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November 7, 2012

When did you last review your planning assumptions?

It is necessary to make estimates regarding various factors when planning for your financial goals.  Regardless of the goal, whether it is a car, wedding, new home, college, retirement, etc. there are numerous factors that you need to consider.  For example, when do you want to meet the goal, how much will it cost at that time, how long will the expenditure be required.  You will need to project how much your savings and investments can earn until the funds are needed, what the tax rates will be and what inflation will be.  These and other factors must be considered to know how to accomplish your goals.

Saving for retirement requires addition factors, such as: how long will you live, how healthy you will be and how much will it cost to maintain your desired standard of living.  There are many calculators available on line today.  Each uses different assumptions and factors.  You need to pick the one that you have the most confidence in.

Try to build a cushion into your calculations.  Do not just use long-term trends.  Consider what is happening today and what your expectations are for the future.   Do not use the most optimistic factors.  Round expected future investment returns down and round up future expected expenses.  Remember to factor in inflation and longer life expectancy.

The most important step is to review your assumption at least annually.  All these factors change.

Before 2008, many people expected long term investment returns of 10%.  Today many people are estimating returns of 5%.  Today, many expect future taxes to be higher. Regardless of what your projections of the future are, you should review and adjust your planning to reflect the changes.

Do not delay your planning.  The sooner you start, the easier it will be to meet your goals.

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