What Investment Rate of Return do you Use?

[DEC-1982]

It's sequence of return risk that comes into play during retirement. Do you forecast sequence of returns?

In FIDO RIP's planning, yes. For my specific asset allocation ...


Years 2016-2025 3.65% return (bad)
Years 2026-2035 6.06% return (normal?)
Years 2036-2045 5.38% return (normal?)
Years 2046-2055 13.61% return (must be a repeat of the roaring nineties)

Naturally, for the planning exercise, the first few years are bad, and the last few years are great.

 

[Danmar]

In FIDO RIP's planning, yes. For my specific asset allocation ...


Years 2016-2025 3.65% return (bad)
Years 2026-2035 6.06% return (normal?)
Years 2036-2045 5.38% return (normal?)
Years 2046-2055 13.61% return (must be a repeat of the roaring nineties)

Naturally, for the planning exercise, the first few years are bad, and the last few years are great.

That's close, but as we all know it's the big loss years that are the issue. If we always get positive results pretty easy to plan?

Doesn't sound like you are retired yet? I can certainly understand why you would forecast results during the accumulation phase. But why would you do it once retired?

 

[pb4uski]

For me, 5.5% nominal, 2.5% real. A significant haircut from the historical nominal and real returns of a 60/34/6 portfolio.

 

[RetireAge50]

$2M for 40 years at 0% Real is $50k per year. At 3% real is $87k. My goal is to spend evenly throughout so plan to pick a reasonable rate (something like 3% real) and then continually adjust spending (based on the fluctuating balance and decreasing years of life).

 

[petershk]

I've pretty much used 0% real for my projections just to be safe. I expect real to be better on average but it's gravy as long as portfolio keeps up with inflation. DW and I haven't seen our real spending increase in 3 years or so (mortgage) and not much outside that in 5 years so the fact that medical will likely outpace cpi will hopefully be close to a wash.

What I focus on is flexibility. So if returns are negative by, say, 3-5% over 5-10 years... Can we adjust our spending to compensate. I know many calculators just assume you keep drawing ignoring market changes but I know a 20% drop will impact my behavior and if I know I can adjust in advance it helps me sleep at night .

Sent from my HTC One_M8 using Early Retirement Forum mobile app

 

[DEC-1982]

That's close, but as we all know it's the big loss years that are the issue. If we always get positive results pretty easy to plan?

I should state clearly that this is just a projection. I am not smart enough to come up with a likely scenario of expected returns, so I am using software from a respectable financial company, Fidelity. Even at that, I fully understand that this is a guess.

If you look at post#15, you will see that the one year numbers are not all positive. 2016 is negative and 2017 is near 0%. Note that these are not inflation adjusted. In real terms, both years have negative returns.

Now you could ask, why doesn't the software assume -20% (stock/bond/cash) for 2016 or 2017? I couldn't tell you.

Doesn't sound like you are retired yet? I can certainly understand why you would forecast results during the accumulation phase. But why would you do it once retired?

I retired recently, and it will take a few years to be more comfortable.

Consider a scenario where every year (2016-2020) has negative nominal returns. New projections in 2020 might show results quite different from what they show today. In the early years of retirement, it makes sense to keep an eye on our situation.

 

[kcowan]

I retired recently, and it will take a few years to be more comfortable..

Yes. In my case it was 3 years before I got confident in our survival regardless.

 

[Symbiotic]

I use 8% nominal, 2% inflation for equities. 100% equities. I am comfortable with what a standard deviation is.

 

[racy]

I've collected some forecasts made in the past several years:
* 2012 - J. Bogle - 7% stocks, 3% bonds, nominal, for the next decade.
* 2014 - Vanguard - a 60/40 portfolio will return 3.1%-5.2% real over next decade.
* 2015 - J. Bogle - 4% stocks, 3% bonds, nominal, for next decade.

For our 50/50 portfolio I'm using 2.5% real (understanding the fallacy in this!).

 

[mathjak107]

because of sequence risk anything less then a 2% real return average over the first 15 years of a 30 year retirement stands a very high chance of failing at 4%. that is what caused all our worst case scenario's .

so odds are 0% will not support a 4% inflation adjusted return , you would have to draw less if 10 or 12 years in to retirement you were at zero . . .

 

[devans0]

I have literally gone back to school on investing. FI gave me some free time so I decided to learn more about economics and investing. I missed these the first time around in school. An economics and accounting professor told me that he aims for 15% returns. He doesn't disclose specifics of his portfolio, but I am working on learning how he works his fishing spots. It is hands-on intensive searching for value in the small cap ponds. That kind of return has me questioning everything I accepted as truth about investments. One thing that is clear, there are quite a few businesses that have lost sight of their business is about, as they have grown. Culling these businesses out of my miniscule personal mutual fund is my education. If it works out, I'll increase beyond play money.

 

[Golden sunsets]

I have literally gone back to school on investing. An economics and accounting professor told me that he aims for 15% returns. I am working on learning how he works his fishing spots. First rule of his econ class, "TNSTAAFL". It is hands-on intensive searching for value. I am questioning everything about investments.

What does your Econ professor say about the uncompensated risk of investing in individual equities?

 

[Golden sunsets]

To all; I'm the OP and I want to thank all of you for sharing your data points and those like Racy who have shared professional's predictions. I had a conversation on this topic with my 31 year old son yesterday. I shared with him the gist of the responses to my question on this thread and he was initially shocked at the consensus of such low percentages for future growth. He is just entering the wealth accumulation stage and is assuming 7.5% -8.0% real in a heavily equity centric (50% international) portfolio. He did observe that the conservative responses of this board's projections are obviously reflective of our age/retirement status. On the other hand whatever future returns turn out to be will be the same for him as for this group( after factoring in a more or less aggressive AA). So for projection purposes I've settled on 5% nominal for Equities and 2% FI with 2% inflation. Fortunately for me our SWD rate will still be well below 2%.

 

[Totoro]

He is just entering the wealth accumulation stage and is assuming 7.5% -8.0% real in a heavily equity centric (50% international) portfolio.

Let him investigate historical returns over 20-year periods and calculate the real return on equity investments + the range of returns. Be sure to take into account expenses and potential taxes.

Then let him explain why he is more optimistic (as he will find out) about the future than the typical return ranges of the past.

 

[devans0]

Speaking from conversations, that professor gave stats that diversifying to 17 or so stocks ( vague from my poor recall.) reduced that risk by 90%. The unexpected detail was that by the studies he cited said that diversifying across sectors made almost no difference. He has two PHDs and is working to his third. What makes him more credible to me is that he is successful at investing. I disagree with his austerity conservativism bent, though. This professor is probably closer to your son's age, so risk is rewarded in the long term and he has recovery time.

 

[eta2020]

Speaking from conversations, that professor gave stats that diversifying to 17 or so stocks ( vague from my poor recall.) reduced that risk by 90%. The unexpected detail was that by the studies he cited said that diversifying across sectors made almost no difference. He has two PHDs and is working to his third. What makes him more credible to me is that he is successful at investing. I disagree with his austerity conservativism bent, though. This professor is probably closer to your son's age, so risk is rewarded in the long term and he has recovery time.

If we could really get 15% annual returns he would not be a professor but some kind of financial whiz money manager.

Now I am sure looking back he is capable to construct portfolio that returns even more then 15%

 

[NW-Bound]

Now I am sure looking back he is capable to construct portfolio that returns even more then 15%

Who needs a stinkin' portfolio? Just a single stock, the right one, will do the job.

 

[eta2020]

Who needs a stinkin' portfolio? Just a single stock, the right one, will do the job.

Even crook Bernard Madoff was not doing 15% annually

 

[NW-Bound]

That's because Madoff pretended to have a portfolio, and not a single stock.

It turned out that he had "no stock".

 

[Danmar]

because of sequence risk anything less then a 2% real return average over the first 15 years of a 30 year retirement stands a very high chance of failing at 4%. that is what caused all our worst case scenario's .

so odds are 0% will not support a 4% inflation adjusted return , you would have to draw less if 10 or 12 years in to retirement you were at zero . . .

Yes, my point. If you are really this pessimistic are you adjusting your WR accordingly? Once retired you really only have to settle on a SWR, which you can adjust if actuals dictate of course. It would be consistent if your SWR reflected both average returns and sequence of return risks. I doubt many people do this. Rather they fall back on Firecalc which inherently has higher historical returns than many forecast now.

 

[Whisper66]

An economics and accounting professor told me that he aims for 15% returns. ......

Aw shucks, I "aim" for 15% returns also......and probably achieve it as seldom as anyone else does....doesn't hurt to aim though!

 

[pb4uski]

...An economics and accounting professor told me that he aims for 15% returns. ...

WADR, if he was actually achieving 15% returns then he wouldn't need to work. Be skeptical of his claims. There is no such thing as a free lunch.

 

[devans0]

Fifteen percent is in the high range, way above prudent safe returns at later stages.

If I was still young, I would have a huge portion for riskier returns. Even now, I still have room for risk for my allocations. Even a 5% portion returning 12% real, funds my bareboned living expenses. I am not willing to write that off. My prof concentrating on a the small cap area that isn't followed by analysts, leaving gaps in MPT. He is using his know how to exploit those gaps.

My own portfolio has increased 4 times since the low of 2008. Note the cherry picking of time and the unstated boosts by contributions.

 

[stepford]

With 3 PhDs he must be at least 3 times as smart as I am. No wonder he can achieve 3 times my rate of return.

 

[devans0]

Still two and working on the third PHD, but yes, he is that ambitious, driven and smart.