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View Poll Results: What pre-tax, real return do you assume in your own plans
0% or less 1 0.93%
1% 2 1.85%
2% 18 16.67%
3% 18 16.67%
4% 24 22.22%
5% 24 22.22%
6% 12 11.11%
7% or more 9 8.33%
Voters: 108. You may not vote on this poll

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Old 01-28-2012, 05:38 PM   #21
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Since my model is FIRECalc, my rate of return is that of the worst 30 year period over the past 139 years. Not sure what that is, so I'm not sure how to respond to the poll. ...
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I don't assume any particular rate of return because, like REWahoo, I use Firecalc ...
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I don't assume any particular rate of return either.
...
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I agree with your technique! Assuming an annual return is likely to lead to huge discrepancies due to the importance of "sequence of returns." ...
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Agreed, aka 'sequence of returns'
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I've never planned on a particular ROI, just plugged the numbers in FIRECALC, ...
Another poll, another incomplete choice of responses

It's one of the reasons I have not done a poll, even with careful consideration, I'd probably screw it up.


But one way to think of this is, if you accept a (say) 3.5% WR from using FIRECALC, you are roughly expecting a 3.5% real return. Yes, roughly, as the portfolio end point will often be significantly higher or lower than the starting point. Ballpark.

-ERD50
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Old 01-28-2012, 05:55 PM   #22
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Another poll, another incomplete choice of responses

It's one of the reasons I have not done a poll, even with careful consideration, I'd probably screw it up.


-ERD50
Yes, trying to get us to provide a straight answer to a poll is like trying to herd cats. But we don't bite - usually.
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Old 01-28-2012, 06:28 PM   #23
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But one way to think of this is, if you accept a (say) 3.5% WR from using FIRECALC, you are roughly expecting a 3.5% real return. Yes, roughly, as the portfolio end point will often be significantly higher or lower than the starting point. Ballpark.

-ERD50
I see where you're going but a bit of a stretch since the end point will be higher or lower than the starting point in 100%, or near 100%, of the cases. And if you accept a 3.5% WR using FireCalc, you're actually expecting less than a 3.5% real return because with FireCalc surviviability achieved by depleting capital is OK.

I really DON'T assume any average rate of return or compounded rate of return when planning. Those are handy for looking at historic portfolio performance but not very useful for projecting portfolio survivability. The distribution of possible outcomes of WR vs annual returns and inflation rates, whether using historical back-testing (FireCalc) or a Monte Carlo type simulation is the only way to go.
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Old 01-28-2012, 09:18 PM   #24
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With Firecalc I'm at 95% or 100% success until age 90.

However, I also use a flexible speadsheet that I constructed.
My mainline case assumes 3% inflation and 5.5% nominal returns on a total portfolio.
It assumes 1% inflation on SS- much lower than past experience.

As a 2010 retiree I am most worried about the "sequence of returns" risk in the current environment. Then again, Im usually wrong. :>)
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Old 01-28-2012, 10:09 PM   #25
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As a 2010 retiree I am most worried about the "sequence of returns" risk in the current environment. Then again, Im usually wrong. :>)
Whichever year you retire, a few bad returns during the first few years can have a dramatic affect on your portfolio. I'm also a 2010 retiree and the first 2 years have been quite reasonable. For me, if we can get through the first 7 years without a string of bad returns then I'll feel much safer, as SS is then available as another income stream.
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Old 01-28-2012, 10:30 PM   #26
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I use Firecalc, OMP and Financial Engines and have a very high probability of success.

I also do a static analysis that assumes a 5.5% gross earnings rate and a 3.0% inflation rate, so a 2.5% real rate of return. The 5.5% is based on a 8.7% historical earnings rate for a 60% equity/40% fixed income portfolio less a 3.2% haircut to be conservative.

A 4% SWR over 30 years implies an average return of 4.1% assuming a 3% inflation rate.
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Old 01-29-2012, 06:16 AM   #27
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Just read an interesting article in the WSJ on the earnings rates used by various pension plans. Berkshire Hathaway uses 7.1% and has a 30% bonds/70% equities mix so the 5.5% that I am using for my static analysis would seem to be in the ball park and perhaps a bit conservative.
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Old 01-29-2012, 07:42 AM   #28
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I've never planned on a particular ROI, just plugged the numbers in FIRECALC, FIDO Income Planner and Financial Engines and looked at the probabilities of success.
Same here...
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Old 01-29-2012, 07:58 AM   #29
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Right now I have 0% real return for bonds and 2% real return for equities plugged into my spreadsheet. And I still come out OK with that. I'm planning for bad times but hoping for good times! If actual returns are higher, that just makes my early retirement date come a little sooner.
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Old 01-29-2012, 08:43 AM   #30
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I'm still collecting my nickels but figuring on 2.5 - 3% real return.

With your real return target, are you shooting for 100% success responses based on the calculator or 95%, 90%, ? I'm kind of shooting for 110% by overestimating my expense budget.

For those not collecting SS yet, do you figure benefit at 100%, 75%, ? My guess it'll depend on your timing for qualifying. Since I won't be 62 until 2031, I'm factoring 50% without spouse benefit. Not sure if we'll start collecting SS at 62 - 70 or some combination of file, file & suspend, etc, but time will only tell with our health and condition of the SS system.

Sure it's somewhat conservative which may equate to working a few years longer than I really have too, but don't want to run short.
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Old 01-29-2012, 09:37 AM   #31
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For those not collecting SS yet, do you figure benefit at 100%, 75%,?
Just to answer your specific question on SS, DW/me are currently age 64 (I retired at age 59, DW still plugging away), with neither collecting SS. DW will claim at her FRA age of 66 (in two years). For me? I'm holding off till age 70 (primarily for the benefit of DW, assuming I die first).

We both plan on "getting ours" at 100%.

Now, if you are asking us about the future? We figure SS benefits taxed at 100% when we claim, or shortly thereafter.

We also expect some type of "means test" based upon total retirement income (including IRA withdrawls), but don't have a problem with that.

Heck, we're fortunate to have what we have (even though we worked like he** to get it, and deferred our immediate wants, for later needs).

Just a personal comment...
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Old 01-29-2012, 10:13 AM   #32
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We both plan on "getting ours" at 100%.
Thanks Rescueme. Yup, you both worked hard for it and deserve it. Since you are close to that magic number, it won't change unless they implement means testing. I assume you will collect spousal SS benefits before you file for yours at 70.

For me, I have a distance to go for SS, so it'll change for sure. Some of my best guess prediction on my FIRE does not include SS or my small pension. Depending on our health will determine when to file, but we have 19 years so it's subject to change.
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Old 01-29-2012, 10:28 AM   #33
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Just read an interesting article in the WSJ on the earnings rates used by various pension plans. Berkshire Hathaway uses 7.1% and has a 30% bonds/70% equities mix so the 5.5% that I am using for my static analysis would seem to be in the ball park and perhaps a bit conservative.
This is interesting. I'm guessing that the 7.1% is a pre-inflation number. We might assign a 2.1% to inflation over the next 10 years (see the breakeven chart here for 10yr Treasuries: US Breakeven 10 Year (USGGBE10:IND) Index Performance - Bloomberg). Then the real rate projected for the pension plan is 5.0%.

Of course, they have actuarial assumptions and a plan lifetime that does not necessarily correspond to our needs. Still an interesting data point, thanks.
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Old 01-29-2012, 11:11 AM   #34
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But one way to think of this is, if you accept a (say) 3.5% WR from using FIRECALC, you are roughly expecting a 3.5% real return. Yes, roughly, as the portfolio end point will often be significantly higher or lower than the starting point. Ballpark.

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I see where you're going but a bit of a stretch since the end point will be higher or lower than the starting point in 100%, or near 100%, of the cases. And if you accept a 3.5% WR using FireCalc, you're actually expecting less than a 3.5% real return because with FireCalc surviviability achieved by depleting capital is OK.
Right. The 'roughly', 'roughly', 'significantly higher', and 'ballpark' where supposed to convey that. I probably would have been better with the actual point that there is no single 'real return' number to capture it.

However, it got me thinking. Now this is just a data point for reference, it doesn't really mean anything since there is no volatility anywhere, but I threw together a spreadsheet, and assuming totally flat responses, here's what it would take to run the portfolio just down to zero in the final year (I may be off by a year or two, depending on what the proper way is to load the spending versus return, but they are consistent for comparison purposes):


4% WR; 30 years, 1.22% real return required
4% WR; 40 years, 2.53% real return required
3.5% WR; 30 years, .32% real return required
3.5% WR; 40 years, 1.75% real return required

And of course, for ZERO real return, you just divide 100 by the years required, so 30 year would be 3.33% WR, 40 year would be 2.50% WR. But no one should assume their portfolio will even keep up with inflation (outside of TIPS, but then you still have tax drag).

I guess that gives some frame of reference for what we would need from a TIPS investment? And then there is that old bugaboo of whether CPI reflects your own personal inflation rate. It's just numbers.

-ERD50
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Old 01-29-2012, 11:16 AM   #35
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3.5% WR; 30 years, .32% real return required
And that even without SS. So, I should be set, right?

Well, the problem is that your calculation does not consider the psychological needs of a Scrooge.

Scrooges like to count money, and absolutely do not like to die broke.
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Old 01-29-2012, 11:17 AM   #36
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I assume you will collect spousal SS benefits before you file for yours at 70.
It's not an assumption - its a fact (assuming we're both alive )...
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Old 01-29-2012, 12:00 PM   #37
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Being a very conservative sort, whenever I do projections I always use one-half percent above inflation.
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Old 01-29-2012, 12:11 PM   #38
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For those not collecting SS yet, do you figure benefit at 100%, 75%, ?
I'll be 57 in 2 weeks, and DW is 56. I plan on collecting SS at 100%.
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Old 01-29-2012, 12:12 PM   #39
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For those not collecting SS yet, do you figure benefit at 100%, 75%, ? My guess it'll depend on your timing for qualifying. Since I won't be 62 until 2031, I'm factoring 50% without spouse benefit. Not sure if we'll start collecting SS at 62 - 70 or some combination of file, file & suspend, etc, but time will only tell with our health and condition of the SS system.
I'm 63, and even at my age I am not counting on full benefits. After all, we were told that at some point only 75% will be covered, and that was before they reduced the amount taken from salaries. Not only that, but the cost of Medicare Part B might go up (effectively reducing SS after Medicare has been deducted). Also I assume that 100% of SS will be taxed, and then there is means testing.

So, although I have one tentative plan based on 100%, I guess that really I'm expecting maybe 50%? I have an alternate plan by which I can live if SS completely craters and I get 0%. Meanwhile, I am whistling in the dark and planning to take SS sometime between now and age 70. My original plan was 66, but I'll play it by ear.
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Old 01-29-2012, 12:18 PM   #40
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It's not an assumption - its a fact (assuming we're both alive )...
Let's hope your assumption is correct. I expect nothing less.
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