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Old 06-10-2008, 06:12 AM   #21
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I have some of our Roth IRAs in TRP Retirement 2035, I think it's a good plan. Be aware that there are different share classes of these funds, make sure you get into the lowest cost, expense ratio shouldn't be higher than about 0.73% (for TRRCX). I split my Roth funds between TRP 2035 and the lower cost Vanguard TR 2035 to get an overall ER of about 0.35% which I think is reasonable for an overall portfolio. Also puts the bulk of funds in indexes with some active management which makes sense to me. Good luck
What is the advantage in the TRP fund with a 0.74% ER vs the V TR fund with a 0.19% ER?
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Old 06-10-2008, 09:34 AM   #22
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Be Conservative

Plan your budget around a 5% or 6% return and if you get 8% or even 10% then it is gravy.

However, plan on 8% and 10% and only get 5% and 6% then start cleaning up your resume cause you're going back to work.

Mike Honeycutt
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Old 06-10-2008, 09:43 AM   #23
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I agree with a planning assumption of 7-7.5% for the total stock market, and maybe 5% for total bond market. Calculate your overall return based on your AA.

That said, this is pure, conservative speculation based on reading what the more sensible and conservatives gurus (Bogle, Lucia, Ferri, Bernstein, others) have said. But you've got to use some assumption if you're going to do any planning.
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Old 06-10-2008, 10:11 AM   #24
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Plan your budget around a 5% or 6% return and if you get 8% or even 10% then it is gravy.

However, plan on 8% and 10% and only get 5% and 6% then start cleaning up your resume cause you're going back to work.

Mike Honeycutt
which reminds me of one of my favorite lines:
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Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.
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Why plan nominal returns?
Old 06-10-2008, 11:01 AM   #25
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Why plan nominal returns?

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Originally Posted by Rich_in_Tampa View Post
I agree with a planning assumption of 7-7.5% for the total stock market, and maybe 5% for total bond market. Calculate your overall return based on your AA.

That said, this is pure, conservative speculation based on reading what the more sensible and conservatives gurus (Bogle, Lucia, Ferri, Bernstein, others) have said. But you've got to use some assumption if you're going to do any planning.
Rich, others - can someone explain to me the value of planning asset returns in nominal (not real) terms? What does it matter what your portfolio returns if it doesn't take into account inflation expectations?

For myself, I use asset allocation to hedge risk/lower variance, but pretty much only assume I can have currently accumulated assets grow with inflation (during my growth phase) and roughly a 4% swr during distribution.
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Old 06-10-2008, 11:09 AM   #26
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I think it's helpful to track both nominal and real amounts.

For me, it's easier to project my future needs in real dollars. I need $x to live on now, so with a real return if %y, my FI line is in year z.

However, it's helpful to have i($x) and i(%y) tracked as well where i is inflation. So, as I'm looking at that future year z approach and checking my investments I don't lose track of what the real number will be.
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Old 06-10-2008, 11:27 AM   #27
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Rich, others - can someone explain to me the value of planning asset returns in nominal (not real) terms?
don't think that was suggested; the original question simply asked about expected returns (nominal being suggested by the first post).
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Old 06-10-2008, 12:39 PM   #28
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In my planning spreadsheets I use a real 4% return now, gradually dropping to a 2% real return by age 65 as my portfolio slowly becomes more conservative.

If inflation stays high I may need to revisit the 4% assumption.
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Old 06-10-2008, 05:23 PM   #29
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7% is completely reasonable for your asset allocation and investing duration, but I wouldn't call it conservative.

Expected equity returns 9%
Expected Fixed Income 4.5%

9% *.65 + 4.5% *.35 = 7.25%

After having gone nowhere for 10yrs while corporate earnings zoomed, equities are quite reasonably valued now. No reason we can't see 8-10% average equity returns going forward.
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Old 06-10-2008, 07:35 PM   #30
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After having gone nowhere for 10yrs while corporate earnings zoomed, equities are quite reasonably valued now. No reason we can't see 8-10% average equity returns going forward.
That could be disputed. By what measure do you conclude that?
PE's, for instance, are still around 25% higher than the historical averages and earnings are falling. Should equities become 25% undervalued, which does happen time to time, things will not be pretty. I think what many do not realize is how severely overvalued equitites were in 2000.
Maybe valuations will stay high forever and "equities are quite resonable now", but maybe not.
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Old 06-10-2008, 07:58 PM   #31
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That could be disputed. By what measure do you conclude that?
PE's, for instance, are still around 25% higher than the historical averages and earnings are falling. Should equities become 25% undervalued, which does happen time to time, things will not be pretty. I think what many do not realize is how severely overvalued equitites were in 2000.
Maybe valuations will stay high forever and "equities are quite resonable now", but maybe not.
The more I read about the weaknesses of the stock market, I more I want to be invested in bonds. But I am already at 65% bonds, and they're not performing all that well either (at least from the two months I have been following them, plus maybe my lack of understanding on "return" with bonds).
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Old 06-10-2008, 07:58 PM   #32
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That could be disputed. By what measure do you conclude that?
Last I looked the SPX P/E was in the high teens, which is within a range of "normal". Earnings may well fall given the economic slow down and all, but I haven't seen a lot of evidence of that outside of financials. Meanwhile 10-yr treasuries are trading at something like a 24x multiple, which make stocks look cheap by comparison.

It's not my contention that stocks are a screaming bargain, I just don't subscribe to the pessimist camp that thinks we should expect sub-par performance for future periods extending out as long as 20 years (which is the investment time horizon of the original post).

P/E graph at Vanguard
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Old 06-10-2008, 08:00 PM   #33
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The more I read about the weaknesses of the stock market, I more I want to be invested in bonds.
The best time to buy stocks is when you don't want to.
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Old 06-10-2008, 08:10 PM   #34
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Last I looked the SPX P/E was in the high teens, which is within a range of "normal". Earnings may well fall given the economic slow down and all, but I haven't seen a lot of evidence of that outside of financials. Meanwhile 10-yr treasuries are trading at something like a 24x multiple, which make stocks look cheap by comparison.

It's not my contention that stocks are a screaming bargain, I just don't subscribe to the pessimist camp that thinks we should expect sub-par performance for future periods extending out as long as 20 years (which is the investment time horizon of the original post).
Fair enough. I think valuations still look fairly high, but if you have a 20year perspective I wouldn't argue they could do ok. I may not be exact here but PE's are still around 19 and historically they averaged about 14. 5/14 is ~36% overvalued by that rough measure (which I know many do dispute based on numerous factors), with a slowdown underway and market earning falling right now... not really looking cheap in my view.

P.S. I looked at your PE chart from Vanguard, it goes back to 1990. Not a valid measure in my view.

P.S.(2) I prefer the PE chart in this article. Hussman Funds - Weekly Market Comment: February 22, 2005 - The Likely Range of Market Returns in the Coming Decade It shows a much different view of things.
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Old 06-10-2008, 08:16 PM   #35
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What is the advantage in the TRP fund with a 0.74% ER vs the V TR fund with a 0.19% ER?
Well, I'll be able to tell you in 2035 who had the advantage, i.e. TRP or Vanguard The way I see it, there's alot to these target-date funds. The choice of passive (index) versus active management. The choice of underlying funds. The design of the glide path which gets more conservative as the target year approaches. I assume that both Vanguard and T. Rowe price (and Fidelity for that matter) put some thought and modeling into the design of their respective target funds. One of them will log the best performance in the end. I believe in spreading my bets. With the TRP fund, since it is almost entirely actively managed, in theory I have at least a chance of exceeding market returns. Of course it could also lag the market However, I believe in keeping costs low and in indexing for market returns also, that is why bulk of $ is in Vanguard's indexed version with lower costs, to keep overall ER at about 0.35% which is reasonable to me. Truth be told, I have $ in Fidelity's Freedom 2035 also, in my 401k, balanced out with super-low cost index finds to keep ER low (0.35%). It's somewhat of an experiment, to see which one of the three target date funds will do best, I don't think any of the three are bad investments that will blow up my retirement. I guess you could say I'm currently a fan of these fund-of-funds, I consider Vanguard TR 2035 as my benchmark to beat and track the other two actively managed funds against it. Time will tell.....
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Old 06-10-2008, 10:01 PM   #36
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7% is completely reasonable for your asset allocation and investing duration, but I wouldn't call it conservative.

Expected equity returns 9%
Expected Fixed Income 4.5%

9% *.65 + 4.5% *.35 = 7.25%
Flipping it around to a conservative portfolio (35/65 instead of 65/35) would yield:

9% *.35 + 4.5% *.65 = 6.075%

I would be ecstatic with 6% on my 35/65 portfolio.

BTW, the 65/35 calculation above comes out to 7.425%. Substituting 4% for the 4.5% fixed income portion yields 7.25%. But I think that still proves your point.
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Old 06-11-2008, 06:36 AM   #37
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I agree with a planning assumption of 7-7.5% for the total stock market, and maybe 5% for total bond market. Calculate your overall return based on your AA.

That said, this is pure, conservative speculation based on reading what the more sensible and conservatives gurus (Bogle, Lucia, Ferri, Bernstein, others) have said. But you've got to use some assumption if you're going to do any planning.
If we're voting on numbers, I would have to say I think in terms of numbers more like these.

With these numbers, my 45:55 (equities:bonds/cash) AA comes out

7% x (.45) + 5% x (.55) = 5.9%


These numbers seem pretty reasonable for this relatively conservative AA. If my portfolio yields more in the long run, it's all gravy.

Depending on how negative I'm feeling, I might assume inflation of 3% which would give me a ballpark estimate of 2.9% real gain. (Average CPI-U for the past 10 years has been 2.60%, and median has been 2.75%, but nothing is forever.)
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Old 06-11-2008, 10:02 AM   #38
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Depending on how negative I'm feeling, I might assume inflation of 3% which would give me a ballpark estimate of 2.9% real gain. (Average CPI-U for the past 10 years has been 2.60%, and median has been 2.75%, but nothing is forever.)
We use 4% for our personal inflation rate, based on 5 years actual experience. We are planning on a real return of 3% so need a higher equity component. We are also suspicious of a pure equity return of 9% going foward. More comfortable with 8%.

8% *.70 + 4.5% *.30 = 6.95%

Also we are unsure how to handle the declining USD because we spend 6 months in Mexico each winter. If the peso gains against the USD, then our real inflation will be higher. Currently around 10.4 down from 10.8...
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Old 06-11-2008, 10:16 AM   #39
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I've used an average of around 7%-9% for a long time now. And, according to my investment history over many years of tracking, that's about what I've earned. I monitor my return pretty closely each year - and will adjust it a bit, when I feel I need to be a little more conservative. Some years I will adjust it down a bit - depending on who's in office and what things are looking like economically. However, I've never made an adjustment above the 9% figure. From what I can tell from the political front, I figure my federal income taxes will be increasing in the near future (and my living expenses will be higher) - so I'm now in the adjustment phase for this.

Great topic!
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Old 06-11-2008, 10:25 AM   #40
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We use 4% for our personal inflation rate, based on 5 years actual experience. We are planning on a real return of 3% so need a higher equity component. We are also suspicious of a pure equity return of 9% going foward. More comfortable with 8%.

8% *.70 + 4.5% *.30 = 6.95%

Also we are unsure how to handle the declining USD because we spend 6 months in Mexico each winter. If the peso gains against the USD, then our real inflation will be higher. Currently around 10.4 down from 10.8...
These numbers aren't bad either. I feel much better with 8% or 7% than 9%, and really I might be happier with 4.5% for fixed than 5%.

8% * .45 + 4.5% *.55 = 6.075%

I haven't computed a personal inflation rate, but plan on withdrawing maybe 2.5%.

After I see how that goes I might consider getting a little more wild. Or less.
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