As a financial planner working primarily with people on the path to FIRE, preparing to retire, or making other life transitions, most people come to me for one reason more than any other. Planning can be overwhelming. They want certainty that they’ll be OK.

You can apply this sentiment to retirement calculators. People look to these tools to provide some certainty to a few crucial questions. 

• Do we have enough money?
• When can I retire?
• Will we be OK?

Unfortunately, financial planning involves many assumptions. As the dad joke goes, you know what happens when you ASS-U-ME. 

Today, I’ll dive into the key variables that determine outcomes of retirement calculations and the inherent uncertainty contained in each. In future posts, I’ll address how to deal with this uncertainty.

Key Factors for Retirement Calculations

The factors that most impact your retirement calculations and whether you are financially independent are:

• Length of retirement,
• How much you will spend,
• Investment returns, and
• Inflation.

Law changes and policy decisions related to tax rates, Social Security, health insurance, and monetary policy are subfactors that impact these variables. Unfortunately, all of these factors and subfactors are impossible to predict.

Low Fidelity vs. High Fidelity Calculators

Retirement planning can quickly become overwhelming. You must make assumptions about each of these variables.

A low-fidelity calculator eliminates a lot of this overwhelm by making assumptions for you. For this reason, these are great tools for someone entirely new to the retirement planning process. 

They provide useful outputs in a few minutes. The impacts of small changes in assumptions compounded over long periods are quickly apparent. Users avoid overwhelm and the frustration that accompanies it, while beginning to get a handle on the planning process.

However, you don’t want to make life-altering decisions based on these crude calculations.

After you gain knowledge and experience using these simple tools, higher fidelity calculators and/or professional financial planning software give you more control over your assumptions. They also enable modeling more complex scenarios to help improve decision-making.

Related: The First Step to Choosing the Right Retirement Calculator

The Only Certainty

High-fidelity calculators provide impressive modeling capabilities, on par with professional financial planning software. But they still can’t provide what so many of us desire: certainty.

The first thing I tell every planning client before presenting results is one thing we can be certain about with our projections is that they are wrong. The plan will constantly evolve as new information is presented.

Compounding Errors

A common assumption for a traditional retirement length is 30 years. For FIRE types, retirement may be 50 years or longer. Small errors in assumptions, compounded over long time frames create wildly disparate outcomes.

Let’s look at one simplified assumption, investment returns, in isolation. Compare the difference between an assumed return of 4% vs 5% on $1,000,000.

Over one year, this 1% difference would amount to a difference of $10,000. I don’t think many of us would pass up a free ten grand, but in the grand scheme of a retirement plan, it’s a rounding error.

Over thirty years, this 1% difference would compound to a difference of $1,078,545. Compounded over 50 years, the 1% difference would compound to a difference of $4,360,717.

Remember, this is an oversimplification of just one variable. When spending from a portfolio, average returns aren’t all that relevant. As important is the sequence of returns.

A sequence of bad returns early in retirement can devastate a portfolio. Good returns later may come too late for the portfolio to recover.

Conversely, a good early sequence of returns could mean that by the time the bad returns came later, your portfolio would have grown and your drawdown rate so low to make those bad returns irrelevant.

Unfortunately, your sequence of returns is yet another largely unknowable variable.

Uncertainty is Inherent

In writing about this topic, I hope to promote a clear understanding of the challenges of retirement planning and the inherent sources of uncertainty. We all need to understand the inherent uncertainty baked into our assumptions. 

These challenges are greater for early retirees. We won’t have the income floor provided by Social Security or the relative stability of Medicare for the first portion of retirement. We also have a longer time for errors to compound.

I equally hope this understanding empowers you in your planning, rather than trapping you in fear. Unfortunately, there are many people pushing products that claim to provide certainty. Beware of such products and claims made by those selling them.

Let’s look at these key variables that determine retirement outcomes.

Retirement Length

One source of uncertainty in retirement calculations is retirement length. Another way of saying the end of retirement is the end of your life. For that reason, this isn’t fun for us to think about. But it is reality. So we need to put thought into realistic assumptions.

Average Lifespan

How long should we plan to live? One place to start is the average lifespan.

The CDC reports that the average lifespan for an American male is 74.8 years and 80.2 years for a female. However, these numbers are dragged down by things like infant mortality, suicide, car accidents, etc.

The Social Security Administration has a life expectancy calculator that allows you to calculate your life expectancy based on your date of birth and sex. Note that my current life expectancy is 82.0 years.

I am expected to live 7+ years longer than the average male based on the fact that I have already not died in my first 48 years. If I reach age 70, my life expectancy rises to 86.7 years by not having died in my first 70 years.

Family and Personal History

Having a grasp on average life expectancy is a useful first step to making better assumptions. However, as the calculator notes, it does not “take into account a wide number of factors such as current health, lifestyle, and family history that could increase or decrease life expectancy.”

Even knowing your personal history may not help much. On just my mom’s side of the family, I have a varied family history. This includes the very early deaths of an uncle (heart attack) and cousin (cancer). My mom passed a bit earlier than average at age 71. Both of my grandparents lived into their mid-nineties.

(Almost) No One Is Average

No one in my family lived an average age. This is typical. Averages are composed of results that lie above and below, some far above or below the mean.

It is important to understand that individuals cannot rely on averages in the same way insurance companies can. Your retirement is an experiment with a sample size of one.

Investment Returns

Like lifespan, you can start with average investment returns to help develop reasonable return assumptions for the different asset classes in your portfolio. The Bogleheads Historic and Expected Returns page is a great place to start, linking to several different resources.

However, it must be noted that past performance may not be indicative of future performance. Using forecasts of future performance is probably a worse method of developing your assumptions. Predicting the future is hard!

As noted above, even if you knew exactly what your average return would be over your retirement it wouldn’t provide accurate retirement projections. Markets are cyclical. 

On the way to obtaining that average return, you will have to endure up and down years. The sequence of returns when drawing from a portfolio plays an important role in retirement outcomes.

Retirement calculators incorporate this reality by using Monte Carlo analysis and/or modeling historic returns to provide a probability of success. These methods produce more robust data and hopefully a more realistic picture than using average returns. Still, they can’t provide certainty.

Unfortunately, we can’t know whether markets will produce average returns, or better or worse than average, over your specific retirement. We also can’t know what order those returns will come in. Again, your retirement is an experiment with a sample size of one.

Related: How Accurate Should Your Retirement Calculation Be?

Expenses

Thankfully we don’t have to make assumptions about spending. We control this variable. Or do we? It depends.

We certainly can ramp up spending if we are doing better than projected by elevating our lifestyle or increasing giving. Assuming you’re not planning retirement on a bare-bones budget, most of us can also cut back spending in meaningful ways if needed while still living relatively well.

• Cut back on the vacation budget.
• Opt to eat more home-cooked meals and less at restaurants.
• Keep our vehicles a bit longer.
• Hold off on the remodel.

However, spending is not entirely in our control. A few areas in particular introduce a significant amount of uncertainty.

Related: Are We Spending Too Much?

Healthcare Expenses

Healthcare expenses add considerable uncertainty for early retirees. This is because if utilizing ACA premium tax credits, premiums can vary wildly based on your income. We don’t know how much health care we will need to consume. There is also the political risk of the ACA changing.

Insurance Premiums

Our family currently buys our insurance through the exchange. This year, we are paying $4,416/year in health insurance premiums.

However, this assumes a $13,178 premium tax credit. All of this is estimated based on our 2024 income. In reality, we won’t know exactly what we have to pay this year until filing our taxes next year. We may owe more or get money back depending on how accurately we estimate our income.

What we do know is that our premium costs could be as little as a few dollars per year if we minimized our income and optimized our premium tax credit. It could also be as much as $17,594 if we had to pay the full unsubsidized price. Kaiser Family Foundation’s Health Insurance Marketplace Calculator is a great resource to see what your insurance may cost based on your income and other personal circumstances.

That’s quite a bit of uncertainty in health care expenses. Especially since it doesn’t consider whether we’ll actually use any healthcare services.

The Cost of Care

Our plan’s family deductible, also our out-of-pocket maximum, for this year is $16,100. If we are lucky enough not to need any care, our expenses could be $0.

Thus, our all-in expenses could range from a few dollars a year with optimized premium tax credits and perfect health up to $33,694 in a world with no premium tax credits and two significant medical events.

Political Uncertainty In the Law

Since the ACA was passed, there have been multiple attempts to overturn it in the Supreme Court and Congress. Each failed, giving me more confidence that this law will persist in some fashion for the foreseeable future.

However, I’m far less confident in what form it will exist. The numbers we pay in 2024 are based on a provision of the Inflation Reduction Act that made tax credits more generous and eliminated the “subsidy cliff” contained in the original ACA.

Related: Maximize ACA Subsidies and Minimize Health Insurance Costs

If this provision is not extended by an act of Congress, it will expire on December 31st, 2025 and the law will revert to its previous form.

I’m currently 48 and Kim is 46, so we have this level of uncertainty for nearly two more decades. Even then, Medicare is not free and we don’t know what our health and thus medical expenses will be in traditional retirement.

Housing

Another area of considerable uncertainty with expenses is housing. Housing is the largest expense for most households.

Renters or those who plan to buy a home in the future are most susceptible to inflation in housing prices and rising interest rates. That is obvious to most people in light of the past couple of years.

We thought we were being smart by purchasing our home outright. We eliminated the need to make a rent or mortgage payment, the largest expense for most people. This also enabled us to shield ourselves from recent inflation in housing prices and rising interest rates.

Even with insulating ourselves from these expenses, we’ve seen our property taxes and home insurance premiums double in the less than 6 years we’ve owned our current home. We’ve also spent more than anticipated on renovations on this new-to-us (but not new!) home.

Owning your home outright or carrying a fixed-rate mortgage provides a degree of certainty over this expense and an inflation hedge. Still, uncertainty in housing spending should be considered. We underestimated ours significantly.

Taxes

Taxes are a large expense for many of us during our working years. Tax rates in retirement can vary greatly depending on how much you spend and how you generate retirement income.

Related: What Will Your Tax Rate Be In Retirement?

Several planning decisions are based on assumptions about future tax rates. One of the most common is the decision of whether to contribute to tax-deferred or Roth accounts when working, or whether to convert from tax-deferred to Roth later.

Related: When are Roth Accounts Better Than Tax-Deferred?

A common assumption pushing people towards the Roth option is that future tax rates will be higher. While future tax rates in general may be higher, that doesn’t mean your tax rate will be higher. That assumption also doesn’t tell you when tax rates will be higher.

Some humility is required. Predicting the future is hard.

That said, some assumption has to be made. I assume the law will remain the same until I know otherwise. Then when things change, I adapt to the changes.

However, even that isn’t a straightforward assumption. As I write this today, provisions of the Tax Cuts and Jobs Act are set to expire on December 31, 2025, if Congress does not take action. So by my own reasoning, I should assume it will revert.

However, if no action is taken, it would amount to an effective tax hike on most households. This is always politically unpopular. 

So what will our tax code look like as soon as 2026? I don’t know. Uncertainty is inherent.

Inflation

Inflation was an easily underestimated factor in the retirement equation until just a few years ago. I doubt that many of us aren’t thinking about inflation today.

Still, as with investment returns, predicting future inflation rates is hard and introduces uncertainty. You can start by understanding the historic average inflation rate and how much it can fluctuate. Also, like investment returns, there is a sequence of inflation risk.

Inflation will likely slow from rates we’ve seen over the past few years. But it is rare to have even a year of deflation (negative inflation) over the past 80 years.

Instead, prices will likely continue to creep up from current levels, even if the rate of growth slows. This means that most prices will likely never return to past levels. 

Similar to poor investment returns early in retirement, this makes high inflation early in retirement more harmful than if it occurs later. The percent and order of inflation are both inherent sources of uncertainty in retirement projections.

One thing you can do is consider your personal rate of inflation. How does your spending differ from the average household?

Consider how vulnerable you are to spending in areas that may be higher than average. They include:

• Housing (for those who don’t own outright or who don’t have a fixed rate mortgage),
• Education (for those helping kids or grandkids with college),
• Health care (for all of us ☹️).

Managing Uncertainty

In Darrow’s book Can I Retire Yet?, he uses an analogy of retirement as a journey into unchartered terrain. He wrote, “You have a compass for direction, but only the sketchiest of maps.”

A desire for certainty is common. We use retirement calculators or seek advisors to confirm we’re on the right track.

Unfortunately, certainty doesn’t exist. Using a good calculator and inputting the most accurate information possible should help build confidence. A good advisor can assist you with this process and help identify your blind spots.

However, we all must embrace the fact that we don’t know exactly what the future holds. You can’t “set it and forget it.” There is no “perfect plan.” Navigating retirement will require ongoing course corrections to keep moving in the right direction without veering too far off track. 

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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. After achieving financial independence, Chris began writing about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. Chris also does financial planning with individuals and couples at Abundo Wealth, a low-cost, advice-only financial planning firm with the mission of making quality financial advice available to populations for whom it was previously inaccessible. Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He has spoken at events including the Bogleheads and the American Institute of Certified Public Accountants annual conferences. Blog inquiries can be sent to chris@caniretireyet.com. Financial planning inquiries can be sent to chris@abundowealth.com]

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