Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Real Growth % Figures in Projections
Old 10-27-2014, 01:03 PM   #1
Recycles dryer sheets
 
Join Date: Feb 2013
Posts: 186
Real Growth % Figures in Projections

I'm curious to hear what growth rate assumptions you all use in your portfolio projections into the future? While I've used many online calculators that show what your ending nest egg balance could be when inputting your savings rate/$ amount as a percentage of salary, and your increase in earnings/contributions, etc, I find using my own "model" to be most conservative and feel it to be a good approach to discovering my FI date in the future.

I just have a simple excel file that I use that shows my current nest egg balance, and each year I assume the following:

18% of gross earnings contributed
3% yearly growth in earnings and therefore a 3% increase in contributions
4% annual growth in portfolio value due to market gains

I find that I like this approach because:

1. It doesn't assume promotions or large salary increases which could cause an earlier FI date.
2. It doesn't account for my annual bonuses
3. While the 4% annual growth figure is conservative, I chose this number as a "net figure" of inflation. I believe the long term S&P 500 growth is about 7% annually; however, when one assumes inflation is about 3%/year, the 4% figure is "real growth". So many people assume 7-10% growth year after year, and get over-confident when they see they'll have a portfolio worth $X amount in only 10 years, yet they are failing to take into account inflation and how it will weaken their spending power.

I think the biggest cons to this approach are:

1. It doesn't take into account large "one-off" expenses that are only incurred once a decade, once a lifetime, etc (i.e., weddings, large trips, unexpected medical bills).
2. It could be overly conservative.

What are your thoughts?
__________________

__________________
younginvestor2013 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 10-27-2014, 01:08 PM   #2
Full time employment: Posting here.
 
Join Date: Feb 2014
Posts: 731
Alot of models use estimated percentages for inflation and returns.

In my own excel spreadsheet, I simply net out inflation against returns for a 'real' return.

I do several whatif 'runs' in my model to bracket different scenarios of 0% to 2% 'real' return.

I balance that against models such as Firecalc and other monte carlo based models - just as extra confirmation on how sound my situation will be for the FIRE decision.
__________________

__________________
BBQ-Nut is offline   Reply With Quote
Old 10-27-2014, 01:19 PM   #3
Thinks s/he gets paid by the post
RetireAge50's Avatar
 
Join Date: Aug 2013
Posts: 1,120
The 3% earnings growth is also net of inflation? I also did lots of spreadsheets like this. In the end the spreadsheets mostly were for entertainment/hobby value as I never really made many decisions based in the results. The 18% over many years will get it done.


Sent from my iPhone using Early Retirement Forum
__________________
RetireAge50 is offline   Reply With Quote
Old 10-27-2014, 06:27 PM   #4
Thinks s/he gets paid by the post
 
Join Date: Jun 2014
Posts: 1,035
I do 7% real return, because i have long horizon, aggressive portfolio, and optimistic view.


Sent from my iPhone using Early Retirement Forum
__________________
dallas27 is offline   Reply With Quote
Old 10-27-2014, 10:14 PM   #5
Full time employment: Posting here.
GravitySucks's Avatar
 
Join Date: Feb 2014
Location: Syracuse
Posts: 989
Quote:
Originally Posted by RetireAge50 View Post
I also did lots of spreadsheets like this. In the end the spreadsheets mostly were for entertainment/hobby value as I never really made many decisions based in the results.
Same. I 'rely' on FireCalc and RIP, but like to spend time playing with my spreadsheets. The one I trust calls for 0% return the next 5 years and 6% there after with a standard 3% inflation rate. This puts a crappy sequence of return in the front.

It so far has been way far off, but someday, somehow, for some hopefully short period, that -3% and 3% real return will look overly optimistic!
__________________
“No, not rich. I am a poor man with money, which is not the same thing"
GravitySucks is offline   Reply With Quote
Old 10-27-2014, 10:21 PM   #6
Recycles dryer sheets
 
Join Date: Aug 2013
Location: Cocoa Beach
Posts: 406
I use 5% annual growth in portfolio value due to market gains.
__________________
Lucantes is offline   Reply With Quote
Old 10-28-2014, 08:02 AM   #7
Full time employment: Posting here.
 
Join Date: Jan 2008
Posts: 882
3-4% real for equity; 0% for fixed income (no cash. if holding lots of cash, probably would use negative real rate)
__________________
jebmke is offline   Reply With Quote
Old 10-28-2014, 09:48 AM   #8
Thinks s/he gets paid by the post
 
Join Date: Oct 2006
Posts: 3,815
I've done models like this, but not when I was a "young investor".

Like you, I assumed my assumptions are "real" numbers, net of inflation.

But, I never assumed a real level wage increase of 3%. Early in my career it was higher than that, but later it was lower. With that much growth in real earnings, I have to ask what you use for target retirement spending. Do you base it on final earnings or average earnings?

The 4% is fine if you're 100% in equities. And, you're 100% in equities only if you're sure you will never want the money "early". I think Shiller's data says that the lowest 35 year periods for US large cap stocks have averaged 5%.
__________________
Independent is offline   Reply With Quote
Old 10-28-2014, 10:29 AM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Lsbcal's Avatar
 
Join Date: May 2006
Location: west coast, hi there!
Posts: 5,676
Here is what will happen in the future because my spreadsheet says so:

8% nominal stock returns
0% nominal bond returns to 2018 and then 2% real thereafter
__________________
Lsbcal is offline   Reply With Quote
Old 10-28-2014, 10:34 AM   #10
Recycles dryer sheets
 
Join Date: Jun 2014
Posts: 406
I run MC simulations and look at the number of times the money runs out as well as the 10% level. I usually use 4% inflation +/-2% and run different scenarios of low to high risk to see what comes out. I am looking for the #of times the money runs out to be relatively low and the 10% number to stay high enough that I won't be living in a 1 room flophouse.

It will probably be better than this and I'll be good. If it is worse...well a lot more people are going to be in a lot more trouble than me
__________________
If money is the root of all evil I want to be a bad man
nuke_diver is offline   Reply With Quote
Old 10-28-2014, 10:34 AM   #11
Thinks s/he gets paid by the post
timo2's Avatar
 
Join Date: Jul 2011
Location: Rio Rancho
Posts: 1,438
I use 2% gains, 3% inflation. sort of a bad scenario.
__________________
"We live the lives we lead because of the thoughts we think" Michael O’Neill
timo2 is offline   Reply With Quote
Old 10-28-2014, 10:36 AM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
braumeister's Avatar
 
Join Date: Feb 2010
Location: Northern Kentucky
Posts: 8,591
1% real return in all projections, because I'm the conservative sort.
__________________
braumeister is online now   Reply With Quote
Old 10-28-2014, 10:41 AM   #13
Thinks s/he gets paid by the post
RockyMtn's Avatar
 
Join Date: Jul 2009
Location: North Scottsdale
Posts: 1,230
Quote:
Originally Posted by Lucantes View Post
I use 5% annual growth in portfolio value due to market gains.
+1 plus 3% inflation.
__________________
FIRE'D in July 2009 at 51...Never look back!
RockyMtn is offline   Reply With Quote
Old 10-28-2014, 11:08 AM   #14
Recycles dryer sheets
 
Join Date: Apr 2013
Location: Fishers
Posts: 385
Timo2 - +1 -

I use:
1% SS annual inc. with a 25% haircut in 2033
2% investment return and
3% inflation in my excel spreadsheets.
__________________
wmc1000 is offline   Reply With Quote
Old 10-28-2014, 11:08 AM   #15
Thinks s/he gets paid by the post
David1961's Avatar
 
Join Date: Jul 2007
Posts: 1,074
Quote:
Originally Posted by braumeister View Post
1% real return in all projections, because I'm the conservative sort.
+1. That's what I do, too.
__________________
David1961 is offline   Reply With Quote
Old 10-28-2014, 11:51 AM   #16
Recycles dryer sheets
racy's Avatar
 
Join Date: May 2007
Posts: 479
Hi Young,
Currently my spreadsheet is using 2% real for my 40/60 portfolio. However, this varies from time to time depending on my mood. (That's the beauty of a spreadsheet isn't it!).

Your 4% real has good company. In 2012 John Bogle said to expect 7% for equities and 3% bonds nominal over the coming decade. In 2014 Vanguard research said that a 60/40 portfolio would be expected to yield 3.1%-5.2% real during the next 10 years.
__________________
The Big Lebowski: Are you employed, sir?
The Dude: Employed?
racy is online now   Reply With Quote
Old 10-28-2014, 11:55 AM   #17
Thinks s/he gets paid by the post
Cobra9777's Avatar
 
Join Date: Jul 2012
Location: Texas
Posts: 1,132
My retirement spreadsheet is expressed entirely in nominal dollars. Individual inflation rates are applied to spending by category (weighted average 2.6%), SS, pensions with COLA, tax brackets, exemptions, standard deductions, rental income, and probably some other stuff I forgot about. My nominal investment return assumptions are 5.3% in the taxable account (90% equity, 10% municipal bonds), and 4.0% in tax-deferred (50/50). Each of those figures is after a 1.5% haircut from the expected returns calculated by applying Portfolio Solutions' 30-year market estimates to my specific portfolio mix. The weighted average return assumption is 4.4% which, using my 2.6% inflation assumption, is 1.8% real.
__________________

__________________
Retired at 52 in July 2013. On to better things...
AA: 55% stock, 15% real estate, 27% bonds, 3% cash
WR: 2.0% SI: 2 pensions, some rental income, SS later
Cobra9777 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
Suggested growth rate for portfolio growth estimates? doneat54 FIRE and Money 35 10-02-2013 12:03 AM
Emerging and Developing GDP Growth exceeds GDP Growth in Advanced Economies bUU Other topics 3 06-28-2013 12:42 PM
Bernstein's future equity return projections wildcat FIRE and Money 2 12-06-2005 10:35 AM

 

 
All times are GMT -6. The time now is 07:01 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.