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What Investment Rate of Return do you Use?
11-19-2015, 10:47 AM
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#1
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Thinks s/he gets paid by the post
Join Date: Jun 2013
Posts: 2,518
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What Investment Rate of Return do you Use?
For those of you spreadsheet nerds who project Investment Returns over future years when comparing Available Funds Versus anticipated expenses, I'd like to get a sense of opinions on what rates you assume. I had been assuming 8% for our Tax Deferred and 4% for our After Tax investments. Our portfolio is a relatively typical AA (55/35/10). My assumptions average out to a Total Return of 6.67% and do include inflation. I've known for some time that I was probably being too aggressive. I'm playing around with different scenarios. I realize AA affects returns, but before I settle on new assumptions, I'd love to hear what rates, you all use. Thanks in advance for sharing.
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11-19-2015, 10:50 AM
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#2
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Moderator
Join Date: Feb 2010
Location: Flyover country
Posts: 25,155
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I'm a conservative sort, so I've always projected 1% real return (i.e., 1% higher than inflation).
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11-19-2015, 10:58 AM
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#3
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Thinks s/he gets paid by the post
Join Date: Feb 2014
Location: Syracuse
Posts: 3,501
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I don't care much for spreadsheets for planning since I found RIP and FireCalc, but I do still play with the old one now and then.
I use -1% real return for first 5 years then 2% for the remaining on the pessimistic side, and a straight 6% for the optimistic scenario. Of course these are just WAG and mean nothing.
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11-19-2015, 10:59 AM
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#4
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Thinks s/he gets paid by the post
Join Date: May 2014
Location: Utrecht
Posts: 2,650
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Equities 6.5%
Bonds, cash & CDs: whatever yield it is currently invested at. Blended i'm roughly at 2% right now.
Inflation: 2% (eurozone)
Above is gross, so before any tax or expenses.
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11-19-2015, 11:14 AM
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#5
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Thinks s/he gets paid by the post
Join Date: Feb 2006
Posts: 4,872
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There's a lot of wishful thinking when it comes to return. People with a lot of savings use low returns because they can and still meet their income goals and people saving just a little often use optimistic returns to make themselves feel better.
Personally I use real returns (ie after inflation) of 4% for stocks and 0% for bonds (I use 2% inflation).
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”
Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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11-19-2015, 11:22 AM
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#6
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2005
Location: Chicago
Posts: 13,149
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Using "average" rate of return and inflation rate guesstimates is pretty useless, even dangerous, unless variation is also considered. You really shouldn't ignore the sequence of return factor.
When playing with spreadsheets for yuks, I generally construct models where the long term average rates of return and inflation are my guess but where they vary from year to year. To make the tests conservative, I'll load high inflation and low returns into the early years. Then I reverse those for the later years in order to have an approximation of the average I'm guessing.
The results are very different (and more realistic and conservation IMHO) that making the assumption that the average return and inflation numbers will occur every year with zero variation.
I like the FireCalc methodology of using actual historical data to test scenarios.
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"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
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11-19-2015, 11:23 AM
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#7
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Full time employment: Posting here.
Join Date: Apr 2014
Location: Houston
Posts: 957
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I use 5% for total portfolio return (I'm around 85% stocks, rest bonds / cash) and 2% inflation. This seems reasonably conservative for a longer term analysis to me.
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11-19-2015, 11:38 AM
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#8
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2005
Location: Chicago
Posts: 13,149
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Quote:
Originally Posted by GravitySucks
I don't care much for spreadsheets for planning since I found RIP and FireCalc, but I do still play with the old one now and then.
I use -1% real return for first 5 years then 2% for the remaining on the pessimistic side, and a straight 6% for the optimistic scenario. Of course these are just WAG and mean nothing.
Sent from my iPad using Early Retirement Forum
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+1
Yep. Spreadsheets using constant rates of return and inflation can be fun to play with but they're a poor (too optimistic) testing tool unless you go to the trouble of including year to year variation (resulting in the same average).
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"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
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11-19-2015, 11:49 AM
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#9
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Thinks s/he gets paid by the post
Join Date: Jul 2009
Location: North Scottsdale
Posts: 1,545
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I use 3% inflation. Return of 3% (or 0% after inflation) on tax deferred which is 100% bonds. Use 6% on after tax accounts (or 3% after inflation) with an AA in those accounts of 65/25/10.
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FIRE'D in July 2009 at 51...Never look back!
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11-19-2015, 11:53 AM
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#10
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Recycles dryer sheets
Join Date: Nov 2011
Posts: 181
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1% real return (4% nominal, 3% inflation)
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11-19-2015, 11:54 AM
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#11
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2006
Posts: 11,401
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Quote:
Originally Posted by youbet
Using "average" rate of return and inflation rate guesstimates is pretty useless, even dangerous, unless variation is also considered. You really shouldn't ignore the sequence of return factor.
When playing with spreadsheets for yuks, I generally construct models where the long term average rates of return and inflation are my guess but where they vary from year to year. To make the tests conservative, I'll load high inflation and low returns into the early years. Then I reverse those for the later years in order to have an approximation of the average I'm guessing.
The results are very different (and more realistic and conservation IMHO) that making the assumption that the average return and inflation numbers will occur every year with zero variation.
I like the FireCalc methodology of using actual historical data to test scenarios.
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I do that too.
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11-19-2015, 12:19 PM
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#12
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Moderator Emeritus
Join Date: Jan 2007
Location: New Orleans
Posts: 47,468
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Before I retired, I used to do projections with various investment rates of return. Often I used 5% and assumed 3% inflation, but also tried various other rates.
But now that I am in my 7th year of retirement, I don't do any of that any more. My financial situation has turned out to be just fine with the market thriving as it has. Plus now I have SS and basically everything is coming up roses.
Now, if hyperinflation should occur I might be back to doing projections. But, so far so good.
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Happily retired since 2009, at age 61. Best years of my life by far!
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11-19-2015, 12:45 PM
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#13
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2005
Location: Chicago
Posts: 13,149
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Quote:
Originally Posted by W2R
Now, if hyperinflation should occur I might be back to doing projections. But, so far so good.
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I wonder what you mean by hyperinflation as opposed to plain old high inflation?
Personally, I never bother with models involving hyperinflation. If we get to that stage (CPI doubling or more every year for example), I figure all the rules are out.
But I have done a few models where I assumed a long term average rate of inflation of 3% but where the first few years had inflation levels of 10% to 15% (high but not hyper). I offset these with years of very low inflation at the end so the average was approximately 3%. My results were much less favorable than if I used a constant 3% over the entire period.
With a "hyperinflation" assumption, I generally assume cash or near-cash becomes worthless and you just have to take a guess on what investment categories keep up with or beat inflation. That is, if CPI doubles year over year (hyperinflation), what investment categories might likely also double or better? Precious metals and stones? Land? Dunno.........
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"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
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11-19-2015, 12:56 PM
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#14
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Thinks s/he gets paid by the post
Join Date: Jun 2013
Posts: 2,518
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Quote:
Originally Posted by W2R
Before I retired, I used to do projections with various investment rates of return. Often I used 5% and assumed 3% inflation, but also tried various other rates.
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Was your 5% including inflation or nominal?
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11-19-2015, 01:10 PM
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#15
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Full time employment: Posting here.
Join Date: May 2015
Location: Atlanta suburbs
Posts: 633
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I don't make my own assumptions, I just use whatever FIDO RIP uses in its Income and Expense Details.
Growth Rate=((Next year's assets-(This Year's Assets-This Year's Withdrawals))*100)/(This Year's Assets)
These were the numbers I came up with. It's pretty ugly, which is probably what FIDO RIP wants for the first 10 years. I am still using the old RIP.
2016 -7.34%
2017 0.03%
2018 4.32%
2019 2.81%
2020 5.28%
2021 1.92%
2022 6.40%
2023 5.31%
2024 6.81%
2025 8.03%
Perhaps the denominator should have been (This Year's Assets-This Year's Withdrawals), because if I do my asset adjustments on Jan 2 of "this year", the subtracted value really is the basis to grow or shrink.
I haven't taken the trouble to do the calculations beyond the first 10 years.
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11-19-2015, 01:26 PM
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#16
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Full time employment: Posting here.
Join Date: Apr 2015
Posts: 903
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I use 0-3% real for spreadsheets (accumulation) and I-ORP. Then I model the portfolio balance I get from the spreadsheet with FireCalc and ********.
Don't have access to Fidelity RIP and I'm somewhat hesitant on purchasing ESPlannerPLUS. To those that have purchased ESPlanner, is it worth it?
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11-19-2015, 02:11 PM
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#17
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Thinks s/he gets paid by the post
Join Date: Feb 2006
Posts: 4,872
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You should do your calculations with numbers that are a few standard deviations from the averages you are using. If you still succeed you should be ok
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”
Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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11-19-2015, 02:18 PM
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#18
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Aug 2013
Location: Texas
Posts: 10,836
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For the past ~5 years I've used 3% for return and inflation
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11-19-2015, 02:27 PM
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#19
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Thinks s/he gets paid by the post
Join Date: Jan 2008
Posts: 1,644
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The only part that I project is the IRAs. I use 0% real since it is close to the going rates for bonds and it makes estimating RMDs easy.
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11-19-2015, 02:44 PM
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#20
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Full time employment: Posting here.
Join Date: Feb 2014
Posts: 731
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I used a range of real returns to bracket scenarios in my spreadsheet, but I will say I used a real return of 1% as my most typical. Then that was thrown into the pot with other 'pro' calculators, such as the Fido RIP.
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