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What are Your Assumed Rates of Return?
Old 11-25-2012, 03:38 PM   #1
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What are Your Assumed Rates of Return?

An interesting article that postulates that low interest rates are here to stay and the choices for future retirees will be to work longer, save more, or get by with less:

PIMCO | Viewpoints - What

My spreadsheet assumes a rate of return of -1% (if I keep up with inflation it would be zero). What rates are others using?
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Old 11-25-2012, 03:52 PM   #2
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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?
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Old 11-25-2012, 03:53 PM   #3
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On a long term basis, I assume 6% total return for the broad indices, a little more for small caps and real estate.
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Old 11-25-2012, 04:17 PM   #4
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I am "inflation+ 3%"
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Old 11-25-2012, 04:37 PM   #5
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Quote:
Originally Posted by truenorth418
On a long term basis, I assume 6% total return for the broad indices, a little more for small caps and real estate.
Ditto. 6% minus inflation for the "real return"
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Old 11-25-2012, 04:38 PM   #6
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i use 2 percent
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Old 11-25-2012, 04:42 PM   #7
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When I was in the accumulation phase, I was assuming a gain of 5%; 3% inflation + 2% on my investments.

Now that I am retired, I just hope to tread water and see gains that approximately equal inflation.

In the past five years we have had a severe market crash, a housing crash, and a crisis in health care costs, all bad for retirees. The one calamity that hasn't happened lately is out of control inflation. So far, so good, but then maybe I am whistling in the dark. If my investments would keep pace with inflation then it would not be a problem, but if they fall too far behind it's back to the spreadsheets and LBYM for many of us.
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Old 11-25-2012, 05:02 PM   #8
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I had run the plan in Quicken based on 8%. When changed to 7%, it runs out at year 35, although house and other assets remain. Some tweaks in spending or timing of retirement obviously remain.
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Old 11-25-2012, 07:34 PM   #9
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My assumption is that I will keep up with inflation. Will probably do better, but I always want to make my assumptions conservative.
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Old 11-25-2012, 07:50 PM   #10
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I dunno what to expect. Moved to our little ranch in SW Oregon in 1999 contemplating FI/ER which finally happened in 2002. Since our move, there has been the crash of 2000-2002, the Maxi crash of 2008, the real estate implosion, 9/11, the two wars, the gridlock in Washington, my back going out, drought, famine, pestilence, global warming, hurricanes. As that general said, enemy in front, enemy behind, enemy to the left, enemy to the right, condition optimal - attack!
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Old 11-25-2012, 08:04 PM   #11
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Originally Posted by GrayHare View Post
Wouldn't a negative real return mean we'd be better off cashing out investments and stuffing the mattress with Benjamins?
For example a 4% interest during 5% inflation would be a -1% return. In a mattress it would be -5%.

Of course that is very simplified, leaving out fun stuff like taxes.
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30 Year Real Rates of Return
Old 11-25-2012, 08:22 PM   #12
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30 Year Real Rates of Return

Here's a nice perspective that says that layered risk premiums can deliver up to 7.5% beyond inflation. Note that the addition of the higher risk layers will also increase variability.
The Portfolio Solutions 30-Year Market Forecast for 2012 Portfolio Solutions Portfolio Solutions
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Old 11-25-2012, 08:41 PM   #13
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I am assuming 5% return and 4% inflation. I think we are in good shape unless inflation goes up too high, as DH's pension is non-COLA.....which means we would have to start making up a more ground elsewhere to compensate, if that should happen. I have the option of making my pension COLA, which I will be doing.
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Old 11-25-2012, 09:00 PM   #14
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Assume 4% return, but have been doing much better the last 2 years. We don't have any debt, so I tend to ignore inflation, though I know it will be an issue down the road. Hopefully, my actual return will exceed 4% by enough to cover the inflation.
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Old 11-25-2012, 10:42 PM   #15
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With the current low bond yields and the uncertainty about future stock returns, I see how folks would expect low rates of return like 2%, or even lower. However, wouldn't buying a 30-year TIPS with a 2.75% coupon essentially give me a guaranteed 2.75%+inflation? Couldn't this be considered a floor rate of return? Am I missing something?

I understand TIPS phantom tax implications, especially during high inflation periods, but as a rate of return, that seems to be pretty good conservative strategy.
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Old 11-25-2012, 10:58 PM   #16
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Are 30-year TIPS paying that high? I thought it was more like 0.5%.
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Old 11-25-2012, 11:08 PM   #17
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Yes, you're right...The most recent 30-year TIPS yield was 0.75%...The 2.75% is for a 30 year treasury bond.

Recent Note, Bond, and TIPS Auction Results
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Old 11-26-2012, 04:21 AM   #18
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Anything above 0 real is a bonus for me.
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Old 11-26-2012, 08:06 AM   #19
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2.75% for me
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Old 11-26-2012, 08:14 AM   #20
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Quote:
Originally Posted by David1961 View Post
My assumption is that I will keep up with inflation. Will probably do better, but I always want to make my assumptions conservative.
That is also my assumption.
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