Financial Projection Assumptions in Personal Financial Planning
When you sit down to map out your financial future—whether for retirement, education funding, or simply knowing if you’re “on track”—the numbers you see don’t appear out of thin air. They’re built on a foundation of assumptions. These assumptions shape the plan’s outlook, influence the decisions you make today, and determine how much flexibility you’ll have in the future.
Getting them right won’t guarantee your future unfolds exactly as planned—but it will give you a much stronger guide.
Why Assumptions Matter
In personal financial planning, assumptions are the estimates we use for the key factors that drive your financial future. They set the stage for your plan’s calculations and include things like:
- How much your investments might grow each year
- How fast your expenses might increase
- What taxes you’ll pay in the future
- How long you expect your money to last
They don’t just answer “what happens if…”—they help you compare choices and see how small changes can have big impacts over time.
The Big Three
There are three major assumptions that can significantly alter your financial projections:
- Investment Returns: How much you expect to earn from a portfolio over time. Do you expect to earn 6%, 8%, 10% or 12%+ per year?
- Life Expectancy: How long you would like your projections to go. A projection to age 85 is very different than a projection to age 95 or 100.
- Inflation: How much expenses are expected to grow over time to keep up with purchasing power. Assuming expenses inflate at 2.5% per year is very different from 4% per year.
Other Assumptions
Of course there are a myriad of other assumptions that can go into a plan. These include:
- Estimating future expenses for lifestyle, medical costs, aging costs, and long-term care.
- Future taxes.
- Income from earnings, pension, social security, etc.
- Projecting Education Costs or family changes.
How to Set Reasonable Assumptions
Setting appropriate assumptions is part art and part science. There is no one right answer. If you got 20 advisors and 20 economists in the room, you’d end up with 40 different answers.
The goal here is to set reasonable assumptions that factor in both historic data points and account for current trends and economic reality. The finance research industry is quite broad and you can often find baseline estimates from industry research from companies like Vanguard, Blackrock, Fidelity, Morningstar, etc.
Setting assumptions is not a one and done event. As the economic situation unfolds, make adjustments to your assumptions to reflect the new reality.
This is where planning for multiple assumptions can be incredibly beneficial in the planning process. Factoring in conservative assumptions and comparing them to more aggressive assumptions can shed light on how you can best interact with your plan.
Even carefully researched assumptions are still educated estimates. The goal is not to predict the future perfectly, but to create a flexible plan that can adapt as reality unfolds.