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View Poll Results: What Overall Rate of Return are you using?
3-4.99% 8 5.41%
5-6.99% 63 42.57%
7-8.99% 64 43.24%
9-10.99% 10 6.76%
Something greater - please explain optimism! 1 0.68%
Something less than 3% - please explain pessimism! 2 1.35%
Voters: 148. You may not vote on this poll

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Old 03-23-2008, 08:10 PM   #21
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With the free SW available now or web tools such as FireCalc, it's no longer necessary to do planning assuming constant average returns. It's too bad some of the guru's keep insisting on expressing market performance in terms of only constant central tendencies since, for most of us, variability will be high and timing will be key.
Right. Unless you're very young or deeply into TIPS, you should be using some sort of Monte Carlo projections.
(And some people would say the same thing even if you are into TIPS.)
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Old 03-23-2008, 08:16 PM   #22
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Hmmm - I use my Vanguard analyzer for my portfolio - 9.215% and I do not plan on croaking for another 24.60 years.

A rough estimate handgrenade wise. .

That third decimal place proved a little pesky in the first 14 years of ER - but I expect to hone in on a tighter estimate as I move into 'serious' retirement.

heh heh heh - funny though - history and Mr Market seem to conspire against my er ah fine prognostications. . 1977 - 1992 at work I had a no. 2 pencil and 8% and 10% lines on a raggedity sheet of K&E graph paper with my wiggly squiggly 401k balances plotted on it.
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Old 03-23-2008, 10:22 PM   #23
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Something greater

Looked at actual for the last 3 years and use the low end of that, even though it's higher then the brackets of the poll. Expenses track about 4% except for taxes. They are obviously higher since income is higher. Still use the higher number as a planning number specifically because of the tax implications yearly, and what it will do when RMDs begin at 70 1/2 from the IRA. Using options causes the income to be treated as short term capital gains, which adds to pensions and SS, when that kicks in, thus taxes become a much larger issue for me then the majority of folks with the LTCG. Thus the split calculation.
Use the expenses number as a planned spend number, with difference available when big items/travel are desired.
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Old 03-24-2008, 08:37 AM   #24
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Usually use 9% for equity and 3-4% for bonds but have not played with the spreadsheets for a while. combined it is around 7%, but I typically discount it to 6-6.5% combined.
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Old 03-24-2008, 11:49 AM   #25
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I have several inputs in my spreadsheet. For my investment returns, since I am 100% S&P 500 index, I use 10.7%, which is the Ibbotson number.

In general, I use the longest-term historical number I can find from what I consider to be a respected source for each assumption I make. So I inflate college costs at 5.9% per the College Board's annual report, I inflate SS COLA's at around 2% I think.

After I do that I build my projections based on those assumptions and my current actual data. Then I watch the results over time. If reality matches my assumptions, then my projections should not change over time. If reality turns out to be trending worse than my assumptions, then my projections should slowly get worse. If reality turns out to be better than I assume, then my projections should slowly get better.

Overall, it turns out that this last case seems to be my situation. A large part of this is that I am projecting something like 4% inflation on my expenses but my expenses have actually been holding steady and/or dropping slightly over the past year.

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Old 03-24-2008, 11:56 AM   #26
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I'm 42 and about 70% in stocks. I use 7.5% until age 50 and then gradually declining to 5% in a linear fashion at age 65 (representing a gradual shift toward bonds from 50 to 65) and holding at 5% after that. That's how I have it in my planning spreadsheet.
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Old 03-24-2008, 04:33 PM   #27
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The problem with average returns is that it takes longer to recover from a period of negative returns than it does to benefit equally from an upswing. Cumulative returns are more representative.

I am about 60% equities (including VC), 20% fixed income, 15% real estate (including my home*) and 5% cash. I am calculating based on an average 5% real return (or ~8% with inflation). If I do better, it will be a bonus. As I see it, the benefit of diversification in noncorrelated asset classes is reduced risk of hitting those deep negative swings.

*which I am considering putting on the market while it's still strong around here.
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Old 03-24-2008, 05:20 PM   #28
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I use 7% during the accumulation phase and 5% after retirement. Hopefully these numbers are realistic enough. If we do better, then BONUS. If we do worse, well I guess I'll w*rk a bit longer, travel less or find a part time gig.

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Old 03-24-2008, 06:15 PM   #29
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In 2001 my FA used 12% in his projections, he changed to 10% in 2003
Do you still retain his/her services? What other predictions did they make?

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the returns projected by Morningstar for stocks (on a risk adjusted basis) make them a less compelling investment than in the past relative to bonds. That's why my portfolio is fairly conservative for someone my age (33, 65% stocks / 35% bonds and cash). I am just not sure that, going forward, taking more risk in the stock market will be rewarded accordingly.
Good point. In order for stocks to return more than bonds, there must be periods of relative underperformance to bonds... otherwise nobody would buy stocks, preferring the safety of bonds. So, when we're in those trying times, best to be thankful because those times provide the very reason stocks will outperform over long periods.

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61% cash, 31.5% stocks and the remaining 7.5% in bonds. We are moving some of that cash to equities monthly, primarily T. Rowe Price Capital Appreciation
Are you buying capital appreciation in a taxable account? Its a VERY tax inefficient fund. If you are I'd very strongly urge you to reconsider a more tax-favorable choice.

Also, at 31 years to retirement and 61% in cash... you're either engaging in detrimental market timing (is there any other kind?), or perversely risk-averse. That is your choice to be that way, but you run serious risk of not accumulating enough assets to retire on with that AA. That is the AA of a person in their 70s!
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Old 03-24-2008, 06:24 PM   #30
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Are you buying capital appreciation in a taxable account? Its a VERY tax inefficient fund. If you are I'd very strongly urge you to reconsider a more tax-favorable choice.

Also, at 31 years to retirement and 61% in cash... you're either engaging in detrimental market timing (is there any other kind?), or perversely risk-averse. That is your choice to be that way, but you run serious risk of not accumulating enough assets to retire on with that AA. That is the AA of a person in their 70s!
No, we're buying Capital Appreciation in tax deferred accounts (IRA rollover from 401(k) and Roth. The 61% cash position is because we are doing a dollar cost averaging in my 401(k) rollover from a previous job instead of a lump sum buy (I've read a lot her about pro's and cons on that, but I didn't want to put the whole thing in at once).

We currently save about 50-55% of our income annually and have paid off our home and have basically no debt. So one of the big problems we have, frankly, is are we saving too much - even with the aversion to risk...?
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Old 03-24-2008, 06:35 PM   #31
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No, we're buying Capital Appreciation in tax deferred accounts (IRA rollover from 401(k) and Roth.
That makes a lot more sense. The only thing I would consider there is that cap app is basically a high-cost version of a balanced fund. I have personal experience there, having recently (1y) sold off my cap app holdings in favor of a mix of low-cost index funds. What I like about that fund is that it tends to limit your downside (never had a losing year yet). What I don't like is that it definitely restricts your upside.. the management is very risk-averse. That may work well for your style, it did not for mine.

Quote:
The 61% cash position is because we are doing a dollar cost averaging in my 401(k) rollover from a previous job instead of a lump sum buy (I've read a lot her about pro's and cons on that, but I didn't want to put the whole thing in at once).
Ok. I also know that lump sum outperforms 2/3 of the time, but like you I'd have a hard time doing it all at once. I suppose DCA'ing in when you can lump sum IS dirty market timing, but I can definitely understand that.

Quote:
We currently save about 50-55% of our income annually and have paid off our home and have basically no debt. So one of the big problems we have, frankly, is are we saving too much - even with the aversion to risk...?
Thats a personal decision. The wife and I save about the same percentage as you and its not uncomfortable - so we'll continue to do so. As a younger investor, the saving rate is far and away the most important variable until substantial assets are built. Our overarching goal is not to die with 20 million dollars, but to be able to make work/life choices that aren't affected by money as we get older.

Once you've tackled that, be sure you are doing things in the following order (in general):
1) 401k to match
2) roth to max (if eligible)
3) 401k to max
4) taxable investing

Have you made your asset-allocation decisions yet? (IE, 80/20 stock:bond, 60:40 domestic:int, REITS, small cap vs. large, etc)? I would suggest writing an IPS (investment policy statement) with your AA, goals, and rationale so you aren't tempted to tinker when the market is on sale.

Finally - make sure you consider costs. Those who pay fewer fees accumulate more assets, and in general the best way to go about this is to use index funds rather than actively managed funds.
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Old 03-24-2008, 06:44 PM   #32
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I own T Rowe Price Capital Appreciation in my IRA and I like it a lot, but it sure distributes a lot of income every December!


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Do you still retain his/her services? What other predictions did they make?
Unfortunately yes we still have the FA. He locked us in a couple of VULI contracts and we are just treading along until the redemption period elapses (in 3 years). We moved the rest of our money over to VG a few years ago. What other predictions did he make? let see... He regularly insists on changing the asset allocation of our VULIs based on what he hears at his firm's invesment seminars. Today, large growth is all the rage, tomorrow who knows what will be hot... It often fails. The predictions are usually either wrong or come too late to capture the gains. He predicted that he could return more than an individual investor ever could... wrong again...
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Old 03-24-2008, 07:04 PM   #33
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He predicted that he could return more than an individual investor ever could... wrong again...
both his prediction and the result are in themselves perfectly predictable!
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Old 03-24-2008, 07:12 PM   #34
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Thats really a bummer about that advisor. Sadly I think your story is more common than not. Do you not have control over your VULI investments?

Honestly, I think anyone that EXPECTS over 8% per year is setting themselves up for big disappointment. I'm certainly well aware of the past, and also of the projections for the future. I hope that 10% returns are the norm but certainly wouldn't stake my savings rate for retirement on that.
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Old 03-24-2008, 07:42 PM   #35
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I calculate three times using 3, 5, and 7%. Anything higher than that would just be a fun bonus.
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Old 03-25-2008, 07:10 AM   #36
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have been using 7.5% nominal, 4-4.5% real.
This is about what I use too.....

Actually in calculators I usually count inflation at 0% and my returns as about 4% figuring a conservative return is about 4% over inflation.
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Old 03-25-2008, 09:15 AM   #37
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Thats really a bummer about that advisor. Sadly I think your story is more common than not. Do you not have control over your VULI investments?
I'm a little confused, but I don't know any FA's selling VULI in my market. Insurance agents yes, not FA's. Maybe it's a geographical thing........
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Old 03-25-2008, 09:54 AM   #38
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I'm a little confused, but I don't know any FA's selling VULI in my market. Insurance agents yes, not FA's. Maybe it's a geographical thing........
Aren't a lot of FAs also licenced insurance agents? It's not like it's hard to become one... Our FA is a licenced insurance agent for health and life policies in our home state. Plus the day he sold us the VULI, he had "invited" a licenced "representative" from their in-house insurance company to our meeting for a hard sale. And since a lot of people who decide to consult a FA end up with annuities, it means that my FA is not the only one with an insurance agent licence trying to sell insurance products to their clients... My wife's uncle who is also a FA is a licenced insurance agent in his home state as well. I am surprised you are not aware of this...

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Do you not have control over your VULI investments?
Technically speaking yes, I should. But guess who I have to go through to make any changes to the investments inside the VULI? The FA. So right now when he comes to me with bright ideas, I try to shut him down and ask him to leave the asset allocation unchanged, but for many years he was making the changes without consulting us (because it was for our own good anyway, so why would we mind?). One day I had to sit him down and explain to him that I didn't want him to make decisions about our money without our approval. He got mad, and suddenly I saw the light. It's as if he didn't see it as our money anymore, but as his money. That's when we decided to regain control of our investments and move everything we could to VG.
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Old 03-25-2008, 09:26 PM   #39
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I plan for 6% over a five year period, but for the past 5 years it has been running ~19%/yr. I still plan for 6%. Getting 19% makes me nervous. I am feeling a little better with this little correction. Reversion to the mean makes me more comfortable. Unfortunately I just looked at my pot and it was up 4% today. NOW what am I gonna do?

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Old 03-26-2008, 12:19 PM   #40
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It seems to me that time horizon should play an important role in determining expected returns. Those with more time can invest more aggressively, those with less can't (or shouldn't). So while the poll results are interesting, they're perhaps not that informative.

(FWIW, I've been assuming in the 7-8% range and am in my mid-30s.)
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