Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Not sure what to use for predicting investment returns!
Old 10-07-2011, 12:22 PM   #1
Dryer sheet wannabe
 
Join Date: Sep 2011
Posts: 16
Not sure what to use for predicting investment returns!

I'm working on calculating my target RE year. I've read a ton of messages on this board, but of course not all! I've finally gotten my health insurance budget to a point I'm comfortable with, which was the one part of my budget I was having trouble with. So now I'm trying to figure what return on investment to use in my calculations. I figure I should expect a slightly larger return on investment accounts that wouldn't be touched for at least 25 years, since I would have none of that in cash, and probably a 70/30 or 75/25 allocation. And I would expect a smaller return on $ that I would be using sooner, since I'd have some in cash, and the rest would probably be 65/35 or 60/40. But I still can't settle on what figures to use. 6% for 25 yr+ and 4% or the shorter? What do you all use? I don't want to be too conservative nor too optimistic. I have used FireCalc also, but want to do my own calculations as well.
__________________

__________________
CantThinkofAUserName is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 10-07-2011, 12:48 PM   #2
Recycles dryer sheets
justplainbll's Avatar
 
Join Date: Sep 2011
Location: Easten Long Island
Posts: 414
You might want to consider using inflation adjusted (real) rates of return and the effect of the tax bite on returns in non-TDAs.
__________________

__________________
justplainbll is offline   Reply With Quote
Old 10-07-2011, 12:49 PM   #3
Full time employment: Posting here.
Coolius's Avatar
 
Join Date: May 2010
Posts: 684
Since I feel that we will be in a low interest environment for some time, and I definitely do not want to put too much allocation into stocks, I am using a 4% return for my planning.

I tend to be more conservative, so have about 30% in cash earning almost zilch, 40% in bonds, and the rest in stocks ( Mostly preferred issues ).

The disadvantages are that I probably will not participate in any market recovery, but the advantage is security and less anxiety when the volatility is high, like now.
__________________
Coolius is offline   Reply With Quote
Old 10-07-2011, 12:54 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Whatever percentages you use, don't make the mistake of using that percentage as an average you get every year. Early losses are more harmful than later losses and early gains are more helpful than later gains........ even if in all cases the average annual return is the same.
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Old 10-07-2011, 02:12 PM   #5
Thinks s/he gets paid by the post
 
Join Date: Nov 2006
Posts: 2,268
Quote:
Originally Posted by youbet View Post
Whatever percentages you use, don't make the mistake of using that percentage as an average you get every year. Early losses are more harmful than later losses and early gains are more helpful than later gains........ even if in all cases the average annual return is the same.
Isnt that only true in the withdrawal phase? During accumulation, it works out the same no matter when your gains and losses come.
__________________
utrecht is offline   Reply With Quote
Old 10-07-2011, 02:36 PM   #6
gone traveling
 
Join Date: Apr 2009
Location: Eastern PA
Posts: 3,851
Quote:
Originally Posted by utrecht View Post
Isnt that only true in the withdrawal phase?
In the withdrawl phase (where I've been in since early '07) it's the same as the accumulation phase, and actually a bit easier to manage overall.

I have no need to max out my returns since prior to retirement I hit my "number". Additionally, since I/DW have more than several years in cash (to provide current retirment income), the current action of the market means little.

We simply sell when the market is up (as it was, earlier this year) and hold tight when the market is down (which it is now, and may be many years in the future - who knows?)

Unless you are a person who keeps their retirement investments in the market (both equity/bonds) and draw directly from it to meet your immediate income needs, or are a bit short in your retirement investments overall, market flux need not be as great an immediate impact to your plan, IMHO.
__________________
rescueme is offline   Reply With Quote
Old 10-07-2011, 03:19 PM   #7
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
Quote:
Originally Posted by utrecht View Post
Isnt that only true in the withdrawal phase? During accumulation, it works out the same no matter when your gains and losses come.
That's only true if no money is added or subtracted from the portfolio for the entire period. During accumulation you are most likely regularly adding to the portfolio, in which case the value will be most sensitive to the market returns near retirement, which are applied to more of your contributions. Similarly, its final value at the end of retirement will be most sensitive to the market returns at the start of retirement, which are applied to more of your money before it is withdrawn.
__________________
Animorph is offline   Reply With Quote
Old 10-07-2011, 03:19 PM   #8
Thinks s/he gets paid by the post
 
Join Date: Nov 2006
Posts: 2,268
Quote:
Originally Posted by rescueme View Post
In the withdrawl phase (where I've been in since early '07) it's the same as the accumulation phase, and actually a bit easier to manage overall.

I have no need to max out my returns since prior to retirement I hit my "number". Additionally, since I/DW have more than several years in cash (to provide current retirment income), the current action of the market means little.

We simply sell when the market is up (as it was, earlier this year) and hold tight when the market is down (which it is now, and may be many years in the future - who knows?)

Unless you are a person who keeps their retirement investments in the market (both equity/bonds) and draw directly from it to meet your immediate income needs, or are a bit short in your retirement investments overall, market flux need not be as great an immediate impact to your plan, IMHO.
I think you misunderstood the question. Someone mentioned that if you are planning for an avg of 6% per year, getting 6% EVERY year is not the same as 9%, 3%, -10%, 16%..ect (or whatever averages out to 6% per year). Big losses in the beginning hurt worse and raise your chances of running out of money. But I'm pretty sure that during the accumulation phase it makes no difference in what order your returns come.
__________________
utrecht is offline   Reply With Quote
Old 10-07-2011, 03:33 PM   #9
Dryer sheet wannabe
 
Join Date: Sep 2011
Posts: 16
Hmm, start with $100.

First year 3% loss, second year 9% gain (avg 6% gain): $105.73

First and second years 6% gain: $112.36

First year 9% gain, second year 3% loss: $105.73 Ok I'm surprised here, how did this end up the same?

Is something wrong with my math or logic here? I would have thought either all 3 would be the same, or the third would have been higher than the other 2?
__________________
CantThinkofAUserName is offline   Reply With Quote
Old 10-07-2011, 03:37 PM   #10
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
Quote:
Originally Posted by CantThinkofAUserName View Post
Hmm, start with $100.

First year 3% loss, second year 9% gain (avg 6% gain): $105.73

First and second years 6% gain: $112.36

First year 9% gain, second year 3% loss: $105.73 Ok I'm surprised here, how did this end up the same?

Is something wrong with my math or logic here? I would have thought either all 3 would be the same, or the third would have been higher than the other 2?

That's correct. The order of returns makes no difference if you never add or subtract from the portfolio. Which is a different problem from arithmetically averaging the returns and then applying the average.
__________________
Animorph is offline   Reply With Quote
Old 10-07-2011, 03:41 PM   #11
Recycles dryer sheets
justplainbll's Avatar
 
Join Date: Sep 2011
Location: Easten Long Island
Posts: 414
Quote:
Originally Posted by CantThinkofAUserName View Post
Hmm, start with $100.

First year 3% loss, second year 9% gain (avg 6% gain): $105.73

First and second years 6% gain: $112.36

First year 9% gain, second year 3% loss: $105.73 Ok I'm surprised here, how did this end up the same?

Is something wrong with my math or logic here? I would have thought either all 3 would be the same, or the third would have been higher than the other 2?
It would help if you bone up on the concept of internal rates of return (IRR).
__________________
justplainbll is offline   Reply With Quote
Old 10-07-2011, 03:47 PM   #12
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Location: Los Angeles area
Posts: 1,432
Quote:
Originally Posted by CantThinkofAUserName View Post
Hmm, start with $100.

First year 3% loss, second year 9% gain (avg 6% gain): $105.73

First and second years 6% gain: $112.36

First year 9% gain, second year 3% loss: $105.73 Ok I'm surprised here, how did this end up the same?

Is something wrong with my math or logic here? I would have thought either all 3 would be the same, or the third would have been higher than the other 2?
First year 3% loss, second year 9% gain = avg 3% gain
__________________
learn, work, save, invest, fire
CyclingInvestor is offline   Reply With Quote
Old 10-07-2011, 03:51 PM   #13
Moderator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Rocky Inlets
Posts: 24,492
Average annual return is much different that annualized return. The first is the simple arithmetic average of all the yearly returns. The second is real return after the effects of volatility. The greater the volatility, the bigger the difference between the two.

Consider to sequences of returns. At 6% per year for 5 years, $100 grows to $133.8. With yearly returns of 10%, 10%, -20%, 0, 30%, the annual average is still 6%, but the portfolio only grows to $125.8 - a much lower annualized rate of return.
__________________
MichaelB is offline   Reply With Quote
Old 10-07-2011, 03:57 PM   #14
Dryer sheet wannabe
 
Join Date: Sep 2011
Posts: 16
Ok thanks everyone, I need to think about this some more. Now I'm even further from knowing how in the world to predict the future LOL. Initially when starting this thread I thought my main problem was trying to zero in on whether to assume, say 4%, 5%, or 6% avg returns per year. Now it turns out, not only that, but I need to also consider the situation where things are bad for the first bunch of years, then good later on. Uggh.

Oh, and CyclingInvestor, thanks for pointing out the error in my math, how embarrassing!
__________________
CantThinkofAUserName is offline   Reply With Quote
Old 10-07-2011, 04:57 PM   #15
Full time employment: Posting here.
 
Join Date: Jan 2008
Posts: 882
Just make up a number and run the calculations. Nobody knows what future returns will be. My base plan had something like ~ 4% expected return (real) but right now, with the situation in Europe, I am thinking zero for the next 20 years or so is more likely.

Whatever you choose for your "expected return" - see how you would fare with a bad situation (zero or some similarly lousy real return). If you are eating pine cones and road pizza in the extreme situation, re-think your plan.

One last thought. Do your numbers in real dollars -- even if you have to put escalators on things that inflate above normal inflation. Nominal dollars are illusory.
__________________
jebmke is offline   Reply With Quote
Old 10-07-2011, 04:59 PM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
clifp's Avatar
 
Join Date: Oct 2006
Posts: 7,451
Quote:
Originally Posted by CantThinkofAUserName View Post
Ok thanks everyone, I need to think about this some more. Now I'm even further from knowing how in the world to predict the future LOL. Initially when starting this thread I thought my main problem was trying to zero in on whether to assume, say 4%, 5%, or 6% avg returns per year. Now it turns out, not only that, but I need to also consider the situation where things are bad for the first bunch of years, then good later on. Uggh.

Oh, and CyclingInvestor, thanks for pointing out the error in my math, how embarrassing!

It is a difficult thing to try and figure out sequences of returns. That is why there is this really handy tool FIRECalc which measure the impact performance of a historical sequence of returns will have over the last 100+ years. Now if you thing that future will look nothing like the past then it is not a useful tool, but it is easier than trying figure not only what reasonable future return should be but trying to predict the sequencing.

To be honest I think you'll driving yourself crazy trying to do the later.
__________________
clifp is offline   Reply With Quote
Old 10-07-2011, 06:15 PM   #17
Thinks s/he gets paid by the post
 
Join Date: Nov 2006
Posts: 2,268
Quote:
Originally Posted by MichaelB View Post
Average annual return is much different that annualized return. The first is the simple arithmetic average of all the yearly returns. The second is real return after the effects of volatility. The greater the volatility, the bigger the difference between the two.

Consider to sequences of returns. At 6% per year for 5 years, $100 grows to $133.8. With yearly returns of 10%, 10%, -20%, 0, 30%, the annual average is still 6%, but the portfolio only grows to $125.8 - a much lower annualized rate of return.
Whats even worse is this:

Start with $1,000,000 and with draw 4% ($40,000) at the beginning of each year. See what happens under these 2 scenarios:

Year 1: -15%.
Year 2: -10%
Year 3: 18%
Year 4: 12%

Scenario 2

Year 1: 12%
Year 2: 18%
Year 3 -10%
Year 4: -15%

Exact same returns but in reverse order. The avg return is the same obviously. The result would be exactly the same if you weren't withdrawing, but when you withdraw money and have bad returns at the very beginning its much worse than having those same bad returns at the end of your retirement life span.

Scenario #1 ends 4 years with $825,431
Scenario #2 ends 4 years with $869,874

Thats more than a 5% difference in what you are left with. Imagine what could happen over 20 years if two people have the same returns but in a different order.
__________________
utrecht is offline   Reply With Quote
Old 10-08-2011, 07:46 AM   #18
Recycles dryer sheets
 
Join Date: Dec 2009
Posts: 214
What you are trying to do manually is best left to calculators like FIREcalc and Fidelity Retirement Income Planner.

Assuming a constant return is folly. Google "retirement planner from hell" by Bill Bernstein.
__________________
chemist is offline   Reply With Quote
Old 10-08-2011, 09:27 AM   #19
Recycles dryer sheets
 
Join Date: Dec 2010
Posts: 391
I've been using 3% in ORP--a good conservative estimate? Or still too high?
__________________
palomalou is offline   Reply With Quote
Old 10-08-2011, 11:00 AM   #20
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Chuckanut's Avatar
 
Join Date: Aug 2011
Location: West of the Mississippi
Posts: 6,337
i have used several of the Monte Carlo calculators including FireCalc. All of them give me a 100% survival rate over 30 years if I choose a 3% withdrawal rate. However 4% moves it to about 90%, still not bad. The biggest risk is that I live more than 30 years past retirement. To help with that, I am waiting to take SS until I am 66 when I can get the full amount, or, if the market is doing well, I may even take SS later than that.

Of course, unexpected events could sabatoge even the best plans. An exteneded serious illness, a complete market melt-down that lasts for years, the state could renege on my pension, or the Feds could cut SS. One can't worry about everything.
__________________

__________________
The worst decisions are usually made in times of anger and impatience.
Chuckanut is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Why geezers give the best investment advice REWahoo FIRE and Money 20 10-06-2011 07:47 AM
diamonds as an investment dm FIRE and Money 14 07-19-2011 10:16 PM
Transition Investment Property to Homestead - Tax Advantages njonge01 Other topics 3 07-11-2011 06:48 PM

 

 
All times are GMT -6. The time now is 02:11 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.