The Retirement Projection That Ignores a Health Shock
Daniel, 61, earns $145,000 and plans to retire at 65. His adviser, Lena, builds a projection assuming 6% nominal returns, 2.5% inflation, and spending of $72,000 a year. Daniel has $840,000 in invested assets and a defined-benefit pension of $28,000 a year from age 65. During the meeting Daniel mentions a recent diagnosis of a progressive condition; his specialist says his working capacity may decline within three years. He also supports his adult daughter with $1,200 a month and has a $300,000 mortgage at 5.9% with 12 years remaining. Lena's software output shows a 92% probability of meeting his goals. Daniel says, 'That number is all I need - just tell me it works.'
1. Evaluate whether the 92% success figure is a sound basis for advice, and identify the assumptions that most need stress-testing.
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The 92% figure is a model output, not a conclusion. It depends on assumptions that Daniel's circumstances directly contradict. The three most fragile are: (1) continued employment to 65, which his specialist's prognosis makes uncertain; (2) constant real spending of $72,000, which ignores the $14,400 annual support to his daughter and any care costs; and (3) a single deterministic return path with no sequence-of-returns analysis.
Lena should re-run the projection under at least three scenarios: retirement at 63 with reduced savings, a period of reduced income starting within three years, and a market downturn in the first five years of drawdown. She should also model the mortgage: at 5.9%, repaying it is a risk-free return that may beat the projected portfolio return after tax, so the debt should be treated as a competing use of cash.
The 92% number should be presented as conditional: 'if you work to 65, spend exactly this, and markets behave as assumed.' Daniel's request for a single number is a cue to explain probability, not to endorse it.
2. Daniel's health changes his insurance and estate needs. What should Lena review, and how does this interact with the retirement plan?
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Lena should review income protection and any trauma or critical-illness cover, checking waiting periods, benefit periods, and whether the condition is excluded or already disclosed. If cover is inadequate, the plan must fund a larger cash buffer before retirement. She should also check whether his pension or superannuation-style benefits include disability provisions and whether he can access them early on health grounds under the applicable rules.
On the estate side, she should confirm beneficiary nominations, a current will, and whether a power of attorney and guardianship appointment exists, because declining capacity is a live risk. The daughter's support should be documented as a discretionary expense that may end or continue.
The interaction matters: if income stops early, the mortgage and the $1,200 support draw on the same assets that fund retirement. Lena should present the trade-offs explicitly - for example, reducing support, using a lump sum to clear the mortgage, or delaying retirement - and record Daniel's choice. She should avoid promising outcomes and instead show the range of results under each path.