What Overall Rate of Return do you use in your financial projections

[ziggy29]

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.

 

[Meadbh]

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.

 

[aaronc879]

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.

Hank

Same here.

 

[innova]

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?

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.

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!

 

[prgsdw]

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...?

 

[innova]

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.

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.

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.

 

[FIREd]

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!

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...

 

[d]

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!

 

[innova]

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.

 

[aworkingrachel]

I calculate three times using 3, 5, and 7%. Anything higher than that would just be a fun bonus.

 

[militaryman]

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.

 

[FinanceDude]

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........

 

[FIREd]

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...

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.

 

[Ed_The_Gypsy]

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?

Gypsy

 

[nickel]

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.)

 

[Lusitan]

I use 6% if I'm having a good day (most days); 5% if I'm feeling especially pessimistic.

 

[Independent]

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.)

Agreed. A 35 year-old can assume long term averages for now, with plenty of time to adjust in the future.

A retiree age 65 has to be aware that those long term averages hide long strings of poor years.

It seems to me that anyone who is serious about a 4% SWR is implicitly assuming about 3% real. I don't know if we have any of those people responding to the poll, but I'm surprised that there aren't more low numbers.

 

[pie2008]

We're currently earning about 5.2%. Our total portfolio has been invested conservatively for the past couple of years as we are winding down for retirement in the next few weeks. Had we lost money in this awful market over the past year, my husband would have refused to retire. After retirement I expect our return will fluctuate, but it will always be conservative. I'm using an initial rate of 4.6%. We'll adjust it year by year, but we always plan to withdraw less than we earn. If rates go to zero, I will panhandle so I can deposit money. haha

 

[Notmuchlonger]

We're currently earning about 5.2%. Our total portfolio has been invested conservatively for the past couple of years as we are winding down for retirement in the next few weeks. Had we lost money in this awful market over the past year, my husband would have refused to retire. After retirement I expect our return will fluctuate, but it will always be conservative. I'm using an initial rate of 4.6%. We'll adjust it year by year, but we always plan to withdraw less than we earn. If rates go to zero, I will panhandle so I can deposit money. haha

Not worried about inflation eating away your purchasing power?

 

[pie2008]

Not worried about inflation eating away your purchasing power?

No, we've run our figures through many, many configurations using very conservative rates and higher inflation. We have always lived beneath our means -- we're "the millionaires next door." I grew up poor, so I still know how to live on next to nothing -- not that I want to go back to those days, but I could. When you're older, you buy less. Medical premiums (and later Medicare) may be our most challenging expense, but I figure everyone will be in the same boat then, and the outcry about lack of/poor medical care will be so great that the government will finally be forced to seriously tackle the issue. In the meantime, we go for all of our annual physicals and routine medical tests, and do most of the other things one is supposed to do to stay healthy.

As a sidenote: my doctor saw something suspicious when I recently went for a routine physical. She took a biopsy, and I spent a week in extreme anxiety waiting for the results which, I'm happy to say, were negative. But what made the biggest impression on me was that when I thought I was potentially facing something serious, I didn't regret that I didn't yet have a big screen TV or have traveled more, and I certainly didn't give a moment's thought about inflation -- all I wanted was more time doing simple things with my husband, like going for walks, preparing meals together, and waking up in a comfortable bed each morning with him by my side.

 

[bigla]

I use 7% now that I am retired.