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What real return do you anticipate for your future investments?
Old 04-18-2014, 08:44 AM   #1
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What real return do you anticipate for your future investments?

Lots of folks have their own spreadsheets to crunch numbers.

So, I was wondering what kind of returns do you typically float around in your calculations?

Do you use numbers for both estimated inflation and return or a single number for a normalized 'real return' after accounting for inflation and any fees?

I make runs in my own spreadsheet for several 'what if' scenarios starting at 0% 'real return' and go up from their, but I guess I'm being ultra conservative as my baseline real return for the core of my plan is only 2%.

Is that being too conservative?
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Old 04-18-2014, 09:10 AM   #2
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In my spreadsheet like one you described, I have separate rates of return for each fund in my portfolio. I have 4 funds in my taxable accounts, the ones whose income is paying for my ER now, and 2 more in my IRA which I will tap into starting in about 8 or 9 years. I use a dividends per share calculation instead of a percentage return because that is what actually determines how much income I generate.

As for inflation, I separate my medical expenses (mainly health insurance with some dental bills) from the rest of my expenses so I can assign a separate inflation rate to each before combining them. This way, I can juice up the medical part in my what-if scenarios without affecting the remaining expenses.
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Old 04-18-2014, 09:46 AM   #3
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My projections were alwys off so I stopped making them. Now I occasionally use FIRECalc to monitor portfolio survival odds.
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Old 04-18-2014, 09:52 AM   #4
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My projections were alwys off so I stopped making them. Now I occasionally use FIRECalc to monitor portfolio survival odds.
+1

I'm getting a 100% success rate on FIRECalc now (9 years into retirement projected out to age 95), so this is essentially saying the future returns I'm using are no worse than the worst returns for any 28 year period since 1871.
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Old 04-18-2014, 10:00 AM   #5
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For my spreadsheet, I use 3% for inflation, increases in SS, increases in HSA contribution limits, medical costs, tax brackets, exemptions, etc.

I have a 60/40 AA and the historical return of such a portfolio is ~8.7% IIRC, but I haircut that down to 5.5% to be conservative (and I concede perhaps too conservative). For my taxable accounts which are invested in equities, I assume 2% of the 5.5% return will be in qualified dividends and the remainder in appreciation (capital gains).

So overall, my real return is 2.5%.

I considered separate rates of return for my taxable, tax-deferred and tax-free portfolios but just haven't done it yet. Actually, I just thought of an easy way to do it so I may make that modification, along with a similar sized haircut to each.
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Old 04-18-2014, 10:13 AM   #6
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I have not used a different set of inflation or returns by taxable, vs IRA or medical costs etc.

I try and keep it somewhat simple but can adjust for time frames. I use 2.5% inflation for the next 2 years (until I'm 60), then default to 3%. This is factored against my total annual expenses. I can vary inflation numbers based on age (e.g. 2.5% til 60, then 3% til 68, 3.2 til 70, etc)

I use a 5% return on my total portfolio (just the retirement funds).

So essentially it is a real return of 2.5 - 2.0%.
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Old 04-18-2014, 10:19 AM   #7
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I use close to historical rates of 6% real for equities and 3% for inflation. The mortgage doesn't inflate, but everything else does, I think.

My margin is in an inflating portfolio value, rather than lower returns. Thus I have planned for the most probable or average case, but have the margin that FIRECalc demands.

I think Roth conversion and portfolio planning will be a little more realistic this way. We may have to figure out how to spend more if the averages actually hold.
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Old 04-18-2014, 10:25 AM   #8
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I don't use any type of spreadsheet, or other method of calculation that relies on a single fixed rate of return (I used to, but not any longer). Even if I were to run several different scenarios based on different estimated rates of return, it strikes me that in the real world, the sequence of returns makes such a difference that the best guesstimate I can come up with is to run Firecalc and not worry about it any more.

My current WR is comfortably below the level that gives me a 100% success rate in Firecalc, and that's good enough for me.

Yes, I'm one of those annoying people who lacks a deep understanding of investing, and so relies on a few Vanguard funds and the occasional fling with Firecalc. I don't preach it as a gospel or repeat it as a mantra though. So far, it seems to be working, and the hands-off approach suits me just fine.

Besides, I have an awful lot of lounging around to do
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Old 04-18-2014, 10:39 AM   #9
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I don't use any type of spreadsheet, or other method of calculation that relies on a single fixed rate of return (I used to, but not any longer). Even if I were to run several different scenarios based on different estimated rates of return, it strikes me that in the real world, the sequence of returns makes such a difference that the best guesstimate I can come up with is to run Firecalc and not worry about it any more.

My current WR is comfortably below the level that gives me a 100% success rate in Firecalc, and that's good enough for me.
That's pretty much my mode of operation except that I have to keep a spending leash on DW as she tends to have too much free time and there are too many retail distractions around here. Plus, she has a SIL nearby that has too much money and likes to flaunt it with her lavish spending (a $100K upgrade on the downstairs of their home? Only a few years after a $65K kitchen upgrade?).

My real rate of return is a function of interest rates and that is uncontrollable to me. Right now, 3% is my ongoing target and hopefully some % adder for increase in principal here and there.
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Old 04-18-2014, 10:44 AM   #10
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I use a 3% rate of inflation on aggregate expenses. I have used both an aggregate monthly expense number, and itemized expenses to which we've applied individual inflation rates; the 3%/aggregate method is a lot easier to work with and probably 'accurate' enough for predicting things in a long window.

I recently took my 401k portfolio and worked out an apportioned rate of return based on the historical performance of each fund; I recently reallocated substantially away from equities, so my aggregate anticipated RoR is about 6%. I do anticipate keeping a fair percentage of my investment in equities, as I have a few annuity-based income sources that let me feel comfortable with bit more risk than if I were relying solely on savings for income.

So, if "real rate of return" is how much money you make minus value eroded by inflation, I'd say mine is anticipated to be about 3%. Based on how I'm assembling my income 'menagerie', I figure that any positive percentage here is good. Oh, I also engage in such slop as projecting our current expenses out to age 100, even though I'm pretty sure they'll go down in real terms as we get older.
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Old 04-18-2014, 10:47 AM   #11
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....I considered separate rates of return for my taxable, tax-deferred and tax-free portfolios but just haven't done it yet. Actually, I just thought of an easy way to do it so I may make that modification, along with a similar sized haircut to each.
I just made this refinement and my age 100 NW is substantially higher since I have higher earning assets in my tax-free accounts (Roth and HSA) and in my taxable account which is effectively 0% tax due to the preferential treatment of qualified dividends and long-term capital gains. It seems to make a big difference. The power of compounding I suppose.
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Old 04-18-2014, 11:22 AM   #12
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My estimate is 6% nominal return.
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Old 04-18-2014, 11:49 AM   #13
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As I am conservative by nature, I expect no real return once I retire. If I keep up with inflation I'll be happy. Anything beyond that would be a bonus.
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Old 04-18-2014, 12:49 PM   #14
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My spreadsheet is expressed in nominal dollars using individual rates of inflation for each of around 30 categories of expense. The weighted average works out to be 2.6%. Assumed rate of return on investments is 4.3%, which IIRC is a point or two conservative for my AA. I guess that means my real return is planned at 1.7%, which does seem a bit too conservative. But that's the rate that holds my portfolio constant through age 100, so that's usually where I leave it when I click save.

Having recently retired, I'm being deliberately conservative since this is the most vulnerable point for sequence-of-return problems. In 5-10 years, if things are still looking good, we will likely increase the travel budget. Until then, this helps keep DW's retail habit in check (to some degree).
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Old 04-18-2014, 12:56 PM   #15
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.....Until then, this helps keep DW's retail habit in check (to some degree).
Right. If she is anything like my DW, good luck with that.
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Old 04-18-2014, 01:05 PM   #16
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As I am conservative by nature, I expect no real return once I retire. If I keep up with inflation I'll be happy. Anything beyond that would be a bonus.
x2

Same here. I also use a worst case scenario of 3% inflation with zero return... in effect -3% real return.
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Old 04-18-2014, 01:06 PM   #17
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As I am conservative by nature, I expect no real return once I retire. If I keep up with inflation I'll be happy. Anything beyond that would be a bonus.
+1
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Old 04-18-2014, 01:12 PM   #18
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Normally, I use 3.5% inflation and 4.5% return (1% real).
If I vary the inflation estimate, the return stays 1% above it, so it's an easy calculation.
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Old 04-18-2014, 01:22 PM   #19
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6%+ nominal return based on my mutual funds' 10 year performance. I have conservative AA of 35/65.
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Old 04-18-2014, 01:27 PM   #20
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6% nominal for domestic total market and 7% nominal for domestic small caps and international. This is total return including dividends.
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