once a year.

Who really built the plan?

It sounds like a strange question, but the odds are that it was not you. Most plans revolve around base inputs supplied by the you the client, and a myriad of assumptions added by the planner that are projected across time. Financially, your plan needs to identify actions for success but at its core it needs to be a description of the life you want to live.

The only way to answer the question “Am I going to be OK?” is to start by defining what your OK looks like and only you can create that definition, not your planner or advisor. If you are not the primary author of your retirement plan you are less likely to follow the path it outlines as it is not really your plan but your advisor’s plan. Be the primary author of your plan – not just a contributor.

Assumption #2: Investment returns will be robust and inflation benign

Most retirement calculators ask you to estimate what your investment returns will look like over the life of your plan and how they will be split across capital growth, dividends and interest (the breakdown allows for optimized tax treatment of investment growth). Long-term S&P 500 returns are north of 10%, much like the last 10 years, but the long term is merely an average of shorter periods of boom and bust. In the decade ending in 2009, the S&P 500 lost money on an annualized basis.

Instead of being overly optimistic about your investment returns, we suggest a conservative approach. First, adjust your “assumed” rate of return downwards. If you have typically been able to earn 7%, plan for something less than that average, I typically target 5%. Second, tax it for the worst case, treating it all like interest income that receives no special treatment like capital gains and dividends do.

For the past 20 years the Consumer Price Index (CPI) increased by 2% or less most years and, coupled with rosy investment returns, made future retirement life look fairly comfortable. In February 2022, CPI showed an increase of nearly 8%. For the short-term, retirees will need to withdraw substantially more from their portfolios to maintain a given standard of living.

To combat the ups and downs of inflationary changes, be realistic about the long-term rate of inflation you will live through. It is unreasonably pessimistic to assume that the current high rate of inflation readings will persist, 3-4% is a good starting point. A 3% rate of inflation matched with a 5% rate of return only leaves you with a 2% real rate of return, and that’s not all that much.

Assumption #3: There will be an inheritance in your future

A recent Natixis survey indicated that 70% of millennials expect to receive some sort of inheritance windfall, yet only 40% of their parents are planning to leave one. Schwab has also identified a similar disconnect between expectations and reality. Moreover, increasing longevity and high health care costs mean that even parents who intend to leave a legacy to their children may not be able to.

The simple solution is simply not to rely on unknown unknowns. If your retirement plan includes an expected inheritance, start talking about it as soon as possible and bring the unknown closer to a known. Alternatively, if you can make things work without an inheritance – or suspect your parents are sacrificing their own well-being for yours – you should have that conversation too.

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