How to Avoid “Garbage In, Garbage Out” in Retirement Planning

calculator, pen, and glasses on top of chart

Disclaimer: With Medicaid, VA, and insurance regulations frequently changing, past blog posts may not be presently accurate or relevant. Please contact our office for information on current planning strategies, tips, and how-to's.

As you meet with Gen-X and younger clients looking to plan for retirement, it’s crucial to beware of missteps during the planning process, particularly pertaining to longevity. Using Monte Carlo-style analysis, which allows you to pair historical returns with a set of assumptions, you have four main aspects to consider: income, assets, spending, and longevity.

Income, assets, and spending are relatively easy to plan for, assuming they stay fairly consistent. Accuracy isn’t much of a concern there. However, when taking life expectancy into account, you and your clients must beware of “garbage in, garbage out.” This phrase, which was coined by an IBM programmer, refers to the notion that computers simply process what’s given to them. If the information fed to computers is garbage, the result will also be garbage. The same goes for retirement planning.

The reality is that life expectancy is constantly changing. Between 1945 and 2019, life expectancy for both men and women has increased by almost 14 years, thanks to countless medical and technological advancements. And that doesn’t even account for the increase that happens over a lifetime. Whereas individuals planning for retirement just 20 years ago would plan for end ages of 85 or 90, Gen Xers should consider stretching that number out to 100. Nowadays, using 85 or 90 in a Monte Carlo analysis may result in a garbage assumption.

Longevity should be a blessing, not a curse. Encourage and assist your clients to be diligent in their planning calculations. Help them recognize the positive long-term impact as they plan for a longer lifespan.

Read the full article from Forbes below.