Help CenterFinancial planning requires many assumptions to be made. Generally, a financial planning client or user would have to come up with their own assumptions, which can make accurate planning difficult.
Savology uses many assumptions to prepare a financial plan so that a user does not have to do so. Savology takes great care in researching and assigning assumptions.
Savology default assumption values
Listed below are the current default values Savology uses for planning assumptions.
| Category | Value(s) | Additional Notes |
|---|---|---|
| Inflation rate | 2% | Annual inflation rate |
| Investment rate of return | 6% | Rate of return on retirement and investment accounts leading up to retirement. This is the nominal rate before adjusting returns for inflation. |
| Rate of return in retirement | 4% | Rate of return on investments during retirement years. This is the nominal rate before adjusting returns for inflation. |
| Cash rate of return | 3% | The blended rate of return on cash and other investments. This is the nominal rate before adjusting returns for inflation. |
| Retirement income replacement |
- 70%: Minimal lifestyle - 80%: Same lifestyle - 100%: Greater lifestyle |
Income replacement % is based on the user’s stated retirement lifestyle goals from their onboarding survey |
| Social security reduction | 25% reduction for those under the age of 50 | Many experts agree the government could reduce social security by 20%-30% for younger generations based on projected population demographics. To account for projected lower social security, the social security offset is reduced for everyone under 50 by 25 percent. |
| Life expectancy | Social Security Tables |
Additional Details for Savology Default Assumptions
Social Security Estimates
In order to include Social Security in retirement projections without overcomplicating it for the user, we rely on the published calculation guidelines from the Social Security Administration and then make several assumptions about each user.
For example, we assume that Social Security payments will begin at the target retirement age. We also assume that the stated income is representative of an individual’s salary history and adjust it forward and backward based on inflation to estimate the necessary indexed earnings for the required 35 years.
Based on our testing, this has produced close representations for a large proportion of users without having to gather additional inputs or overcomplicate things for users. Then, as users get closer to retirement, advanced planning should be incorporated to dial in assumptions, optimize the timing of distributions, and produce more exact numbers.
Social Security Reduction
Many experts say that the government could reduce social security by 20 to 30 percent for millennials based on projected population demographics. To account for lower social security for younger generations, we reduce the social security offset for everyone under the age of 50 by 25 percent.
6% Investment Rate of Return
A pre-retirement, 6% rate of return is used because it is a conservative estimate of returns for a well-diversified portfolio across a variety of time frames. This helps account for a wide array of ages since the assumption needs to apply uniformly to those early in their career up to those who are a few years away from retirement.
The primary goal is to encourage savings and be less reliant on aggressive returns.
The 6% is also based on 2 key data points:
- The first is the work of Dr. Craig Israelsen who is the creator of the 7 12 portfolio. The 25-year returns of that diversified portfolio are between 6 and 7%.
- The second is based on future portfolio forecasting from economists and investment managers including Vanguard that project longer-term returns to be less than recent returns as the economy matures. So while a 60/40 has returned 7% to 9% since the 2000 recession, it is projected at closer to 6% for the next 10 years and has even been projected as low as 3.5% at points in the last few years.