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View Poll Results: What Real Return are You Planning on over the next 30 years or so?
less than 0% 0 0%
0-2% 8 6.35%
2.1-4% 51 40.48%
4.1-6% 41 32.54%
6.1-8% 18 14.29%
greater than 8% 8 6.35%
Voters: 126. You may not vote on this poll

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What Real Return Are You Planning On?
Old 04-25-2010, 09:13 AM   #1
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What Real Return Are You Planning On?

Real return being actual returns minus inflation? For example, if you expect 10% portfolio returns and 3% inflation, you're projecting a real return of 7%.

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Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
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Old 04-25-2010, 09:15 AM   #2
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About 2 1/2%

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Old 04-25-2010, 09:37 AM   #3
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Don't have to actually plan this do we? Doesn't Firecalc simply use historical results?
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Old 04-25-2010, 09:38 AM   #4
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I clicked on 2 to 4 %. Expecting 2 to 4 % each year, which would end up being more than 2 to 4 %, after 30 years, due to compounding. Hoping for much more than 2 to 4 % after 30 years.
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Old 04-25-2010, 09:58 AM   #5
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I am partial to the way Stein and DeMuth put it:

People are forever bragging about their investment returns. Never mind all the cases where they're conveniently forgetting to mention all their losses, are just plain wrong, or are outright lying. This talk is meaningless unless you know how much risk they took to get the returns they brag about. The guy at the next locker whose portfolio was up 15 percent last year while yours was up only 7 percent? He may not know it, but for the chance he was taking, he should have been up 30 percent. Knowing returns without understanding risks is like knowing only one team's score in a football game.
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They go on with: "If it were simple to take a very small amount of risk and capture a big reward, everyone would do it and we would all be rich."
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Old 04-25-2010, 10:22 AM   #6
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Some say we should expect 8% returns from the stock market, but with an asset allocation of 55% bonds, I am thinking that around 6% might be a better estimate of long term returns for my total portfolio.

Subtracting 3.0%-3.5% inflation, that would give me (ouch!) roughly 2.5%-3% real return.

I am not entirely sure that past market performance is any indication of what we might expect in the future. I just don't know. So maybe this is too optimistic. Or, maybe it is too pessimistic. As the years go by, we will see. To me this uncertainty is one reason why it is advisable to have a comfortable margin over and above what we will need in retirement, before pulling the plug.
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Old 04-25-2010, 10:46 AM   #7
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Originally Posted by Danmar View Post
Don't have to actually plan this do we? Doesn't Firecalc simply use historical results?
Yes, but it also requires faith that the future will be like the past, which a lot of people are increasingly uneasy about assuming.

I expect about a 4% real return from stocks and maybe 1% from a bond fund, so my current target 60/40 allocation would put me at 2.8%.
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

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Old 04-25-2010, 11:13 AM   #8
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I usually throw around a 6% (3% real) when playing fantasy retirement simulations.
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Old 04-25-2010, 11:50 AM   #9
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My "assumptions" policy is to find the longest-term, most-recent, most-applicable assumptions I can find for the ~26 variables in my model.

For inflation, I assume 3%. I believe this is the long-term average in the US going back to at least WWII. I believe the WSJ has been reporting around 2% core inflation over the last year. My personal rate has been negative over the past several years, but that is due to cost-cutting measures I've been able to put into play.

For investment returns, I assume 10.7%. I believe this is the Ibbotson-reported rate going back to 1928. I've been invested 100% stocks in the S&P for a long time, so my return over the past year or so has been better than 10.7% -- it should be more like 70% or so.

In my short (~20 years) of watching the world and my rates of return, I've seen a lot of what I could call "emphasis on the present" -- the world was nearly going to end during the TARP timeline, and during the crash in 87, and the Asian meltdown, and the Y2K disaster, and the first Iraq war. The world was going to be all flowers and sunshine during the tech bubble, and the housing bubble. I don't buy the "this time it's different" argument either on the upside or the downside, although I do look for historical signals that it might be. Haven't seen anything yet that makes me think that "this time" is going to be much different than the last time. And we have bumbled our way through.

That having been said, using those trend numbers and the other 24 dials, I keep coming up with between 45 and 48 to be FI. And I have more and more flexibility each day with things I can do to keep myself on that track. So unless we do start WWIII, or have Weimar Republic-level inflation, I think I'm going to be OK.

"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
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Old 04-25-2010, 11:53 AM   #10
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based on my AA, adjusted for inflation, I'm expecting just a tad over 4%....hoping for more of course but as my investment buddies are always reminding me "hope is not a strategy".
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Old 04-25-2010, 12:10 PM   #11
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I voted 2.1-4%. Nominal returns could be anything from negative to some double digit number, but on average, equities might be expected to return 7% and fixed income substantially less. Let's say a balanced portfolio has an (average) weighted absolute return of 5% over the next 30 years. Subtract 2-3% for (average) inflation and you end up with 2-3%. Of course if a period of hyperinflation correlates with a period of negative returns, one is screwed. But if real returns remain positive, one should be ahead of the game.
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Old 04-25-2010, 01:12 PM   #12
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I expect that my real return will be around 6% to 8% on average per year. My AA is around 90/10 now. I am invested globally, pretty close to market cap and country weightings. I'm about 70% indexed and 30% active funds and individual stocks.

As long as I can get at least 3% real return I'll be happy. That's about all I plan to withdraw each year once I have enough to semi-retire.
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Old 04-25-2010, 01:23 PM   #13
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Originally Posted by ESRwannabe View Post
As long as I can get at least 3% real return I'll be happy.
That's the way I feel as well. DH and I are both retired and our WR is 3%. We could take more, but there is not a need.
There's no need to complicate, our time is short..
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Old 04-25-2010, 01:25 PM   #14
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Hoping for 3% real, but making sure we could still get by on 2% real.
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Old 04-25-2010, 06:50 PM   #15
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Originally Posted by Danmar View Post
Don't have to actually plan this do we? Doesn't Firecalc simply use historical results?
I agree.

Similar with Fido Income Planner - it assumes an inflation rate (or you can enter an inflation rate?). I've not looked at what the return (real or otherwise) needs to be. (Fido uses Monte Carlo simulations)

Since I'm going with a 3% SWR I guess I'm hoping for a real return of at least 3%.
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Old 04-25-2010, 07:24 PM   #16
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My rather simplistic assumption is to expect that the net-of-everything yield on my real estate and equities will be a realistic proxy for real return on the assumption that the value of the underlying assets more or less matches inflation over the longer term. The net yield is currently around 3% so I am assuming a 3% real rate of return.

Of course, history suggests that there can be prolongued periods when the underlying assumption is not true and the underlying assets either outperform or underperform against inflation so I am open to better ideas.

As a side note on inflation, I am wary of assuming that the CPI rate can be used as a proxy for my personal rate of inflation.
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Old 04-25-2010, 08:13 PM   #17
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I don't even understand this question. What return you expect has nothing whatsoever to do with what return you might get, unless you are some kind of trader and you have good reason to expect certain results. Over a relatively short time bubbles or crashes can temporarily change that for better or worse, since if youk have the skill to sell when there is overvaluation youk will do better. But if you don't give credence to valuation, how would that even be possible?

For the rest of us the expected mean retun is baked in when we make the investment, subject to a little minor jiggering when we rebalance. It's in interest rates and stock valuations. As long as we don't go out very far, at least the fixed rate bet has a time limit based on it's duration.

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Old 04-25-2010, 08:27 PM   #18
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I see almost half the respondents said 2.1 to 4 percent. I wish that was divided even finer. It would be interesting to see.
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Old 04-25-2010, 08:44 PM   #19
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4.5%, I intend to extreme ER, so will have the ability to have a higher equity ratio than normal. I am thinking of something like 70/20/10 during retirement, unless we are at an extreme high or low.
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Old 04-25-2010, 10:41 PM   #20
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To find the real return on the S&P 500 for any series of years since 1871 here is a site
From 1970 to 2009 the real return is about 5%. while the 1871 to 2009 real return is 6.68% This is sort of the basis on which Firecalc works and you can thus see the return numbers for any series of years. Note just for grins if you started on Jan 1 1926 and went to Dec 31 1932 you get a return of .04% but thats probably about the worst case. The issue is the short term versus long term focus involved and suggests the common theme here of not having to access non bond/cd investments for several years in the event of a downturn.

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