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Planning for retirement can feel like a daunting task. Not only does it involve thinking about many unknowns such as what you might be spending in 20-30 years or when to take social security but there are also things that you can forget to include as part of your retirement planning.Today we will cover six things that you may have forgotten to consider when planning for your retirement.

1: Sequence of Returns

The math seems straight forward for retirement planning:calculate what your investment portfolio will hypothetically be worth, find out what your social security and/or pension won’t cover during the year and see what percent of your portfolio value you’ll need to cover the gap. Easy enough to use an average rate of return to cover that right? Wrong. An average rate of return is not enough to compensate for the sequence of when markets go up and down. Let’s take a look at the same investor with a 4% average rate of return over 20 years:

YearPortfolio ValueGain or lossDistributionsEnding Value  YearPortfolio ValueGain or lossDistributionsEnding Value
1$100,000.0020%5,000.00$115,000.00  1$100,000.000%5,000.00$95,000.00
2$115,000.005%5,000.00$115,750.00  2$95,000.00-15%5,000.00$75,750.00
3$115,750.0012%5,000.00$124,640.00  3$75,750.00-30%5,000.00$48,025.00
4$124,640.0010%5,000.00$132,104.00  4$48,025.004%5,000.00$44,946.00
5$132,104.003%5,000.00$131,067.12  5$44,946.0018%5,000.00$48,036.28
6$131,067.12-4%5,000.00$120,824.44  6$48,036.2810%5,000.00$47,839.91
7$120,824.447%5,000.00$124,282.15  7$47,839.916%5,000.00$45,710.30
8$124,282.15-15%5,000.00$100,639.82  8$45,710.3014%5,000.00$47,109.74
9$100,639.82-2%5,000.00$93,627.03  9$47,109.745%5,000.00$44,465.23
10$93,627.0318%5,000.00$105,479.89  10$44,465.2310%5,000.00$43,911.76
11$105,479.8910%5,000.00$111,027.88  11$43,911.7618%5,000.00$46,815.87
12$111,027.885%5,000.00$111,579.28  12$46,815.87-2%5,000.00$40,879.55
13$111,579.2814%5,000.00$122,200.37  13$40,879.55-15%5,000.00$29,747.62
14$122,200.376%5,000.00$124,532.40  14$29,747.627%5,000.00$26,829.95
15$124,532.4010%5,000.00$131,985.64  15$26,829.95-4%5,000.00$20,756.76
16$131,985.6418%5,000.00$150,743.05  16$20,756.763%5,000.00$16,379.46
17$150,743.054%5,000.00$151,772.77  17$16,379.4610%5,000.00$13,017.40
18$151,772.77-30%5,000.00$101,240.94  18$13,017.4012%5,000.00$9,579.49
19$101,240.94-15%5,000.00$81,054.80  19$9,579.495%5,000.00$5,058.47
20$81,054.800%5,000.00$76,054.80  20$5,058.4720%5,000.00$1,070.16
 Avg Rate of Return4%     Avg Rate of Return4%  

2: Not accounting for taxes

Don’t forget that during retirement you will have taxes to consider on most accounts from either investment activity or taxed withdrawals. Furthermore, you can cause offsets to SSI (if taken before Full Retirement Age) as well as Medicare premiums. Forgetting to calculate these into the plan can lead to shortfalls that you may not be expecting due to the larger gross withdrawal rate.

3: Forgetting to calculate in RMD distributions

You’ve accurately accounted for sequence of returns and budgeted in for taxes on your portfolios, but you’re only calculating for your withdrawal needs. This can led to a hiccup in your planning due to the fact that you will have requiredminimum distributions (RMDs) that the IRS sets as a minimum amount to betaken out of your tax-deferred accounts causing for additional tax costs. This also means more detailed planning to account for where the portfolios rebalance to and how that folds into your tax considerations.

4: Assuming costs will be level

Costs will change over time. We can see this looking at how the prices of things such as gasoline for our car, a loaf of bread or a movie ticket have changed over the last 20 years. More importantly, it’s been shown in various studies that spending goes through a “retirement smile” where upfront there will be higher expenses with a more active retirement lifestyle,dipping down as things quiet down in the middle and rising back up towards the end due to additional medical, prescription or care needs. Using a flat approach to your spending assumptions can lead to pitfalls in your outcome.

5: Missing the mark on inflation

Inflation refers to the rising cost of our goods overtime.This can be measured by the consumer price index for some of our every day expenditures and it historically is somewhere around 2% a year that costs rise.However, inflation for medical considerations over time can have inflation rates in the range of 5%! Missing the mark on accounting for these changes in your expenditures can be something that would throw your best planning offtrack over time.

6: Not planning for longevity properly

We benefit from the advances in medical sciences and therefore are living longer than ever. However, this may not be considered in your planning process when looking at the different ranges of outcomes. Most often we can see planning that hasn’t looked at single longevity and the effects of how that impacts a surviving spouse as benefits from social security, pension, taxes or other considerations aren’t properly added into the range of outcomes.

BONUS: Not viewing performance by your set goals

Your thorough planning is now in place but you’re still using the market indexes as your marker for success or failure? Head over and see WhyYour Goals are The Only Index to Measure Against .

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