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Old 11-26-2012, 08:14 AM   #21
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My deterministic plan assumes a 5.5% nominal rate of return on a 56 stock/38 bond/6 cash mix and 3% inflation, so a 2.5% real rate of return.

The 5.5% is based on the 8.6% average annual return of a 60 stock/40 bond portfolio from 1926-2011 according to Vanguard and judgmentally adjusted downward to be conservative and reflect the new normal (if there is such a thing). I think/hope a 3.1% haircut is sufficient.
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Old 11-26-2012, 08:20 AM   #22
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I assume 1 ± 1% real return, rarely look outside that range long term, but we're prepared for lesser returns. And if returns are better than we plan, there are plenty of worthy causes we'd love to support even more...
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Old 11-26-2012, 08:33 AM   #23
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Long term, my projections always assume a return equal to the inflation rate. Short term, I assume a one or two percent real return.
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Old 11-26-2012, 08:50 AM   #24
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I use 2% real return in my spreadsheet for a 75/25 portfolio (17 years from retirement).
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Old 11-26-2012, 05:16 PM   #25
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I use multiple return rates to determine at what rate my plan will fail. So far, anything above 1% will lead to a successful outcome. I also use an average 3% inflation rate, any inflation-based income increases limited to 2.5%, projection out for 35 years and an retirement balance less than where I currently stand. Hopefully all of these conservative factors will ensure a successful outcome.
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Old 11-26-2012, 05:48 PM   #26
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I think I already posted on this topic a couple of months ago. Right now my spreadsheet uses about 1% inflation rate, and the return on investment is about 2.5% a year.
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Old 11-27-2012, 08:08 AM   #27
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I use multiple return rates to determine at what rate my plan will fail. So far, anything above 1% will lead to a successful outcome. I also use an average 3% inflation rate...
+1, except that I'm using - 3½% inflation rate.

If I could get an average real rate of return above 1%, I would be sooo happy.

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Old 11-27-2012, 08:45 AM   #28
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My original plan (1989... before the on-line calculators, and without a financial adviser) was to validate retirement security. I worked out the plan on many dozens of those extra large green spreadsheets, to include buying houses, cars, moving, etc... and different rates of return. Each calculation ended with a year end net worth determination. The final assumption at the time, was 5% income and 3% inflation, and that was the basis for the final plan.

Absolutely nothing worked out as I had expected in the short term, but... due to other factors... house sale profit, higher or lower returns, and planned expenses... Despite these variations... twenty three years later, that net worth line is within $10,000 of the original plan. (to the good)

I haven't checked the inflation/ROI, but at this point, it doesn't matter. Of course, we are aware of our plan, and check the NW regularly... so this has to factor in, on our decisions on major $$$ commitments.

The plan was to die at age 84, but last check, it looks like we're safe 'til 92.
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Old 11-27-2012, 11:47 AM   #29
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The sequence of returns has such a great effect on your portfolio performance that average returns mean little. It makes for great spreadsheets, but don't base your plans on it. SWR methodologies are more relevant, but obviously not perfect.
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Old 11-27-2012, 11:54 AM   #30
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The sequence of returns has such a great effect on your portfolio performance that average returns mean little. It makes for great spreadsheets, but don't base your plans on it. SWR methodologies are more relevant, but obviously not perfect.
While I agree with the first part, if you have a cash cushion as part of your AA and/or some reasonable flexibility in tightening your belt with respect to living expenses/withdrawals, particularly in the first few years of living on your portfolio, I think the risk of sequence of returns is managable.

OTOH, if you are so close to the edge that you critically need every dollar of withdrawals to put food on the table and a roof over your head, then I agree sequence of returns becomes more of a risk.

That said, I think average returns are still useful and the risk of sequence of returns can be addressed by some supplemental stochastic testing (Monte Carlo analysis).
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Old 11-27-2012, 12:14 PM   #31
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This is an interesting thread. Two things come to mind for me when reading some of the responses:

1) I think people get too bogged down by "real returns". Maybe not any of you who have posted in this thread, but I've talked about this before with friends, and SOME of them look at "real returns" and decide not to invest at all because of it. If you manage to retire with no debt including a paid for house, you can live on much less than you did while working and paying for such things (cars, homes, student loans, etc.). More than likely you'll pay less tax as a percentage of your income, so that helps too. If you have Social Security coming in and investments that earn 2% or more "real return" then as long as you're not in debt, that's a pretty doable situation (assuming you have a decent investment pool to take from).

2) Even when considering "real returns", the expectations seem a bit low. I know I'm a bit younger than some of you, but I've been investing since 1989, and my annual return average since then is just over 11%...I count reinvested dividends in that but not any contributions. I DO probably have more stocks as a percentage of my portfolio than those of you who are retired or closer to it than I am (I'm at 13% bonds and have been for 11 years; since I was 35). I don't invest in risky things (mutual funds only), and I pretty much never change things around. When I feel like more diversification, I'll simply buy another mutual fund rather than switch out of one and into that one.

Over time, I'll go with an inflation rate of 3.5% and lower my returns to 11% annually for a 7.5% real rate of return expectation. If inflation ever gets crazy like it did in the late 70s/early 80s, then rates on CDs and other short-term investments will go up, so if that happens, I might buy some CDs then. Used to be you could get CDs at 12% return.

I still plan to withdraw much less than I can in the first few years of retirement just to help grow my investments even more, but I think 7-7.5% expectation is not out of the realm of possibility. I may change that later if I decide to go with a much higher percentage of bonds in retirement, but for now I don't see getting much beyond 25% bonds. Lots of things could make me change my mind on that though...an unforeseen inheritance, a better-than expected stock market between now and 14 years from now when I plan to retire, etc.
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Old 11-27-2012, 01:14 PM   #32
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The sequence of returns has such a great effect on your portfolio performance that average returns mean little. It makes for great spreadsheets, but don't base your plans on it. SWR methodologies are more relevant, but obviously not perfect.
If you are accumulating then I don't believe the sequence of returns matters at all. (try taking $1,000, losing 50% in year 1 followed by 5% gains the next 4 years - you will get the same result if you start with 4 years of 5% gains followed by a 50% loss).

However, as you point out the sequence of returns can have an enormous effect in the withdrawal stage. Like pb4, I keep a large cash component to smooth out the down years in the withdrawal phase.

PS

I don't have an assumed rate.
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Old 11-28-2012, 06:32 PM   #33
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I don't know what either the general inflation rate or my personal inflation rate will be in the years ahead but I do expect it to be a positive number most of the time.

With most of my money in risk assets (real estate and equities), my very crude assumption is that over the long term net cash flows will more or less compensate for inflation implying a zero real return. (Obviously, there will be fluctuations over shorter time periods.) Anything above that is a bonus.

For the few years worth of expenses held in bonds and cash, I assume a negative real rate of return.
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Old 11-29-2012, 02:49 AM   #34
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If you are accumulating then I don't believe the sequence of returns matters at all. (try taking $1,000, losing 50% in year 1 followed by 5% gains the next 4 years - you will get the same result if you start with 4 years of 5% gains followed by a 50% loss).

However, as you point out the sequence of returns can have an enormous effect in the withdrawal stage. Like pb4, I keep a large cash component to smooth out the down years in the withdrawal phase.

PS

I don't have an assumed rate.
Well put and exactly my sentiments. I don't have an assumed rate. I figured that it should be quite some time before I am in the withdrawal stage and as long as my monies are not idle and I am still accumulating some, I'll take whatever safe return it can bring. If I have to name a number, then - at least 1% return - as you can see, not aggressive at all.
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Old 11-29-2012, 07:31 AM   #35
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Don't know what to expect. Just try to protect oursleves against the big one. Since 3/09 bottom, assets up 13%/yr. Over last eight years, up 6%/yr. There is some added savings in that, but it's small potatoes vs. previous accumulations. Up 4% APR over six months of retirement w/o SS yet and with some significant house improvement spending & vacations.
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Old 11-29-2012, 07:39 AM   #36
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I'm figuring a 2% real return. I believe that's close to the century+ norm.

Wouldn't a negative real return mean we'd be better off cashing out investments and stuffing the mattress with Benjamins?
No.......If inflation runs 3%, the "Benjamins" in the mattress are giving a return of -3% real annually. To get a -1% of real return your investment portfolio would have to return 2% nominal annually.
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Old 11-29-2012, 07:56 AM   #37
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No.......If inflation runs 3%, the "Benjamins" in the mattress are giving a return of -3% real annually. To get a -1% of real return your investment portfolio would have to return 2% nominal annually.

I think this thread started out rates of return. It did not say rates of real return.
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Old 11-29-2012, 08:03 AM   #38
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I think this thread started out rates of return. It did not say rates of real return.
The Original Poster mentioned keeping up with inflation would be a zero rate of return....That's a Real Rate of Return.

To ignore inflation, is foolish.
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Old 11-29-2012, 11:52 PM   #39
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Larry Swedroe writes about future expected stock returns:

Projections show smaller future stock returns - CBS News

Quote:
A 3.9 percent expected real return for stocks might be distressing enough for some people, but making matters worse is that most people don't hold all-stock portfolios. With current yields on safe bonds forecasting negative expected real returns, the outlook for balanced portfolios of stocks and bonds can be outright depressing. The reality is that to have a reasonable chance of achieving their financial goals, many investors will have to plan on either raising their savings rates (cutting current spending) and/or plan on working longer. And they may even have to consider taking more equity risk at a time when expected returns are below historical levels.
On the bright side, he believes expected returns on foreign developed market stocks are quite a bit higher (at least 1% higher and maybe more). This is not mentioned in this particular article, however.
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Old 11-30-2012, 08:52 AM   #40
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Another source of future expected returns, real, nominal & inflation. I review Ferri's projections whenever he updates, but it's just another data point, albeit a good one IMO. Table summary near the end of The Portfolio Solutions 30-Year Market Forecast for 2012 « « Portfolio Solutions Portfolio Solutions
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Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
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