The 3 Unknowns that Dominate Your Retirement Calculation

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Retirement calculators are supposed to make retirement-related decisions easier, showing you how much you need to save, or how much you might be able to spend once you reach your retirement goal. But as soon as you open up one of these calculators you are plunged into a confusing world of interrelated and surprisingly arcane mathematical variables. One of the most common problems people have is simply knowing what data to enter!

And there are three unknowns that dwarf all the others. These are absolutely essential for performing any retirement calculation, and yet nobody else can really tell you what they should be. You can pay an expert to make some educated guesses. But what you’re really buying is his or her personal views about the environment, politics, and your health. That’s right, when you really dig into these supposedly mathematical values, you’ll find yourself facing some unexpectedly subjective judgment calls on some surprisingly emotional topics. Here’s what I mean by that…

The growth rate. We’ve all heard that the long-term historical return from the stock market is in the neighborhood of 10%. Yet in recent years we’ve seen a steady stream of news and views questioning whether we’ll ever get those returns again. What underlies the growth of stocks? Simply this: the growth in the economy. And how has the economy been doing over the long term? In the 1950’s and 60’s real growth in Gross Domestic Product (GDP) averaged about 4% annually. In the 1970’s, 80’s, and 90’s it averaged about 3%. And since 2000, the average growth in GDP has dropped under 2%. What’s causing that decline in growth?

Well, for starters, what exactly is growth? The dictionary defines it as “an increase, extension, or expansion.” And that requires consumption. So if growth is limited, it’s probably because we’re running out of something. What could we be running out of? Fuel, land, other natural resources? Your answer, and your beliefs about how long we can sustain our current consumption patterns, probably will determine what values you use for growth in your investment portfolio.

The inflation rate. Since the 1970’s, when it averaged slightly over 7%, to today, when it’s lurking below 2%, the officially-stated inflation rate has been in a long-term decline — though we’ve seen some volatility and spikes along the way. What does inflation mean to a near retiree? Technically, inflation is defined as the percentage rate of increase in the prices of goods and services (or the decrease in the value of the dollar) in the economy. At the simplest mathematical level, inflation is simply subtracted from your investment return, so it is a headwind to the growth of your portfolio and its ability to support you. But if we want to assess its possible threat in the future, we need a deeper understanding of inflation. What is it, really?

In fact, inflation is simply a back-door tax on those with wealth, a mechanism for the government to spend money it doesn’t have, by taking some from those with savings and giving it to those without. Whether or not you approve of that policy is a political matter, but the mechanism itself is pure economics. So what might inflation do in the future? Nobody knows. But your answer to that question is probably dictated by your views on whether there will be more or less government going forward. And the impact on you, personally, will depend on where you sit on the wealth scale, compared to your neighbors. If you’re better off, you’ll probably lose from increases in inflation, and if you’re less well off, you’re likely to gain.

Your life span. The final unknown factor that dominates your retirement calculation is simply the length of your life. We’ll all know the date when our retirement starts. And we all know we must leave this world at some point. But none of us knows exactly when. Since the 1950’s, average life expectancy at birth in the United States has risen from approximately 65 to about 80 years. Yet this is one area where we all intuitively understand that statistics have little bearing on our personal experience. Genetics, accidents, lifestyle, health care, or lack thereof, are just some of the personal factors that mean our life expectancy could deviate substantially from the average. How long will you live?

Nobody knows. The question is clearly impossible to answer, most of the time. And yet virtually every retirement calculator demands to know how long your retirement will last. To be on the safe side, most of us will plan to live into our 90’s or 100’s. But, a more realistic approach to this question could be to ask how long might you be solely dependent on previously saved assets without the capacity, or desire, to generate income or reduce your lifestyle? And for that estimation, family history may be your best, or only, guide.

So, when we analyze the retirement equation, and when we attempt to compute it using most any of the available retirement calculators, we will run up against those three unknown factors: growth, inflation, and lifetime.

Over the course of little more than a decade or two, modest and entirely plausible changes in any one of these factors could either magnify your retirement portfolio several-fold, or lay it to waste.

So do these unknown factors call into question the validity of retirement planning? No. Planning is always useful. It tells you the path you are on, in case you want to change it. But these three unknowns do call into question the actual results of any retirement calculation.

Growth rate. Inflation rate. Life span. How do you know what they will be for you? You don’t.

Then, how do you calibrate them for yourself within the range of historical and statistical possibilities? Well, I won’t get into numbers right here, but I will tell you where they ultimately come from:

  • Growth rate comes from your views on the world economy and the physical environment it operates within.
  • Inflation rate comes from your views on the direction of the political environment.
  • Life span comes from your understanding of your own personal environment.


  1. Hi Darrow,

    What is worse: running out of dough and hoping to fall on support from children and the government, or leaving a sizable pot o’ gold that our heirs may appreciate, toasting each other while enjoying a barge trip down the Seine?

    Bottom line: save often and save more! And probably the most important item, stop working when the economy and market is growing, to minimize the permanent bite from one’s savings.


  2. Ted Leber says

    GR8 piece. For planning I’ve found it useful to think like a golfer.
    Golfers dream about getting holes in one. But I think they aim
    for an imaginary circle around flag–the goal. I think that will work for most
    of us too, by using the 3 points you have provided.
    Growth rate.
    Inflation rate.
    Life span.
    And as always the impact of fees.
    Cheers, Ted Leber

    • Thanks Ted. Good analogy. Thinking in terms of a broad target instead of a hole in one, seems like the best approach. I’m such a devotee of low-cost investing that I tend to assume fees will not be an issue. They should be a known, minimal quantity. But individuals need to review their own portfolios to ensure that!

  3. Great post. Growth rate, inflation rate, and life span are good to keep in mind but there are three things that I always keep in my life: keep earning, keep saving, and keep various sources of income.

  4. I’d add a couple more: tax policy and safety net issues. Should Social Security or Medicare undergo any major changes, the landscape for retirement could change suddenly. And if taxes (particularly as related to retirement accounts) change one way or the other, your math will change quickly also. But, that said, I agree with you overall. Inflation is the wildcard I worry most about.

  5. Wannabe Retired says

    Nice post. Not yet retired but play around with retirement calculators like Firecalc, so I’m very familiar with the big 3 variables. I think the “guess when your gonna die” variable is the most difficult and sort of darkly funny. Based on family history and lifestyle, I usually put 91 for me and spouse, but who knows? Most sources I’ve read do NOT expect social security or medicare to change radically, so while I have decreased the expectations of social security, I do not eliminate it completely from my calculations (I’m roughly age 50, so tail of the baby boom). Good topic, appreciate the post.

    • Thanks Wannabe. I agree with your thinking here. We are forced to make some of these assumptions, but it’s good to keep a sense of perspective and humor about it all!