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A 7% annual return?
Old 07-25-2011, 11:13 PM   #1
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A 7% annual return?

I think I am aiming for a 7% or so annual return. Maybe a bit higher now in our early 30's and bit lower in our 40's. Does that seem reasonable? That's after expense ratios and taxes but before inflation. If I use a 7% rate of return we should be able to retire in our 50's. That's assuming that we can outpace inflation by 1 or 2% a year.

I've read that stocks have returned 9% historically (based on the Shiller's S&P500 data). Is there similar data for bonds? How far back does it go?

I am trying to figure out if we should be 90% stocks 10% bonds or only 80% stocks? Or something else? Thoughts?

(I'm not sure if we'll include other asset classes yet. They seem to be correlated with the S&P 500 minus those high historic returns.)
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Old 07-25-2011, 11:23 PM   #2
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I think I would plan for a lower return, but be happy when/if a higher return happens and you can FIRE earlier. I'm older than you, maintain a roughly 60/40 AA and run my models using 5-6%. That said, my muni bonds are returning nearly 6% so, I may be overly conservative, but with the markets lately reacting so wildly to emotion, you really never know what is going to happen.

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Old 07-25-2011, 11:38 PM   #3
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I am getting about 4-5% across my entire portfolio. It would involve a lot more risk to try and reach for anything higher, so I'm comfortable with this.

I have an allocation of 25% stocks/MFs, 40% bonds ( individual ), and 35% CDs.

As the CDs mature, rather than renewing them, I'll try for a bit more return through preferred stocks and some large cap blue chips. So my portfolio will probably get more aggressive as I grow older - not exactly the direction most FC's would recommend.


My SWR is right at 4% , so I should be OK until I start collecting Social Security. Still agonizing if I should take it at 62, or wait a little longer, I have a little over a year to make my decision.
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Old 07-25-2011, 11:50 PM   #4
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So do you think that 80 or 90% stocks is too aggressive for someone my age with 25 years to go?
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Old 07-26-2011, 12:01 AM   #5
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So do you think that 80 or 90% stocks is too aggressive for someone my age with 25 years to go?
Don't know if this question would be better answered by Rambler, but assuming you are about 45 now, I would probably be more comfortable with a 70/30 mix.

But you still have lots of earning power left, so if you are OK with the risk level, by all means, go for it.

At my age, I prefer to err on the side of conservative; was burned badly in 1987 , got further hit in 2002, but avoided serious damage in 2008. So now I choose to be conservative and sleep soundly at night.
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Old 07-26-2011, 12:42 AM   #6
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So do you think that 80 or 90% stocks is too aggressive for someone my age with 25 years to go?
Nope, that sounds fine. You might want to try 80%/20% stocks/cash, or at least six months' emergency fund. The cash gives you the opportunity to invest more during bear markets.

I tend to be an aggressive investor accustomed to volatility. If the volatility keeps you awake at night then you'll want a more conservative asset allocation.

The "Gordon Equation" gurus feel that 4-6% over inflation is more likely for the next few years, but that's also based on historical analysis.
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Old 07-26-2011, 12:42 AM   #7
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I think I am aiming for a 7% or so annual return. Maybe a bit higher now in our early 30's and bit lower in our 40's. Does that seem reasonable? That's after expense ratios and taxes but before inflation. If I use a 7% rate of return we should be able to retire in our 50's. That's assuming that we can outpace inflation by 1 or 2% a year.

I've read that stocks have returned 9% historically (based on the Shiller's S&P500 data). Is there similar data for bonds? How far back does it go?

I am trying to figure out if we should be 90% stocks 10% bonds or only 80% stocks? Or something else? Thoughts?

(I'm not sure if we'll include other asset classes yet. They seem to be correlated with the S&P 500 minus those high historic returns.)
What's your tax rate? 7% after taxes sounds high to me, but that may be because I'm thinking in terms of a tax-deferred account which will all be considered ordinary income when you eventually get around to spending it. With a taxable account where you would be paying a lower rate on part of the income, and be able to take advantage of tax-loss-harvesting, maybe it's not an unreasonable expectation.
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Old 07-26-2011, 12:47 AM   #8
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Nope, that sounds fine. You might want to try 80%/20% stocks/cash, or at least six months' emergency fund. The cash gives you the opportunity to invest more during bear markets.

I tend to be an aggressive investor accustomed to volatility. If the volatility keeps you awake at night then you'll want a more conservative asset allocation.

The "Gordon Equation" gurus feel that 4-6% over inflation is more likely for the next few years, but that's also based on historical analysis.
The best thing about the crash a few years ago is that it taught us that we can tolerate volatility. If anything riding the market down to the bottom and back up again has increased my comfort level.

And I was going to keep our emergency fund in a separate portfolio. I'll probably give that its own post.
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Old 07-26-2011, 12:53 AM   #9
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What's your tax rate? 7% after taxes sounds high to me, but that may be because I'm thinking in terms of a tax-deferred account which will all be considered ordinary income when you eventually get around to spending it. With a taxable account where you would be paying a lower rate on part of the income, and be able to take advantage of tax-loss-harvesting, maybe it's not an unreasonable expectation.
Honestly, I haven't really thought through the tax implications just yet. Who knows what taxes will be like 20 to 30 years from now? Probably higher. Maybe much, much higher. *sob*
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Old 07-26-2011, 03:28 AM   #10
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80/20 sounds fine to me in your 30's.

As for 7% return, who really knows what the future holds, but the predicted return should reflect how much you save rather than if you go 90/10 or 80/20. In your 30's the best thing you have going for you is time. Good for you to be starting now. (I didn't start putting money into RE accounts until I was 38 and contributed to a 401k for the first time.)
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Old 07-26-2011, 03:46 AM   #11
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I am a very conservative investor and would plan for a lower return.
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Old 07-26-2011, 05:23 AM   #12
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That may be achievable over the long term. It might be reasonable for planning purposes.


You could use 3 returns: Pessimistic, Optimistic, and Expected. This will help you better understand potential outcomes and what you might do to deal with these different possibilities.

I assume your goal is FI or Retirement...

You should get a book on investing... look around on this forum or Bogleheads... there are several fine recommendations.

Most/many people here are fans of index funds and strategic allocation (broadly diversified across asset classes and withing asset classes) and rebalancing.

Assuming you are intending to use the above method... You have some ability to shape your returns and risk through keeping expenses low and the asset allocation.




A couple of other general comments (my opinion) of considerations that go hand in hand with preparation for retirement.

  • Control your spending now and later... Save as much as you can while you are younger. That is not to say you should deprive yourself... but controlling your spending and saving is very important.
  • Do not buy a bigger or more expensive house than you really need. Houses are an ongoing expense.
  • Do not carry too much debt. Create a plan to become debt free.
  • Create a plan that includes your life risks.... (e.g., what will you do if one of you die early, lose a job, or become disabled, etc).
  • Two incomes will help you become FI sooner.
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Old 07-26-2011, 05:37 AM   #13
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So do you think that 80 or 90% stocks is too aggressive for someone my age with 25 years to go?
I have no idea, since I have not seen your risk profile.

However, DW/me were at 90% equities from 1982 through 2004-05, when we started scaling back for our planned retirement in 2007 (at age 59).

Our risk profile included the fact that our current income did not include our retirement investments, much different than today, when I am retired (DW chose to remain in the wor*kforce), and my income comes exclusively from my portfolio (no pension, no SS till age 70).

In 2004-05, we "sold off" many years of profits, funded our retirement cash buckets (3-4 years of gross income, including taxes due), and set our "early retirement AA" at 60/40. Today, (me) being a bit more than four years in retirement, we've changed our current AA to 50/50. That might be more agressive for a lot of folks in retirement, but it matches our current risk acceptance.

That's our story...
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Old 07-26-2011, 05:51 AM   #14
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Dr Crusher, I agree with Nords. 80/20 at your age would not be a bad mix, with some cash on the sidelines to take advantage of periodic dips. At your age, you still have time. What I would do is to map out your anticipated expenses incl college for the toddler, figure out what SWR that will allow you to sleep at night, and based on that, figure the size your stash will need to be at your target retirement age (run numerous simulations), and over time, slowly shift your AA to something more conservative. One rule of thumb (not that I am in full agreement with it) is to have an AA that is 100 minus your age in equities. Thus at 60, you my want to have 40% in equities, most of the rest in fixed income incl CDs, and a couple years expenses in cash that is easily accessible. That would mean about 70/30 at your age. For me, this is a little too conservative, and I have the means to be a tad more aggressive than the above noted rule of thumb. I'm nearing 50, and I think 50% in equities is more conservative than I would prefer to be.

At the end of the day, it's all about what let's you sleep at night.

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Old 07-26-2011, 06:40 AM   #15
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80/20 sounds alright by why plan for any particular return? It will be what it will be.
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Old 07-26-2011, 07:27 AM   #16
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7% long term average return for a 70/30 stock/bond balanced, global portfolio has been my assumption.

Estimating 3% inflation, this gives a 4% SWR - which again fits other analyses.
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Old 07-26-2011, 08:42 AM   #17
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You can plan for a 7% return or a 10% return or a 5% return or whatever percent-return you want. It won't matter in the slightest because it won't affect the percent-return that you actually get.

Select 90/10 or 80/20 or 75/25 or 70/30 based on the losses that you can sustain and feel very happy about. Just don't use 100/0 because you will need some money to buy equities when they drop in value. This is called "rebalancing".
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Old 07-26-2011, 10:05 AM   #18
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Originally Posted by Dr.Crusher View Post
I think I am aiming for a 7% or so annual return. Maybe a bit higher now in our early 30's and bit lower in our 40's. Does that seem reasonable? That's after expense ratios and taxes but before inflation. If I use a 7% rate of return we should be able to retire in our 50's. That's assuming that we can outpace inflation by 1 or 2% a year.

I've read that stocks have returned 9% historically (based on the Shiller's S&P500 data). Is there similar data for bonds? How far back does it go?

I am trying to figure out if we should be 90% stocks 10% bonds or only 80% stocks? Or something else? Thoughts?

(I'm not sure if we'll include other asset classes yet. They seem to be correlated with the S&P 500 minus those high historic returns.)
The key number isn't the 7% nominal, it's the 1% or 2% after inflation.

TIPS have recently been priced at inflation plus 2.4%, so getting inflation plus 1-2% doesn't seem like much of a stretch.

Shiller's data is available as an Excel file here: Online Data - Robert Shiller

You can get inflation adjusted total returns with a little manipulation of his data.

There's a ton of interest data at the St Louis Fed's site here:Federal Reserve Economic Data - FRED - St. Louis Fed
It's all available as graphs or as downloadable data.

Here's the 10 year Treasury constant maturity: 10-Year Treasury Constant Maturity Rate (GS10) - FRED - St. Louis Fed which is probably very close to Shiller's "long interest" rates.

If you have an emergency fund, why not 100% equities for your very long term investments? If you won't be spending the money you save this year until 25 years from now, why would you put some of it in bonds? (There are plenty of good reasons, but it helps to be specific about which apply to you.)
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Old 07-26-2011, 10:26 AM   #19
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7% (real return) is too high. I use 0% for cash. 2% for bonds. 4% for stocks. Thus, I expect our 60/30/10 portfolio to return a real 3% per year over the long term.

If we get more return, we're happy.
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Old 07-26-2011, 11:41 AM   #20
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80/20 sounds alright by why plan for any particular return? It will be what it will be.
Exactly. You can 'aim' for an asset allocation, but you can't 'aim' for a return.

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