No, this is not about the richest people on the planet – it is about the impact on your planning that a single percentage point wields. This arises in a variety of circumstances and, if you think about it, applies in many ways to our planning. For example, we all understand that a one percent fee charged to us on our assets by a financial adviser adds up to a significant amount over time but if we have chosen the right adviser, that cost will be more than covered by the benefits derived from the advice over time.
What we are looking at today is the difference a single percentage point makes when it is tied to the assumptions underlying our planning for the future. One big example is the rate of inflation we apply to the spending goals in a plan. Although the stated rate of inflation, using a variety of benchmarks, has been “historically” low for a number of years, anyone paying attention knows that certain costs have risen at a higher rate than these stated rates. First among them have been health care costs and that associated with the costs of higher education (though the upward trend seems to have leveled off for some schools). The rates for these important items have tended to be several times the so-called inflation rate meaning that if you have been using a benchmark such as the CPI, you have not allowed enough to cover the likely costs in your future. In turn, that means your confidence in your plan may be unfounded.
Another area where the increase in costs seems totally unrelated to the stated inflation rate is that applicable to our living space. Whether you own or rent, increases in property taxes, utility rates, maintenance services and more are pretty much out of your control and generally trend nowhere but up. Yes, there are isolated instances where there are well publicized decreases, but for the most part these are more than offset by the constant upward pressure of insatiable government demands. These may be local, state-wide or national but the net impact will be that discretionary spending is curtailed because of the necessary spending which is subject to increase. If your plan does not allow for that pressure, you may be in for some discomfort.
Bottom line, pay attention to your assumptions – and understand just how pervasive those assumption are – and make sure your plan considers items like inflation in a realistic fashion. Your adviser should be helping you with this on an ongoing basis.