financial plan assumptions
The underlying projections a financial plan is built on — investment returns, inflation rates, and life expectancy.
Example
“Financial plan assumptions of 7% returns and 3% inflation were reasonable but not guaranteed.”
Memory Tip
ASSUMPTIONS — change the assumptions and the outcomes change dramatically. Model multiple scenarios.
Why It Matters
Financial plan assumptions form the foundation of your entire retirement and investment strategy. If your assumptions are too optimistic or unrealistic, your plan may fall short when you need the money most, leaving you financially vulnerable in retirement or during emergencies.
Common Misconception
Many people assume that using historical average investment returns guarantees they will achieve those same returns in the future. In reality, past performance does not ensure future results, and market conditions, economic cycles, and personal circumstances can significantly alter actual returns.
In Practice
A couple planning retirement might assume a 7 percent annual investment return, 3 percent inflation, and a life expectancy of 95 years. If markets only return 5 percent instead and inflation hits 4 percent, their retirement savings could be depleted years earlier than planned, forcing them to reduce spending or work longer than expected.
Etymology
Modern financial planning term — the inputs that determine plan outcomes.
Common Misspellings
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Related Terms
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See Also
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