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Old 08-17-2015, 09:09 PM   #21
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Most people here seem to need extremely low returns for their retirement plans to work. I would be very nervous if my plans were built on a needed 8% return going forward.
That is my plan - more or less live off SS + pensions once the kids are out of college. Higher portfolio returns would be great but we aren't counting on them.

We do work part-time but mostly hobby stuff we would do even if we weren't paid and I don't put that income in the plan, so we can use that income and extras like frequent flyer rewards for savings or fun money.
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Old 08-17-2015, 09:58 PM   #22
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That is my plan - more or less live off SS + pensions once the kids are out of college. Higher portfolio returns would be great but we aren't counting on them.

We do work part-time but mostly hobby stuff we would do even if we weren't paid and I don't put that income in the plan, so we can use that income and extras like frequent flyer rewards for savings or fun money.

Dont feel bad, I am less diversified. I just live off a pension and am 11 years away from collecting my SS which will be $105 a month. Hope I make it to 62 so I can cash in!
While I am collecting a nice war chest of preferred stocks that generate nice supplemental income that I reinvest, plus continue to save from my pension income; at my age if my pension went away tomorrow, I would be back to work very soon! Wait, I really haven't worked in 5 years so I have now become so lazy, I would probably be better off staying for free at a minimum security prison the rest of my life.


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Old 08-17-2015, 10:13 PM   #23
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U.S. large cap dividend yields have been trending down for the last twenty years, total bond market yields are low, both could very well have be a drag on future returns.

If you read the research from Jeremy Grantham of GMO you'll find some interesting medium term forecasts.

No one knows for sure what the future holds but if you plan for a lower than average return, and returns trend to historic averages then you can enjoy the benefits of your careful planning.
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Old 08-17-2015, 10:22 PM   #24
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Dont feel bad, I am less diversified. I just live off a pension and am 11 years away from collecting my SS which will be $105 a month. Hope I make it to 62 so I can cash in!
While I am collecting a nice war chest of preferred stocks that generate nice supplemental income that I reinvest, plus continue to save from my pension income; at my age if my pension went away tomorrow, I would be back to work very soon! Wait, I really haven't worked in 5 years so I have now become so lazy, I would probably be better off staying for free at a minimum security prison the rest of my life.
We're actually pretty happy at how low we are getting our overhead while keeping the same basic lifestyle (except for the full time work part) we had when we were both working full-time. I do not think spending more would make us happier. I like the idea of still saving money in retirement and not drawing down much if anything from the portfolio (except for taxes on RMDs). I'm fine with leaving the house and portfolio to charity and the kids.
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Old 08-17-2015, 10:52 PM   #25
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I use 5% return for any calculations I do looking at a future value of standard market investments (and I figure it includes inflation etc.).
Doesn't mean it is right or wrong but it is what I have decided to use and I use it consistently in any calculation I do (future 401K value, taxable investments etc.).
If it ends up being too high then I hope our planned less than 4% SWR will carry us through, if it ends up being higher then we get more fun money to use. YMMV however.
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Old 08-17-2015, 11:02 PM   #26
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I use 3% over inflation rate.
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Old 08-17-2015, 11:25 PM   #27
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I would use this Treasury Inflation-Protected Securities (TIPS) - Markets Data Center - WSJ.com
to determine the expected real yields to maturity on bonds that I already own.
(I'd add something for credit quality premiums if I don't own treasuries.)

It seems to me that these yields are mostly locked in.
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Old 08-18-2015, 03:52 AM   #28
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I use 3% over inflation rate.
For stocks I use 5% real (1% population growth, 2% productivity, and 2% dividends)

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I would use this Treasury Inflation-Protected Securities (TIPS) - Markets Data Center - WSJ.com
to determine the expected real yields to maturity on bonds that I already own.
(I'd add something for credit quality premiums if I don't own treasuries.)

It seems to me that these yields are mostly locked in.
I base my bond returns on the this also. Right now it looks like 1% real or a tad under.
So for my 80/20 portfolio, that works out for 4.2% real or 3.4% for a 60/40.

of course YMMV
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Old 08-18-2015, 02:53 PM   #29
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I'm using .5% real in our retirement plan for our portfolio. We have a conservative portfolio and .5% is pretty easy to achieve just with a TIPS ladder, especially adding in some of our older TIPS purchases at higher yields than are available today.

Even a 0% real would allow for a 2.5% draw down over 40 years, so we are okay with that or a bit better in return for minimal volatility and relatively worry free investments.
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Old 08-18-2015, 03:04 PM   #30
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I use 2% real returns to be safe. I realize it's historically very conservative, but better safe than sorry IMO. I seriously doubt there will be real returns on bonds or cash for many, many years - probably negative. YMMV
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Old 08-18-2015, 03:25 PM   #31
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At a 40/60 split with a mini pension I view anything over inflation as a bonus. I am hoping to have a bond/CD avg yield of 2.5 - 2.8% next year which with 1-1.5% equity dividends should just about cover my expenses. This is pretty conservative and I wouldn't mind being pleasantly surprised.
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Old 08-18-2015, 03:49 PM   #32
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I don't try to guess future returns since I don't think there is really any point to it. For myself I just pick a withdrawal rate that is historically "safe/reasonable" and withdraw at that rate without adjusting for inflation. I figure the portfolio balance will either cover inflation, or not. If inflation is not well represented then I will be spending less, if it more than covers it, then good I will be spending more. I just don't get why we want to spend valuable play time trying to guess the unknowable. Just look at predictions from 5 or 10 years ago and see how far off they were. No point to it.
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Old 08-18-2015, 04:03 PM   #33
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I just don't get why we want to spend valuable play time trying to guess the unknowable. Just look at predictions from 5 or 10 years ago and see how far off they were. No point to it.
I guess that is the idea behind matching strategies for retirement. No growth options for essential expense coverage but the returns are all relatively "knowable" in advance.
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Old 08-18-2015, 04:44 PM   #34
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Wouldn't using actual historical data be better than assuming anything?

FireCALC handles this easily - I entered $1,000,000 portfolio, no spending, 10 years, default 75/25 portfolio.
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Here is how your portfolio would have fared in each of the 135 cycles. The lowest and highest portfolio balance at the end of your retirement was $694,772 to $3,789,153, with an average at the end of $1,839,777.
Those are inflation adjusted, so sometimes a 10 year period has a negative real return. Averages don't mean much if you don't live in average times.

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Old 08-18-2015, 08:53 PM   #35
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The lowest portfolio balance at the end of <10 years> was $694,772
That's quite brutal. I suspect that this worst case happened during a high-inflation period, so that the saver would still have the consolation of staying a millionaire in inflated money.

Come to think of it, the period of 2000-2010 that we just lived through was not that great either, if we count the starting point right at the top of the market.
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Old 08-18-2015, 09:15 PM   #36
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For my 60/40 portfolio, I use 5% return and 3% inflation for a real return of 2%. Conservative projection, yes. I look forward to being proved wrong.
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Old 08-18-2015, 10:06 PM   #37
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I don't understand all these posts talking about x% (typically ~ 2%) real return for a ten year period as being 'conservative'?

Look back at my post # 34. History shows we have had 10 year periods of negative 4% real returns. A portfolio with no withdraws going from $1,000,000 to $694,772 ( 1000000⋅0.96^10 ≈ 664832.64 )

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Old 08-18-2015, 10:09 PM   #38
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It's so bad, we block it out of our mind.

See no evil. Hear no evil. Talk no evil.
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Old 08-18-2015, 11:25 PM   #39
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The problem with a traditional 60/40 portfolio is that traditional bond fund returns are going to suck for the foreseeable future...

However... if you all believe that interest rates are going to stay low, which I do, then you could juice your income returns by using leverage or going way out on duration...

Vanguard extended duration treasury etf (EDV) would work if you wanted to extend duration... For leverage there are a lot of CEFs. I'd probably go with PIMCO or Doubleline...

A combination of one or both above in combination with money held in cash for a "barbell" fixed income allocation might work better than the traditional total bond market index for a 60/40.

P.S. I also like Vanguard's Managed Payout fund (VPGDX). I have all of my Roth IRA in it. It tries to maintain a 4% payout while preserving capital. The payout adjusts gradually over time if returns are lower than desired... Right now its like 3.65%... So maybe that is a good approximation for what a 60/40 can do right now.
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