"Where All The Children Are Above Average" (Day 4)

From the first time I heard Garrison Keillor say, "Where all the women are strong, all the men are good-looking, and all the children are above average", I've always smiled when I think about or hear, "all the children are above average".  How does that relate to retirement?  Generally.  But for you specifically, how much does average matter?  A lot less than most people think it does.  However, many people base their decisions on averages when it comes to retirement.  None of us want to be "average", so why make decisions on what happens with the "average" person?  You shouldn't.  It's a mistake.


The mistake with basing decisions on averages is that AVERAGES DON'T AFFECT WHAT HAPPENS TO YOU!


The best example I can think of is in regards to long term care insurance.  I can't tell you the number of times I've seen LTC (AKA, "nursing home") insurance that was bought and sold based on "the AVERAGE stay in the nursing home is 4 years".  That's an interesting statistic.  But it's a statistic.  The average doesn't matter if you are the one who needs help with bathing, toileting, eating, etc.  You might need help for 30 days or for 30 years.  The average is irrelevant.  The right way to plan is to be prepared both for never needing that help and for needing that help for 20 years or more.  If you plan only for a 4 year stay in a nursing home,  anything over that will blow your plan up and you are likely to be no better off than anyone who didn't plan at all.  Think about the large number of people who go into the nursing home for only a couple of days and how they affect the average.  If you plan only thinking about the average and then need care for 10 years, which is very common, you're screwed because the average is skewed.


Planning retirement income based on averages is another huge mistake.  Time and time again I see people basing all their planning on what an investment averaged over the last 10, 20, or 100 years.  It's smart to know those numbers, but a smart person also considers that "past performance is not a guarantee of future results".  It doesn't matter what happened on average for the last 100 years.  What matters is what happens to you in your time.  You need to have a plan for the best and worst possibilities.


The same principle applies to things like longevity, cost of living changes, tax rates, etc.  It's good to know the average, but to be successful you also need to be prepared for when "all the ___________ are above (or below) average.