Posted by Tim Stobbs on February 4, 2008
It occurs to me while planning retirement, we all make a serious simplification while we make our plans. Almost everyone assumes you will never make another dollar from something other than your investments again while in retirement.
Is it just me or is that perhaps just a little stupid? After all if you sell something in a garage sale you are making money or you could changes homes and make a small profit. Or perhaps we actually sell something from our hobbies (ie: wood working, crafts, writing, etc). To assume you are never going to make any money ever again actually seems a little excessive in the end.
So why do we assume we are never going to do this again? In short, it is easier to assume nothing and then not have to worry about it. After all we are already making gross assumptions about inflation for the next 30 years and average investment returns. So trying to make about extra income becomes a little scary to predict because what happens if we are wrong?
Well to combat this little problem I’m going to make a suggestion. Let’s assume something, but keep it small so if you are wrong you won’t be losing all that much out of your quality of life. So let’s try $250/year/person during your early retirement period (ie: until age 65).
So does that really matter for that little amount of money? Well if that is from 45 to 65 for my wife and I that would be $10,000 if you do the math (20 years x $250 x 2 people). So it in the end is a rather small assumption to have to worry about. Yet it does provide a bit of a point.
Even minor variations of your calculations can have significant affects on your retirement planning. So it is important to be aware of all your assumptions and try doing a little sensitivity analysis on them. Try to see what happens when inflation is at 4% and then try 1%. Then try changing your investment return up 5% and down 5%. Then try different combinations of your assumptions (perhaps 4% inflation with a low investment return). All of these will help flush out what could happen and provide a little comfort about your plan or perhaps motivation to change it.
Yet a word of caution. Don’t spend too much of your time playing with ‘what if’ you can often end up planning for something so remote it isn’t worth the effort to try and figure it out (ie: 0.1% inflation and 20% investment return).